Navigating the investment landscape reveals a number of ways to categorize equity mutual funds and exchange-traded funds (ETFs), which can be sorted by characteristics such as geography, sector or company size.
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Yet a straightforward method to distinguish these funds is by their management style, specifically how they select and weigh the stocks in their portfolios.
Active management dominates one end of the spectrum, where teams of portfolio managers and researchers engage in extensive due diligence, employing fundamental and technical analysis bolstered by quantitative models.
On the other end are the automated funds that mirror or sample a benchmark index. These indexes are constructed following a transparent, objective rules-based framework.
A prime example is the well-known S&P 500, which tracks the performance of the largest U.S. companies based on criteria including market capitalization, liquidity, public float and positive earnings, along with some subjective decisions by an index committee.
So, which approach is more effective? The S&P Indices Versus Active (SPIVA) study suggests a challenging landscape for active management. As of June 30, the SPIVA report indicates that 84.7% of all large-cap U.S. funds failed to outperform the benchmark S&P 500 over the past decade.
This pattern of underperformance extends to other segments managed actively, such as mid-cap stocks, small-cap stocks, value stocks and growth stocks. If these results resonate with you, then embracing passive management by investing in an index fund might be the sensible choice.
“Vanguard, founded by the late John Bogle, revolutionized investing by introducing the first index fund in 1976,” says Henry Yoshida, CEO and co-founder of Rocket Dollar. “Individual retail investors typically achieve better results through Vanguard’s low-expense-ratio, broad stock market index funds compared to higher-cost actively managed funds.”
Here are seven of the best Vanguard index funds to buy today:
| Index Fund | Expense ratio |
| Vanguard 500 Index Fund Admiral Shares (ticker: VFIAX) | 0.04% |
| Vanguard S&P 500 ETF (VOO) | 0.03% |
| Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) | 0.04% |
| Vanguard Total Stock Market ETF (VTI) | 0.03% |
| Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) | 0.12% |
| Vanguard Growth ETF (VUG) | 0.04% |
| Vanguard Dividend Appreciation ETF (VIG) | 0.06% |
Vanguard 500 Index Fund Admiral Shares (VFIAX)
“Beyond their industry-leading low costs, Vanguard’s index funds benefit investors through reduced portfolio turnover, which minimizes tax implications in taxable accounts,” Yoshida explains. In addition to a now-expired patent that allowed ETFs to exist as share classes of its mutual funds, this feature has helped the majority of Vanguard index funds avoid large capital gains distributions.
Consider VFIAX, which tracks the aforementioned S&P 500 index. The S&P 500 does not reconstitute its portfolio frequently; typically, only a handful of companies are added or removed in a given year. As a result, VFIAX has an annual portfolio turnover rate of just 2.2%. The fund is also extremely cost-effective, with a 0.04% expense ratio.
Vanguard S&P 500 ETF (VOO)
“As the original index fund creator and consistently lowest-cost provider, Vanguard continues to innovate,” Yoshida says. “They recently expanded their automated investing capability to include ETF versions of their broad market indexes — a feature previously limited to their mutual fund offerings.” This dynamic can be seen in play with VOO, the ETF variant of VFIAX.
This minimum required investment for VOO is simply the price of one share, starting at around $536. If your broker allows for fractional share trading, you can even buy as little as $1 worth to gain some exposure. In contrast, investing in VFIAX requires at least a $3,000 minimum. Today, investors using Vanguard’s brokerage platform can now automate scheduled investments into their favorite ETFs, making it easier than ever to put a portfolio on autopilot. VOO charges a 0.03% expense ratio.
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
When it comes to Vanguard index funds, selection matters. For instance, investors who buy VOO are only getting exposure to the large-cap segment of the U.S. market. This is because the S&P 500’s methodology limits its breadth. If you want exposure to the broad U.S. stock market, the Vanguard index fund to buy is VTSAX, which tracks the CRSP US Total Market Index.
This benchmark currently holds more than 3,600 stocks. It is far less rigorous than the S&P 500 — instead of featuring a committee process and earnings screen, it simply aims to hold the entire investable market. Overall, VTSAX’s top holdings are very similar to that of VFIAX, but the fund contains thousands more mid- and small-cap stocks, making it more diversified. VTSAX charges a 0.04% expense ratio.
Vanguard Total Stock Market ETF (VTI)
Older investors might be accustomed to the limitations of mutual funds, such as only being able to make transactions once per day at market close and dealing with minimum required investments. However, younger investors more used to trading stocks on a brokerage app may find these restrictions onerous. As a result, a younger investor may prefer an ETF like VTI over a mutual fund like VTSAX.
This ETF also tracks the CRSP US Total Market Index but does it for a lower 0.03% expense ratio. In addition, VTI does not have the $3,000 minimum initial required investment that VTSAX has. As an ETF, VTI can be purchased as long as you can afford a share, which sits at around $287. However, the minimum required investment could be even lower if your brokerage offers fractional trading.
[7 Best Monthly Dividend ETFs to Buy Now]
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
Vanguard’s index funds aren’t limited to the U.S. stock market. Modern indexing methodologies can seamlessly incorporate stocks from international markets, even if they trade in different currencies and time zones. As a result, investors looking for international diversification no longer need to buy individual American depositary receipts (ADRs)
. Instead, an international index fund like VTIAX could work.
This Vanguard index fund tracks the FTSE Global All Cap ex US Index, which holds 8,688 stocks from both international developed and emerging markets. As with most Vanguard index funds, VTIAX has a low 3.9% annual portfolio turnover rate and a minimal 0.12% expense ratio. It is also available as the Vanguard Total International Stock ETF (VXUS) at a lower 0.08% expense ratio.
Vanguard Growth ETF (VUG)
It’s important to understand that fundamentally, indexes are just a collection of rules that determine how stocks get picked and weighted. As a result, index providers are able to tweak these rules. This allows them to create more tailored, focused benchmarks that screen stocks more selectively than just holding a broad basket. A great example is the CRSP US Large Cap Growth Index tracked by VUG.
This Vanguard index ETF holds 183 large U.S. growth stocks screened for higher earnings growth rates and return on equity (ROE). Top holdings include Apple Inc. (AAPL), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA) and Amazon.com Inc. (AMZN). VUG charges a 0.04% expense ratio. It also has a counterpart, the Vanguard Value ETF (VTV), which charges an identical 0.04% expense ratio.
Vanguard Dividend Appreciation ETF (VIG)
The versatility of index funds extends beyond just targeting broad market exposure or value versus growth styles. Some specialized indexes can even employ more intricate rules-based methodologies to target desirable characteristics like dividend growth. A great example is VIG, which tracks the S&P U.S. Dividend Growers Index for a 0.06% expense ratio and pays a 1.7% 30-day SEC yield.
VIG’s benchmark index requires all eligible holdings to achieve a minimum 10-year streak of consecutive dividend growth. In addition, the index features a quality screen to weed out companies in poor financial health by eliminating the top 25% highest-yielding stocks. Just like how VUG has a counterpart in the form of VTV, VIG’s polar opposite is the Vanguard High Dividend Yield ETF (VYM).
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7 Best Vanguard Index Funds to Buy originally appeared on usnews.com
