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Vanguard Index Funds: What They Are and How to Invest

Vanguard index funds kicked off the passive-investing revolution, in which investors try to meet rather than beat market moves for long-term gains.
March 22, 2019
Investing, Investing Strategy
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Vanguard index funds pioneered a whole new way of building wealth for the average investor.

What are Vanguard index funds?

Index funds are a type of mutual fund where thousands of investors pool their cash to purchase shares in a fund that mimics a benchmark index, such as the S&P 500 (hence the name “index fund”).

That was a radically different investment approach when Vanguard founder John Bogle launched the first publicly available index fund in 1976. At the time, active investing — where fund managers try to beat the market’s returns — held sway. The index fund sought simply to match the rise and fall of broad market, industry or sector moves, and allowed everyday Americans more access to investing in stocks.

This simpler approach — known as passive investing — has proved more profitable for the average investor than active investing, for two reasons: Markets tend to rise over time, and index funds charge lower fees, allowing investors to keep more of their money in the market. As a result, investors now flock to passive funds.

And many of those investors turn to Vanguard, the world’s No. 1 originator of mutual funds, with $5.3 trillion under management as of September 2018.

How do Vanguard index funds work?

Vanguard creates index funds by buying securities that represent companies across an entire stock index, or that are targeted to specific groups (for example, an industry sector, similarly sized companies or firms in the same part of the world). Individual investors purchase shares of the fund that interests them, claiming a slice of its returns.

Vanguard creates an index fund by buying securities that represent companies across an entire stock index.

Vanguard also offers index funds that mirror the bond markets, which buy and sell government and corporate debt, and are considered safer investments but with smaller returns.

In all, Vanguard has more than 65 index funds and some 80 index exchange-traded funds.

» Ready to get started? See how to invest in index funds

Are Vanguard index funds a good investment?

All investments carry risk, and Vanguard index funds are no exception. For example, investors in Vanguard’s flagship S&P 500 Index Fund saw the fund’s value drop more than 4% year over year after the market tumult in 2018. But the fund’s 10-year average annual return was 14.3%, thanks to the second-longest bull market in history.

Passively investing in index funds is so popular because most actively managed funds fail to consistently outperform the market. For example, from 2002 to 2017, only about 11% of actively managed stock funds beat their designated benchmark, according to Vanguard and Morningstar data.

Investing in index funds is so popular because most actively managed funds fail to consistently outperform the market.

As with all mutual funds, a key benefit of Vanguard index funds is instant diversification, spreading out risk and dulling the impact of volatility, as broader stock market swings are less bumpy than the rise and fall of any one company’s shares.

Vanguard
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Account minimum: Assessed by product type; fund minimums start at $1,000.

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How much does it cost to buy Vanguard index fund shares?

Investors make an initial minimum investment — typically between $3,000 and $10,000 — and pay annual costs to maintain the fund, known as an expense ratio, based on a small percentage of your cash invested in the fund.

There are two types of Vanguard index fund shares available to individual investors, and which one you choose will determine how much you pay up front and how much you’ll pay in annual fees:

Admiral shares

  • Minimum investment: $3,000 to $100,000.
  • Average expense ratio: 0.11%.

Vanguard recently dropped the account minimum from $10,000 to $3,000 for Admiral shares in 38 index funds.

Investor shares

  • Minimum investment: $1,000 to $3,000.
  • Expense ratio: 0.18%.

Most Vanguard index funds are no longer open to Investor Shares purchases, which makes the drop in account minimums for many Admiral Shares even more welcome news for investors.

Another way investors can get a piece of index fund action is by buying Vanguard exchange-traded funds, which carry no minimum investment and can be bought and sold throughout the day like stocks.

There are a variety of per-share prices, depending on the ETF, up to a few hundred dollars. These funds can be good for investors who like to keep a hands-on approach to investing (and have the time to maintain their portfolio, as you can’t make automatic payments or withdrawals with Vanguard ETFs).

How do you buy Vanguard Index fund shares?

Besides investing through your 401(k) provider, there are two ways to purchase index fund shares: directly from Vanguard or by opening a brokerage account.

You’ll need to choose the type of account you’d like to open, such as a traditional or Roth IRA, or a taxable account.

Finally, decide which index fund shares you’d like to purchase depending on how much you have to invest, and whether to make monthly additional share purchases in the fund.

What are the best Vanguard index funds?

As noted above, Vanguard has more than 100 index funds and ETFs from which to choose. Which fund is best for you depends on your portfolio mix and what you can afford based on account minimum and fees.

You can also check the fund’s historical performance — with the standard caveat that past performance does not guarantee future results.

Some popular Vanguard index funds include:

Vanguard 500 Index Fund

Also known as the Vanguard S&P 500 Index fund, this is the one that started them all, giving investors exposure to 500 of the largest U.S. companies, which make up 75% of the U.S. stock market’s total value.

Minimum investment: $3,000. Expense ratio: 0.14%.

Vanguard Total Stock Market Index Fund

Three-quarters of the U.S. stock market not enough? This fund covers the entire U.S. equity market, including small-, mid- and large-cap growth and value stocks.

Minimum investment: $3,000. Expense ratio: 0.14%.

Vanguard Total Bond Market Index Fund

This fund gives wide exposure to U.S. investment-grade bonds, investing about 30% in corporate bonds and 70% in U.S. government bonds.

Minimum investment: $3,000. Expense ratio: 0.15%.

Vanguard Balanced Index Fund

As the name suggests, this fund mixes its investments between stocks (roughly 60%) and bonds (about 40%) to balance growth through exposure to equities with stability through fixed-income investments.

Minimum investment: $3,000. Expense ratio: 0.19%.

Vanguard Growth Index Fund

This fund has a buy-and-hold approach for stocks in large U.S. companies in sectors that have larger growth potential, such as technology, consumer services and financial services.

Minimum investment: $3,000. Expense ratio: 0.17%.

Vanguard Small Cap Index Fund

Big companies aren’t the only potentially profitable players in the stock market. This fund targets smaller publicly held companies, for investors who want to diversify investments away from larger public companies.

Minimum investment: $3,000. Expense ratio: 0.17%.

Vanguard Total International Stock Index Fund

Total U.S. market not enough? This fund takes on the world, tracking stock indexes in both developed and emerging markets across the globe.

Minimum investment: $3,000. Expense ratio: 0.17%.

Vanguard Total International Bond Index Fund

This fund tracks the performance of non-U.S. investment-grade bonds from corporations and governments in developed and emerging markets.

Minimum investment: $3,000. Expense ratio: 0.13%.

OK, what’s next?

If you’re ready to purchase Vanguard index funds, our Vanguard brokerage review can help you decide whether to buy directly from the company or through another broker (many of which also sell Vanguard index funds). Still unsure? Read more about investing with index funds.

Read: How to Invest with Index Funds »

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