Lowest Fees. Best Funds.
You Can’t go wrong with Vanguard Index Funds
What is it that makes a mutual fund attractive to investors? The two things that stick out to me are above average performance and low fees. This is going to be a comprehensive Vanguard Index Funds Review for 2015.
Sure there are other factors you need to consider, but nothing can kill your returns more than mutual funds with front or back-end loads and high management fees.
Risk tolerance is also something to keep in mind, but risk can be mitigated simply by choosing different mutual funds. When we’re talking Vanguard Index Funds, we know we’ll be getting low fees and expert management. There’s really no reason to choose a different company for your index-based mutual funds.
First Things First, What Is an Index Fund?
Like we said, if you’re going to be investing in index funds, there is no reason to go with anyone other than Vanguard. Index funds are designed to track a specific index such as the S&P 500 or Mid Cap growth stocks. Because mutual funds that track specific indexes don’t require very much management interference, most index funds tend to perform identically.
A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
If you have two funds that perform nearly identically, your main concern should be the expense ratio as index funds are designed to track an index. This means if there is an S&P 500 index fund offered by two competing financial companies, the returns should be nearly identical which makes the deciding factor on which was more profitable the fees that you were charged.
What Indexes Can Be Tracked With an Index Fund?
There are all kinds of indexes that are tracked via index funds. Some of the most popular indexes tracked by mutual funds are:
- The S&P 500
- Total Stock Market Index
- Russell 2000
- Nasdaq 100
There are also other indexes that are used to track various sectors or investing ideas, for instance, there is an index fund that looks to track consumer discretionary spending, manufacturing indices among others.
No matter which index you choose, the one thing all indexes have in common is that the value of the index fund will change proportionally to the underlying stocks contained in the index.
This means that just because you are invested in an index fund doesn’t guarantee you will make money in a given year as the returns of the fund will be related to the performance of the stocks in the fund.
Why Indexing Works
After fees marginal out-performers will typically under-perform. On average, only 20% of actively managed funds will beat their respective index – and typically by a small percentage.
There just are no actively managed funds that outperform the indexes over time. Very few (if any) actively managed funds will outperform a benchmark index over 15 years.
Recognizing that even the best managers that have the best funds win on about 52% of their picks and lose on the 48%. It is not easy picking stocks consistently over time, but as we’ve seen, historically the stock market increases in value over time which is why indexing is a strategy that works – if you give it decades – not years.
Why Choose Vanguard? How about rock-bottom fees!
Vanguard by-far offers the lowest mutual fund fees in the business. With an average expense ratio of .19%, Vanguard mutual funds are, on average, 5x lower than any competitor!
Vanguard also does not charge trading commissions when you invest in their low-cost mutual funds or ETFs.
The Vanguard Mutual Fund Recommendation Tool
If you are not confident picking out your funds on your own, Vanguard has provided us with their slick index fund recommendation tool. With this tool you can choose from a variety of factors such as time, risk and income and they will provide you with a list of recommended funds.
The Best Vanguard Index Funds
We could fill an entire book if we went ahead and listed every Vanguard index fund available to investors. So we’re not going to do that. Instead, we are going to focus on a few of the best Vanguard index funds that could help you fill-out a well rounded portfolio.
We want to primarily focus on index funds that invest in stocks so let’s get this rolling!
Vanguard 500 Index Fund Investor Shares (VFINX)
Any investor interested in index funds will probably want to take a stake in a fund that tracks the S&P 500 stock market index. When you purchase an index fund like this, the fund will invest in 500 of the largest companies in the U.S. Simple as that. With a 500 index fund, there is no guess work, nothing to actively manage. For this reason the only differentiatior would be the fees you pay and Vanguard has the lowest @ .19% for this fund.
The VFINX fund invests in 500 of the largest U.S. companies, which span many different industries and account for about three-fourths of the U.S. stock market’s value.
The main risk with a 500 index fund is the volatility that comes along with investing in the stock market in general. Your capital could appreciate by 20% in a given year, or it could go down by 40%. The main thing to note when investing in an index fund is consistent investment over time in order to dollar-cost-average and get the biggest returns.
Vanguard Small-Cap Growth Index Fund Investor Shares (VISGX)
Small-cap companies can produce some of the biggest returns since these companies are growing fast. The Vanguard Small-Cap growth index fund looks to wrap an index around companies that are of a certain size and showing the same type of growth. Specifically…
This low-cost index fund offers exposure to small-capitalization U.S. growth stocks, which tend to grow more quickly than the broader market. The fund seeks to track a growth-style index of small-sized companies.
To get an idea of the types of companies that are held by the VISGX, we have listed the top 10 holdings as of October 31, 2014. These companies make-up only about 5.4% of the fund’s holdings.
- Cooper Cos. Inc.
- Medivation Inc.
- Alkermes plc
- Harman International Industries Inc.
- Palo Alto Networks Inc.
- WhiteWave Foods Co.
- Duke Realty Corp.
- Puma Biotechnology Inc.
- Extra Space Storage Inc.
- MEDNAX Inc.
The Vanguard small-cap growth index fund only charges a measly .24% management fee. This is definitely higher than the Vanguard 500, but with good reason. These small-cap companies take a little more time to keep track of and ensure that quality companies are kept in or added to the fund and companies that are struggling are dropped.
Small-cap investment should be part of a well-balanced portfolio, however, small cap stocks are definitely more volatile than their large-cap siblings.
Vanguard Small-Cap Value Index Fund Admiral (VSIAX)
If you are fan of Warren Buffet or a student of Benjamin Graham and have read “The Intelligent Investor” you can appreciate the concept of value investing. The Vanguard small-cap value index fund looks to take an index-like approach and invest in small-cap stocks that appear to be undervalued at current levels.
Value stocks are those that may be temporarily undervalued by investors.
While we don’t know exactly how Vanguard selects these value stocks, we can guess that they are trading at P/E ratios that are relatively low based on current and future earnings.
The average 10-year return for the VSIAX was 9.34%.
Just like the Small cap growth index, the main risk with the Small-Cap value index is the fact that we’re investing in small-cap companies. They are subject to greater market volatility.
Surprisingly, the fees for the small-cap value fund at Vanguard are only .09%. I would have guessed that a small cap index would carry a higher expense ratio, but it does not. This is a great expense ratio if you want some small-cap exposure added to your portfolio and are a proponent of value investing principles.
Vanguard Mid-Cap Growth Index Fund Investor Shares (VMGIX)
Investing in mid-cap companies can offer a bit more stability than small-cap, but still provide room for growth. Specifically the VMGIX seeks out mid-cap companies that show the most potential for growth when compared to their peers.
The fund seeks to track a growth-style index of medium-sized companies, whose stocks tend to be more volatile than large-company stocks.
To get an idea of the types of companies that are held by the VMGIX, we have listed the top 10 holdings as of October 31, 2014. These companies make-up only about 12.8% of the fund’s holdings. As you can see, compared to the small-cap index funds, you may already begin to recognize some of the companies listed.
- Vertex Pharmaceuticals Inc.
- Health Care REIT Inc.
- Avago Technologies Ltd.
- Moody’s Corp.
- AvalonBay Communities Inc.
- Chipotle Mexican Grill Inc.
- Cerner Corp.
- Sherwin-Williams Co.
- Keurig Green Mountain Inc.
- L Brands Inc.
Associated Risk when Investing in the VMGIX
As with the other index funds, the main risk with the VMGIX would just be volatility and possible drop in price in down market years.
Fees & Performance
The Vanguard Mid-Cap Growth Index Fund offers an attractive expense ratio of only .24% which is about 82% lower than the the average fees of similar funds. As far as performance, the 10-year average comes in at 10.23%.
Vanguard Mid-Cap Value Index Fund Admiral (VMVAX)
Just like the small-cap value fund, the mid-cap value index fund looks to achieve the same balance, expect with larger companies. This fund attempts to build an index at mid-cap value stocks. Stocks that meet certain valuation criteria are owned by this fund.
To get an idea of the types of companies that are held by the VMVAX, we have listed the top 10 holdings as of October 31, 2014. These companies make-up only about 11.4% of the fund’s holdings. As you can see, compared to the small-cap index funds, you may already begin to recognize some of the companies listed.
- Delphi Automotive plc
- Mylan Inc.
- United Continental Holdings Inc.
- Alcoa Inc.
- Seagate Technology plc
- AmerisourceBergen Corp.
- Hartford Financial Services Group Inc.
- Boston Scientific Corp.
- Fidelity National Information Services Inc.
- Sigma-Aldrich Corp.
Fees & Performance
The rock-bottom fees for this fund are .09% which is 93% lower than the average fees charged by other companies for a similar fund! The fund also holds its own in the performance arena with a 10-year return of 10.25%.
Vanguard Large-Cap Index Fund Investor Shares (VLACX)
A portfolio would not be complete with out some additional large-cap investing. The VLACX is a blended fund focused on large-cap companies. This fund targets both growth and value.
This fund provides broad, low-cost exposure to the large-capitalization market by investing in the U.S. stocks that represent the top 85% of market capitalization.
Large-cap stocks are traditionally less volatile than small and mid-cap stocks, however the prices will still fluctuate with market conditions.
To get an idea of the types of companies that are held by the VLACX, we have listed the top 10 holdings as of October 31, 2014. These companies make-up only about 11.4% of the fund’s holdings. As you can see, you probably recognize every company in the list as they are well-known banks, technology, product and investment companies.
- Apple Inc.
- Exxon Mobil Corp.
- Microsoft Corp.
- Google Inc.
- Johnson & Johnson
- Wells Fargo & Co.
- General Electric Co.
- Berkshire Hathaway Inc.
- Procter & Gamble Co.
- Chevron Corp.
Vanguard REIT Index Fund Investor Shares (VGSIX)
Also available as a lower-cost Admiral™ Shares mutual fund and an ETF, this fund invests in real estate trusts (companies that purchase offices, hotels and other real estate properties). Since real estate often acts differently than stocks and bonds, investors will purchase REITs when looking to diversify their portfolio.
The main risk for the VGSIX is it has a narrow scope that invests solely in real estate. While it can be part of a diversified portfolio, the fund itself is narrowly focused on a single sector.
As of 10/31/2014, 38.5% of this index fund is made-up of holdings in the following companies:
- Simon Property Group Inc.
- Public Storage
- Equity Residential
- Health Care REIT Inc.
- Prologis Inc.
- AvalonBay Communities Inc.
- Ventas Inc.
- HCP Inc.
- Boston Properties Inc.
- Vornado Realty Trust
Performance & Fees
The Vanguard REIT Index Fund’s 10-year average return comes in at a solid 8.94%. This puts it almost right in-line with other stock-based mutual funds. The fees are also very low @ .24% – nearly 80% lower than the fees charged by averaging related mutual funds.
Vanguard Dividend Appreciation Index Fund Investor Shares (VDAIX)
This fund is available in Investor Shares and also available as a lower-cost Admiral™ Shares mutual fund and an ETF. As the name implies, the dividend appreciation index fund seeks to track a benchmark against stocks that have a history of increasing dividends over time.
As you can imagine, the fund will ultimately be focused on large-cap stocks with good balance sheets and a history of providing a dividend, sustaining the dividend and even increasing the dividend over time.
Since this fund does carry a high majority of large-cap stocks, you may want to choose between the VDAIX and any other Vanguard large-cap index funds so you will be properly diversified.
Top Holdings In The VDAIX
As of 10/31/2014, 36% of this index fund’s net assets are invested in the following companies:
- Johnson & Johnson
- PepsiCo Inc.
- Coca-Cola Co.
- Wal-Mart Stores Inc.
- QUALCOMM Inc.
- Exxon Mobil Corp.
- International Business Machines Corp.
- 3M Co.
- CVS Health Corp.
- United Technologies Corp.
Risks & Fees
Risks are typical with holding a large-cap mutual fund. You will be subject to market fluctuations. However, since this fund is focused on dividends, you do have a bit more protection as the fund should generate income.
The fees are low as they are in most Vanguard funds. The fees come in at a measly .2%
The VDIAX has performed well against its peers boasting an average 10-year return of 7.55%.
Why choose vanguard mutual funds
Again, there is more to mutual funds than just random stock picking. When you buy into a mutual fund, you are purchasing a product offered to you by a company. You want to be certain you trust the company with your money and you are paying a fair price for the product you are purchasing.
Vanguard is actually owned by the shareholders of its mutual funds. If the company is profitable, those profits go to the people who own Vanguard funds, not to outside investors. This is atypical in the financial world as the executives at the companies usually take-home huge bonuses and salaries.
Hence the lower fees
Vanguard’s business model does not contain an incentive to charge any more in fees than necessary to keep the company afloat and pay the bills. However, other companies do better when they charge higher fees and loads. This is why Vanguard can charge you less.
The main reason to choose Vanguard and index funds in general is that high expenses, turnover and active management miscues can totally derail your portfolio. Vanguard’s index funds and low fees prevent the most common reasons portfolios head south.
What Is Index Fund Investing – Another Viewpoint
Traditionally actively managed mutual funds would have hired an expert portfolio manager and it was his job to research companies and determine which stocks to purchase for the fund.
This is a time consuming process and, you know, people have to get paid, so the fees on actively managed funds are higher.
Index funds don’t work like that. They are designed to track a third-party index. Companies like S&P or Dow Jones create a list of stocks that represent the market. It is then the job of the index portfolio manager to go out and buy those list of stocks. Not much to it.
So, with this passive mode of investing, one would think, wouldn’t have a chance of competing with an actively managed fund that has thorough research being conducted. However, research dating back to the 1970’s studied the performance of these actively managed funds and it showed that they usually under-performed the broader market.
In 1976, Vanguard launched the first S&P index fund.
The concept of indexing was actually developed back in the 1960’s. The concept of buying the entire market was to invest in a low-cost way in gaining exposure to the market. Again, it comes back to low fees.
Because of the low cost, index funds have provided competitive returns over time. Indexing used to be the total stock market, but now it is spread across a vast array of segments of the market.
Can actively managed funds outperform the market?
The decision to move to index funds from actively managed funds may be a difficult one. Is it possible to conceive that a small set of skilled managers can consistently outperform the market?
This is a dangerous proposition. Trying to beat the market is a risky proposition for anyone.
The main difficulty is that even though there are active managers that have been able to outperform the market for even 10 years, it is difficult to maintain this performance. Unless this manager believes in a specific style, they won’t change. There would definitely be a time where the outperform (and it may be several years), however, over the course of 20 or 30 years, the numbers just don’t reflect this risk is worth the reward.
One thing to look at is that lower cost active funds could be helpful, otherwise the premiums you pay for active funds don’t necessarily reflect the returns you’ll get back.
Long story short, actively managed funds can outperform the market, however sustained performance is very difficult to achieve and we don’t want to be actively managing our actively managed funds.
Pros and Cons of Index Funds and ETFs
The choice between ETFs and an open-end mutual fund and the debate usually comes down to your preference to the structure of the investing vehicle.
The overwhelming majority of ETFs are indexed based today. If you’re going to get into ETFs, you will typically track that back to an index. It usually comes down to cost differentials and the ETF does have an additional cost layer.
They are traded on an exchange, you could have commission costs and there are bid/ask costs. The trading cost are over and above what a traditional index fund might employ. However you do get more flexible trading ability with an ETF – if you’re going to trade these frequently or even intraday, you might want an ETF.
If you are an investor who wants to make regular investments and not do much selling or trading, a traditional index mutual fund might be the way to go.
Vanguard Index Funds List
Here’s a list of the most popular index funds available at Vanguard. Most of the funds below are listed as the Admiral Shares which means you need a higher initial investment to get in. However, Ivestor share options are available in most (if not all of the funds listed below) which require around a $3000 minimum investment.
- 500 Index Admiral Shares VFIAX
- Dividend Appreciation Index Admiral Shares VDADX
- FTSE Social Index VFTSX
- Growth Index Admiral Shares VIGAX
- High Dividend Yield Index VHDYX
- Large-Cap Index Admiral Shares VLCAX
- Total Stock Market Index Admiral Shares VTSAX
- Value Index Admiral Shares VVIAX
- Extended Market Index Admiral Shares VEXAX
- Mid-Cap Growth Index Admiral VMGMX
- Mid-Cap Index Admiral Shares VIMAX
- Mid-Cap Value Index Admiral VMVAX
- Small-Cap Growth Index Admiral VSGAX
- Small-Cap Index Admiral Shares VSMAX
- Small-Cap Value Index Admiral VSIAX
- Tax-Managed Small-Cap Admiral Shares VTMSX
Difference between Admiral and Investor shares at Vanguard (share classes)
When choosing an index fund at Vanguard, you may be a bit confused between the different share classes – namely Admiral and Investor shares. According to Vanguard:
Admiral™ Shares are a separate share class of Vanguard mutual funds that were created to pass along the savings that result from larger accounts to the investors who own them.
So basically you’re getting a better deal if you have more money to invest in a single fund. Most of us will need to go with the investor shares as the minimum to get the Admiral share price is, on average, a $10,000 minimum investment.
The two main share classes you’ll see when investing at Vanguard are:
Investor Shares: Shares for individual investors. The investor shares at Vanguard will have lower initial deposit requirements, but slightly higher fees (still much lower than industry averages)
Admiral™ Shares: A separate class of lower-expense shares available to Vanguard investors whose accounts meet minimum-balance requirements. Vanguard created Admiral Shares to recognize and encourage the cost savings. Basically when you invest more money in a fund, costs get lower. Vanguard passes on these savings to you.
5 Tips To Getting Started Investing
Now that you have read all about the greatness that is Vanguard, we’re going to leave you with five helpful tips to get you started investing for the future.
- Start Early. The longer your money can grow the better off you will be.
- Use Automatic Investments – Ensure to dollar-cost-averaging works in your favor by using an automatic investment strategy.
- Balance – Find a saving and spending balance. You want to save for the future, but you still need to live your life
- KISS – Keep It Simple Stupid – don’t try beat the market and use index funds when possible
- Think Long Term – it is the nature of the market to fluctuate, but by thinking long-term, you’ll be prepared for retirement.