Vanguard ETFs ushered in a new era of easy diversification and low-cost investing.
Before 1976, the average investment portfolio looked very different. Most investors purchased individual stocks via a broker, or had a financial advisor actively manage a portfolio on their behalf. This all changed in 1976, when John “Jack” Bogle, the founder and chairman of the Vanguard Group, launched the first index fund. The launch was derided by the investment management industry as “Bogle’s Folly,” but Bogle and Vanguard had the last laugh. Thirty-six years later, Vanguard has now grown to over $7 trillion in assets under management, 17,000 employees and over 200 globally listed funds. Vanguard has also launched multiple low-cost exchange-traded funds, or ETFs, that track numerous stock market indexes, sectors, market caps and themes. In line with Bogle’s philosophy of looking out for the retail investor, Vanguard ETFs are designed to be low-cost and diversified. Here’s a list of the 10 best Vanguard ETFs to buy in 2022.
Vanguard S&P 500 ETF (ticker: VOO)
Vanguard’s debut Vanguard 500 Fund tracked the S&P 500, a market-cap-weighted index of some of the largest companies trading on U.S. exchanges. The index’s total returns, including dividend reinvestment, have averaged around 10% a year since its inception in 1957. Retail and institutional investors alike use the S&P 500 as both a barometer of U.S. market performance and as a benchmark for their portfolio’s performance. The original Vanguard 500 Fund received a face-lift on Sept. 7, 2010, making its debut in ETF form as VOO. Since then, VOO has become one of the most popular options for tracking the S&P 500, largely due to its low cost: The ETF charges an expense ratio of just 0.03%. That’s $3 annually for every $10,000 invested.
Vanguard Total Stock Market ETF (VTI)
Bogle famously remarked, “Don’t look for the needle in the haystack — just buy the haystack!” What he meant was retail investors shouldn’t spend time trying to pick stocks and beat the market. Rather, investors should buy a diversified portfolio of stocks, which allows them to passively match the market’s long-term performance with little effort or cost. Bogle’s investment of choice was VTI, which tracks the CRSP Total Market Index. Whereas VOO just holds the 500 largest U.S. stocks, VTI holds roughly 4,136 stocks from the entire U.S. stock market, including mid- and small-cap stocks. It costs the same as VOO at a 0.03% expense ratio, and the two together make for a great tax-loss harvesting pair.
Vanguard Total International Stock ETF (VXUS)
Bogle was highly bullish on the U.S. market and preferred to keep his stock allocation there. However, in his later years, Bogle said that investors could keep up to 20% of their portfolio in international stocks if desired. Experts today argue that an international stock allocation is sensible to hedge against the risk of the U.S. market underperforming for extended periods of time. This happened between 2002 and 2009, when international stocks strongly outperformed U.S. ones. A great way to gain international exposure is via VXUS, which holds 7,896 stocks from developed and emerging markets. VXUS costs an expense ratio of 0.07%, but holding it in a taxable account allows investors to claim a foreign tax credit on dividends.
Vanguard Total World Stock ETF (VT)
Investors looking to invest in the world’s stock market can buy a combination of VTI and VXUS. This approach grants exposure to U.S. and international stocks. However, it also requires deciding what proportions of each to hold, and also carries the hassle of rebalancing. For a managed approach, investors can buy VT, which tracks 9,500 stocks from U.S., international-developed and international-emerging markets. For a 0.07% expense ratio, Vanguard buys stocks worldwide and manages them on your behalf. Currently, the ETF is 55% U.S. and 45% international, and Vanguard will adjust this as the world’s stock market changes. In many ways, VT is the ultimate passive investing approach.
Vanguard Value ETF (VTV)
Value stocks are those that appear to be trading at a share price below what their fundamentals suggest. Common metrics used by value investors to screen stock picks include low price-to-sales, price-to-book and price-to-earnings ratios. An alternative is investing in an index fund that automatically selects value stocks based on a preset criteria, like VTV does. VTV tracks the CRSP U.S. Large Cap Value Index, which holds notable U.S. large-cap value stocks like Berkshire Hathaway Inc. Class B shares (BRK.B) and Johnson & Johnson (JNJ). Year to date through Sept. 7, VTV is only down 6.5% compared to the 16.5% loss suffered by the S&P 500. The ETF costs an expense ratio of 0.04%.
Vanguard Growth Index Fund ETF (VUG)
Growth stocks are the opposite of value stocks. These stocks tend to trade at share prices above what their fundamentals suggest would be fair. The elevated valuations reflect investor expectations for future growth, which can be measured by past or projected revenue growth, profit margins, return on equity and earnings-per-share growth. A great way to buy growth stocks without the need for screening is via VUG, which tracks the CRSP US Large Cap Growth Index. This index holds notable U.S. large-cap growth stocks like Tesla Inc. (TSLA), Alphabet Inc. (GOOG, GOOGL) and Nvidia Corp. (NVDA). Like its counterpart VTV, VUG also costs an expense ratio of 0.04%.
Vanguard High Dividend ETF (VYM)
Income-oriented investors often seek companies with high dividend payments. These are cash disbursements investors can receive out of a company’s after-tax profits. When reinvested, dividends play an important role in an investment’s total return and often have tax advantages. A great way to buy a portfolio of high-yielding U.S. dividend stocks is via VYM, which tracks the FTSE High Dividend Yield Index. VYM holds 440 blue-chip stocks largely from the financial, health care, energy and consumer staples sectors that are forecast to have above-average dividend yields. The ETF’s top five holdings are Johnson & Johnson, Procter & Gamble Co. (PG), JPMorgan Chase & Co. (JPM), Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX). VYM costs an expense ratio of 0.06%.
Vanguard S&P Small-Cap 600 Value ETF (VIOV)
A popular investment strategy that has historically beaten the market is investing in small-cap value stocks, those with market caps of $300 million to $2 billion, that also appear undervalued. This is known as a “small-cap value tilt.” While risky and more volatile than regular index investing, the approach is backed by research from Nobel Prize winners Eugene Fama and Kenneth French and used by dozens of fund managers, notably Dimensional Fund Advisors. Vanguard also offers a low-cost small-cap value fund in VIOV, which tracks the S&P SmallCap 600 Value Index. VIOV employs a quantitative earnings and fundamentals screener to weed out unprofitable or high-valuation small caps to ensure maximum exposure to value and size. The ETF costs an expense ratio of 0.15%.
Vanguard ESG U.S. Stock ETF (ESGV)
Passive investing means buying all the stocks in a particular index in the proportions they’re represented at the time. However, this can entail the inclusion of undesirable companies from an environmental, social and governance, or ESG, perspective. For ESG-conscious investors, a good alternative to VTI is ESGV, which tracks the FTSE U.S. All Cap Choice Index. This index holds 1,524 stocks and excludes those involved in the adult entertainment, alcohol, tobacco, weapons, fossil fuel, gambling and nuclear power industries. The ETF also screens for companies that have a history of labor rights, human rights, corruption, diversity and environmental standards violations. ESGV costs an expense ratio of 0.09%.
Vanguard ESG International Stock ETF (VSGX)
If ESGV is the ESG version of VTI, then VSGX is the ESG version of VXUS. ESG-conscious investors who want to expand their portfolio international can buy VSGX, which tracks 5,337 stocks held in the FTSE Global All Cap ex US Choice Index. This index employs the same screens as ESGV does, ensuring that VSGX makes for a great international counterpart. A portfolio of 55/45 ESGV and VSGX would therefore roughly be equivalent to VT, but minus any non-ESG-oriented stocks. This combination is one of the simplest ways to hold a globally diversified portfolio with an ESG focus. However, due to the higher cost of indexing international stocks, the ETF is slightly more expensive, coming in at an expense ratio of 0.12%.
10 best Vanguard ETFs to buy:
— Vanguard S&P 500 ETF (VOO)
— Vanguard Total Stock Market ETF (VTI)
— Vanguard Total International Stock ETF (VXUS)
— Vanguard Total World Stock ETF (VT)
— Vanguard Value ETF (VTV)
— Vanguard Growth Index Fund ETF (VUG)
— Vanguard High Dividend ETF (VYM)
— Vanguard S&P Small-Cap 600 Value ETF (VIOV)
— Vanguard ESG U.S. Stock ETF (ESGV)
— Vanguard ESG International Stock ETF (VSGX)
More from U.S. News
Update 09/08/22: This story was previously published at an earlier date and has been updated with new information.