Ask yourself this: How do you know if your investment strategy truly aligns with that of a buy-and-hold investor, rather than that of an opportunistic trader?
One way to determine this is by calculating your portfolio’s turnover ratio — a standardized metric that reflects the percentage of your portfolio’s holdings that have been replaced within a year.
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For instance, a 50% turnover ratio suggests that half of your portfolio has been turned over, while a 100% turnover ratio suggests a far more active strategy, with the entire portfolio being turned over.
For buy-and-hold investors, lower turnover is generally better. Consider the fascinating case of the Voya Corporate Leaders Trust Fund Series B (ticker: LEXCX), a unit investment trust (UIT) that purchased a portfolio of U.S. blue-chip stocks at its inception in 1935.
Since then, the fund has made no new purchases or sales — allowing its portfolio to be whittled down over the years to just 22 companies through spin-offs, mergers and bankruptcies.
How did this ultra-low turnover fund fare? For most of its life, LEXCX enjoyed market-beating returns with minimal intervention from its portfolio managers. By simply keeping turnover low and letting winners run, the fund performed exceptionally well.
Today, buy-and-hold investors who want to stick to a consistent, long-term strategy can emulate the success of LEXCX with various Vanguard funds, many of which boast similarly low turnover and are particularly appealing for those with a long investment horizon.
“Vanguard funds as well as other low-cost investment options are an efficient way for investors to gain exposure to both the overall market as well as specific market sectors,” says Robert F. Draper Jr., founder and chief investment officer of Draper Asset Management. “The usage of Vanguard funds removes the burden of specific security analysis.”
Here are seven of the best Vanguard funds to buy and hold today:
| Vanguard fund | Expense ratio |
| Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) | 0.04% |
| Vanguard 500 Index Fund Admiral Shares (VFIAX) | 0.04% |
| Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) | 0.12% |
| Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) | 0.10% |
| Vanguard Value Index Fund Admiral Shares (VVIAX) | 0.05% |
| Vanguard Wellington Fund Investor Shares (VWELX) | 0.26% |
| Vanguard Target Retirement 2070 Fund (VSVNX) | 0.08% |
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
The broader and more passive a fund’s benchmark is, the more likely it is to have lower turnover. Consider the case of VTSAX, which tracks the CRSP U.S. Total Market Index. It features a portfolio of more than 3,600 domestic equities, spanning all 11 market sectors, small-, mid- and large-cap stocks, and both value and growth styles. It achieves all this with a low 2.2% turnover rate and 0.04% expense ratio.
This is possible because VTSAX’s benchmark is designed to track the total investable U.S. stock market. The fund doesn’t try to pick and choose the best stocks — instead, it simply invests in all possible ones relative to their market capitalization. As such, it’s a great way to passively track the returns of the U.S. stock market. However, you’ll need a minimum initial investment of $3,000 to access this fund.
Vanguard 500 Index Fund Admiral Shares (VFIAX)
Another low-turnover Vanguard fund commonly used as a tax-loss harvesting partner for VTSAX is VFIAX. This fund tracks the S&P 500, which is narrower and slightly more active compared to the CRSP U.S. Total Market Index. It’s limited to 500 large- and mid-cap stocks, has requirements in place for positive historical earnings, and potential holdings are vetted by a committee before inclusion.
Still, the market-capitalization-weighted structure of VFIAX requires minimal intervention. After the index is reconstituted as needed, there’s no need to re-weight holdings. As stocks do well and their market cap increases, they’ll naturally rise to the top. This makes the fund a potent holding for betting on the biggest and most successful American companies. VFIAX charges a 0.04% expense ratio.
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
The broad-market approach used by VTSAX can be applied to international stocks with great effect, too. By simply buying the entire ex-U.S. stock market in one fund, investors can save on individual currency transaction fees or the necessity of American depositary receipts (ADRs). For this role, the Vanguard fund to buy is VTIAX, which tracks more than 8,600 stocks represented by the FTSE Global All Cap ex U.S. Index.
This index is a market-cap-weighted benchmark of both international developed and emerging market stocks. The former includes countries such as the U.K., France, Germany, Japan and Switzerland, while the latter includes the likes of China, India and Brazil. VTIAX boasts a competitively low turnover rate of 3.9% and a 0.12% expense ratio, along with the usual $3,000 minimum investment requirement.
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Vanguard Total World Stock Index Fund Admiral Shares (VTWAX)
Investors can obtain a globally diversified investment portfolio by purchasing VTSAX and VTIAX in tandem. However, this creates new questions — when will you rebalance the portfolio, if at all? What proportion will you allocate to VTSAX versus VTIAX? Can you resist chasing past performance if U.S. markets pull ahead? These are active management decisions detrimental to a buy-and-hold strategy.
To keep things as simple as possible, a buy-and-hold investor can opt for a globally diversified equity index fund like VTWAX. This fund tracks the FTSE Global All Cap Index, which holds more than 9,900 stocks from U.S., international developed and emerging markets. VTWAX’s broad nature and market-cap-weighted index allows it to keep portfolio turnover low at 4.3% and expense ratios reasonable at 0.1%.
Vanguard Value Index Fund Admiral Shares (VVIAX)
Buy-and-hold investors looking to potentially outperform the market can do so via funds that target the “value” factor. This factor refers to the historical outperformance of stocks with high book-to-market ratios over those with low book-to-market ratios. Over long periods of time in the past, value stocks have consistently outperformed their growth counterparts in a statistically significant manner.
However, actively managed value factor mutual funds often face significant headwinds from higher expense ratios and turnover, which hurts their net returns and tax efficiency. A viable alternative is VVIAX, which tracks 340 stocks represented by the CRSP U.S. Large Cap Value Index. This fund delivers U.S. large-cap value exposure at a 0.05% expense ratio and a decently low 10.3% portfolio turnover rate.
Vanguard Wellington Fund Investor Shares (VWELX)
“Launched in 1929, VWELX has seen it all — the Great Depression, World War II, the intense bear market of the 1970s, the subsequent bull market of the ’80s and ’90s, the global financial crisis and the COVID-19 pandemic, just to name a few,” says Brian Miller, senior investment specialist on the multi-asset solutions team at Vanguard. Since inception, VWELX has returned an annualized 8.3%.
Although not a passive, low-turnover index fund, VWELX’s track record makes it a strong contender for a buy-and-hold investor. Two-thirds of this fund are allocated to out-of-favor large- and mid-cap stocks with high dividends and low valuations, while one-third is allocated to investment-grade corporate bonds. The fund charges a 0.26% expense ratio and pays an above-average 2.3% 30-day SEC yield.
Vanguard Target Retirement 2070 Fund (VSVNX)
“Vanguard’s suite of target retirement funds can be a complete portfolio solution for investors who want a simple, globally diversified portfolio that adjusts its risk profile over time,” Miller says. “Simply pick the target date closest to when you plan to retire, and the fund allocates your assets to a low-cost mix of stocks and bonds that gradually gets more conservative as you approach retirement.”
A buy-and-hold investor looking to retire on or around the year 2070 could therefore obtain a single-ticker portfolio solution via VSVNX. This target-date fund is currently 90% allocated to global stocks, and 10% allocated to global bonds. But as the years pass, the fund will gradually increase its bond allocation on a glidepath to become more conservative, prioritizing capital preservation and income.
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7 Best Vanguard Funds to Buy and Hold originally appeared on usnews.com
Update 09/06/24: This story was previously published at an earlier date and has been updated with new information.
