For active investors, the path to outperforming the market is fraught with numerous obstacles and inefficiencies. These include not only brokerage commissions and bid-ask spreads but also other sources of drag like transaction costs and taxes on frequent trading.
Each of these factors can chip away at investment returns, making the task of beating the market even more challenging. Beyond these impediments, active investing also demands a significant investment of time and effort in researching and managing a portfolio.
Despite these efforts, there’s no guarantee of success for active investors. This point is underscored by the latest S&P Indices Versus Active, or SPIVA report, revealing that 92.2% of U.S. large-cap funds have underperformed the S&P 500 over the past 15 years.
This statistic highlights the difficulty that even professional fund managers face in trying to outpace the market. For the average investor, the challenge is even greater, raising the question: If the professionals struggle, what chance do retail investors have?
In this context, adopting a buy-and-hold strategy using low-cost index funds becomes an attractive proposition. This approach is about matching the market’s long-term returns, rather than trying to beat it and risking underperforming.
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Vanguard, with its unique investor-owned structure, emerges as a standout option for investors looking to implement this strategy. Vanguard’s ownership model means that fund shareholders own the funds, which in turn own Vanguard, aligning the company’s interests with those of its investors.
“Very few, if any, investors should be paying 1% each year for investment advice and portfolio management,” says Jordan Taylor, an independent financial advisor at Core Planning. “Vanguard does a great job of trying to provide as many low-cost investment options as they can, something many asset management firms fail to do.”
Furthermore, Vanguard’s extensive selection of 83 exchange-traded funds, or ETFs, and 267 mutual funds offers broad diversification across various asset classes, geographic regions and sectors. This wide range of options allows investors to build a diversified portfolio tailored to their long-term financial goals, with the added benefit of low expense ratios.
Here are seven of the best Vanguard funds to buy-and-hold today:
| Vanguard Fund | Expense Ratio |
| Vanguard S&P 500 ETF (ticker: VOO) | 0.03% |
| Vanguard Total Stock Market ETF (VTI) | 0.03% |
| Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) | 0.11% |
| Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) | 0.10% |
| Vanguard Dividend Appreciation ETF (VIG) | 0.06% |
| Vanguard Small-Cap Value ETF (VBR) | 0.07% |
| Vanguard Utilities ETF (VPU) | 0.10% |
Vanguard S&P 500 ETF (VOO)
The S&P 500 is an index, and investors cannot invest in it directly. Instead, the index can be accessed through ETFs that track it. S&P 500 index ETFs like VOO can provide accurate and accessible exposure by buying and holding each of the index’s constituent stocks in the correct weightings. By buying a share of VOO, investors therefore receive exposure to the returns of the S&P 500, net of fees.
Speaking of fees, VOO is extremely affordable. The ETF charges an annual expense ratio of 0.03%. This means that for every $10,000 invested in VOO, investors can expect to pay just $3 in fees. “Cost is important, as a fund’s expense ratio comes directly out of the performance that an investor will earn,” says Daniel Dusina, director of investments at Blue Chip Partners Inc.
Vanguard Total Stock Market ETF (VTI)
“I still believe that a quality ETF for a long-term growth portfolio from Vanguard is VTI, especially for investors who are not really near retirement and have the ability to invest monthly in up or down markets,” says Jim Penna, senior manager of retirement services at VectorVest Inc. This ETF provides broad exposure to the total U.S. stock market for a 0.03% expense ratio.
As a market-cap-weighted ETF, VTI’s top holdings consist of some familiar drivers of recent market returns such as Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Nvidia Corp. (NVDA), Alphabet Inc. (GOOGL, GOOG), Meta Platforms Inc. (META) and Tesla Inc. (TSLA). “VTI holds all of the ‘Magnificent Seven’ stocks, so it’s a nice way to capture all seven of the names,” Penna says.
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
ETFs like VOO and VTI only provide exposure to the domestic U.S. stock market. While these stocks have outperformed over the past decade, there is no assurance that this will continue in perpetuity. Long-term buy-and-hold investors may therefore wish to diversify internationally by holding stocks from both developed and emerging markets. The Vanguard mutual fund for this role is VTIAX.
This fund tracks the market-cap-weighted FTSE Global All Cap ex US Index. On the developed markets side, VTIAX holds stocks from countries like Japan, the U.K., Canada, Switzerland, France and Germany. From emerging markets, the ETF features stocks from China, India, Brazil and more. All of this comes at an affordable 0.11% expense ratio, but there is a $3,000 minimum required investment.
[SEE: 9 Highest Dividend-Paying Stocks in the S&P 500]
Vanguard Total World Stock Index Fund Admiral Shares (VTWAX)
Buy-and-hold investors can combine VTI and VITAX in varying proportions to obtain a globally diversified portfolio, but this approach still requires periodic rebalancing. To make matters even simpler, consider a global equity mutual fund like VTWAX. This fund tracks the FTSE Global All Cap Index, which holds small-, mid- and large-cap stocks
from U.S., developed and emerging markets.
VTWAX’s holdings are based on the world’s current market-cap-weighted composition. Currently, investors can expect around 60% in U.S. stocks, 30% in developed countries and 10% in emerging markets, but this can change over time. The expense ratio for this fund sits at a reasonable 0.1%, but again, investors have to invest at least $3,000 initially to access it.
Vanguard Dividend Appreciation ETF (VIG)
Investors looking to focus on the snowball-like compounding potential of dividend stocks can also do so with Vanguard funds. One of the firm’s most popular offerings here is VIG, which tracks the S&P U.S. Dividend Growers Index. This index doesn’t hold stocks that are currently paying the highest dividends, but rather picks those with a long history of growing them year over year.
The result is a high-quality portfolio of more than 300 mostly large-cap stocks, with notable names like Microsoft, Apple, UnitedHealth Group Inc. (UNH), Exxon Mobil Corp. (XOM) and JPMorgan Chase & Co. (JPM) in VIG’s top holdings. Right now, investors can expect a 1.9% 30-day SEC yield and a fairly low 0.06% expense ratio.
Vanguard Small-Cap Value ETF (VBR)
Most Vanguard ETFs are weighted by market capitalization, meaning that larger companies are held in higher proportions and usually dominate the top holdings. On the other hand, risk-tolerant buy-and-hold investors trying to beat the market can consider targeting out-of-favor companies, such as small-cap value stocks with a factor ETF like VBR. The ETF is fairly cheap with a 0.07% expense ratio.
VBR tracks the CRSP US Small Cap Value Index, which as its name suggests focuses on domestic stocks trading at favorable valuations while being of a smaller market capitalization. Historically, both value and small-cap stocks have outperformed their large-cap growth counterparts over long periods. Therefore, patient and contrarian investors could find VBR to be a viable holding.
Vanguard Utilities ETF (VPU)
Vanguard’s ETF lineup isn’t limited to just broad market index ETFs. The firm also has ETFs that can help buy-and-hold investors invest long term in a specific sector. A great example is VPU, which targets small-, mid- and large-cap U.S. utility stocks, a long-standing defensive sector that in 2023 suffered some headwinds. The ETF charges a 0.1% expense ratio and pays a decent 3.5% 30-day SEC yield.
“While I may not have thought this a year ago, I believe it is not a bad time to begin entering a position in VPU,” Penna says. “The utilities sector will often struggle when interest rates rise, as Treasury bills are a safer haven in times of macro uncertainties.” Year to date as of Nov. 31, VPU is down 9.6% with dividends reinvested, but has grown at an 8.7% compound annual growth rate since its inception on Jan. 26, 2004.
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7 Best Vanguard Funds to Buy and Hold originally appeared on usnews.com
Update 12/11/23: This story was previously published at an earlier date and has been updated with new information.
