Few investment products have brand-name recognition. Vanguard mutual funds is one of them.
The 40-plus-year-old company’s mutual funds and exchange-traded funds have long been a mainstay in 401(k)s, pension plans, IRAs and managed portfolios.
But longevity isn’t the sole reason Vanguard has become a go-to source for retirement plan administrators and individual investors. The firm’s forward-thinking, fee-conscious approach to fund management — most notably launching the first publicly available index mutual fund — has helped its customers get markedly better investment returns than what more conventional funds delivered.
What are Vanguard mutual funds?
Mutual funds are investments that pool investor cash to purchase stocks, bonds and other assets. They offer a cost-effective way to create a diversified portfolio — where your money is spread across a variety of investments instead of going into a single stock — without the hassle of having to pick and manage the assets on your own.
Vanguard manages and sells mutual funds, with investment pros analyzing and picking which stocks to hold to try to beat average market returns. But the company is best known for pioneering index mutual funds, which seek solely to match the returns of a broad market index (like the S&P 500) or other benchmark.
Why investors love Vanguard
There are three main things that make investors happy:
Vanguard’s comprehensive stable of more than 170 mutual funds and 80 ETFs allows it to fill every niche of an investor’s asset allocation needs. Offerings include:
- Index mutual funds. Since company founder John Bogle launched the Vanguard 500 Index Fund in 1976, Vanguard’s suite has expanded to include index funds for bonds, international stocks, emerging markets and more.
» LEARN MORE: How to invest with Vanguard index funds.
- Actively managed mutual funds. Unlike index funds, the stocks and other assets in these funds are curated by investment managers.
- Target-date retirement funds. This type of diversified fund contains a mix of Vanguard’s broadest index funds that gradually shifts toward more conservative investments as your retirement date draws near. These funds are popular in employer-sponsored retirement plans like 401(k)s.
- Vanguard ETFs. Bought and sold like individual stocks, these offer investors the opportunity to purchase a small stake in most of Vanguard’s funds at much lower entry price — the cost of a single share versus the $1,000-plus Vanguard fund investment minimum.
2. Low fees
All mutual funds and ETFs have a management fee, known as the fund’s expense ratio. It’s a percentage of your overall fund balance that is automatically deducted from your investment returns every year to cover administrative charges, management salaries and other overhead costs.
Vanguard’s expense ratios are known for being lower than the industry average for all of the major retirement-savings investment types. Lower fees mean more of your money remains invested in the market. Although a few fractions of a percent may not seem like much of a difference, it adds up over time:
Vanguard investment expenses vs. industry average
|Vanguard average expense ratio||Industry average expense ratio||Account balance difference after 30 years* after $50,000 initial investment|
|Source: Vanguard and Morningstar Inc. as of Dec. 31, 2017.
*Assumes a 6% average annual return
|Target-date retirement funds||0.13%||0.50%||$30,139|
3. Competitive long-term returns
The low-fee management approach has enabled Vanguard mutual funds to outperform other similar mutual funds over time. In fact, over the last decade 178 out of 199 Vanguard funds — nearly 90% — earned higher returns than their peer-group average during the same time frame.
And the best Vanguard fund is…
We’re not being evasive, just realistic.
The best Vanguard fund is one (or several) in sync with your investment objective and budget. That involves choosing between active and passive management, identifying appropriate funds and seeing if you meet Vanguard’s mutual fund minimum (as low as $1,000 for many funds, and much lower for Vanguard ETFs).
» MORE: An A-Z guide on how to invest in index funds
How to buy Vanguard mutual funds
The easiest way to buy Vanguard mutual funds is in your 401(k) or 403(b), if they are among the investment choices. This helps you sidestep Vanguard investment minimums. But, because of retirement plan fees, the expense ratios may be higher than what you’d pay if you bought the same funds directly through Vanguard or even another discount broker.
One plus of buying direct: Like other financial firms with proprietary funds, such as Fidelity, T. Rowe Price and Charles Schwab, Vanguard charges no trading commissions on its own funds. Just make sure you have enough investment cash on hand to meet the minimum investment requirements ($1,000 for target-date funds, $3,000 for actively managed funds). If not, consider purchasing an ETF version of one of Vanguard’s index fund offerings. All Vanguard ETFs are commission-free, as well.
|Vanguard||Why we like them:|
Don't let the three-star rating dissuade you — if you want to invest in funds, Vanguard is a standout choice, offering what you need without being overwhelming.
» Read our full review
|Commissions: $0 for Vanguard funds, $8 to $20 for non-Vanguard and select funds.
Account minimum: Assessed by product type; fund minimums start at $1,000.
|Ally Invest||Why we like them:|
Ally Invest may not be the place to turn for no-transaction-fee funds, but it has rock-bottom fund commissions compared with many brokers.
» Read our full review
Account minimum: $0
Promotion: Up to $3,500 cash bonus + commission-free trades for new accounts with qualifying balance.
|Why we like them:|
E-Trade hits the mark on the things that matter to mutual fund investors: selection, affordability, service and tools.
» Read our full review
Account minimum: $500
Promotion: Up to 500 commission-free trades with deposit of $10,000 or more
The benefit of buying through another broker is that many have more robust investment tools and favorable commissions on stock trading than fund-centric Vanguard’s online offerings. (See our roundup for brokers for mutual fund and ETF investors for the best low-cost options.)
If the specific Vanguard fund you want isn’t on a broker’s list of transaction fee-free products, you will pay added costs: Fund trades typically run anywhere from $9.95 to $49.95; ETF commissions range from $4 to $7.
If researching mutual funds to build a portfolio falls outside of your comfort zone, a low-cost option is to set up an account at a robo-advisor that picks and manages investments based on your time frame and tolerance for market volatility. Many robo-advisors use Vanguard funds and ETFs in their core portfolios. Our roundup of the best robo-advisors explains how these services work.