Vanguard's ETFs provide diversification at a low cost.
Vanguard, the well-known index fund investing powerhouse, premiered the first index fund in the 1970s, with the launch of the First Index Investment Trust tracking the S&P 500. The first Vanguard exchange-traded fund, the Vanguard Total Stock Market ETF (ticker: VTI) began trading in 2001, growing to more than $1.2 billion in assets during its initial seven months. Today, VTI is joined by dozens of Vanguard ETFs that manage more than $850 billion in assets. Depending upon your investment goals, you might benefit from investing in any of the Vanguard ETFs. Here's a list of the 10 best Vanguard ETFs to spur your investing.
Vanguard Total World Stock ETF (VT)
For one-stop stock market investing, this fund is ideal for investing in both foreign and U.S. stocks. VT covers the entire world equity markets and removes the need for multiple stock funds. It's also great for investors seeking diversification with a small number of investment dollars. VT tracks the returns of the Spliced Total World Stock Index. Within one fund, you own stocks from North America, Europe, Asia-Pacific, Middle East and emerging markets. VT allows investors to own the top companies in the U.S. and abroad. With a current 2.2% yield, retirees can enjoy cash flow, too.
Vanguard Total Stock Market ETF (VTI)
VTI tracks the performance of the entire U.S. stock market, including large-, mid-, small- and micro-cap stocks and holds nearly 3,600 stocks. "I was able to retire at 35 by buying and holding a single Vanguard ETF, VTI," says Jonathan Lima, retired vice president of business development at Prometheus Group in Raleigh, North Carolina. "I recommend it to anyone looking to get into investing." With a yield of 1.7% and a 0.03% expense ratio, this fund is a viable core holding for any investment portfolio.
Vanguard Tax-Exempt Bond ETF (VTEB)
For retirees in higher tax brackets, a municipal bond ETF offers federal tax-free income. The after-tax returns of VTEB can trump those of a comparable taxable ETF, depending on your tax bracket. To compare tax-exempt with taxable yields, use a tax-equivalent yield calculator. The fund tracks the performance of the S&P National AMT-Free Municipal Bond Index. The fund is safe from default risk as the majority of bonds are rated AAA, AA or A. Presently, the fund invests in more than 4,000 bonds and yields 1.6% tax-free. For an investor in the 25% tax bracket, that yield is roughly a taxable 2.2%.
Vanguard Extended Market ETF (VXF)
Investors seeking small- and mid-cap U.S. stock exposure need to look no further. VXF offers a convenient way to invest in the U.S. markets excluding S&P 500 companies. This fund is a low-cost, diversified path for exposure to smaller firms. Although, if you're investing in VTI, it may be redundant to also own VXF, as these small- and mid-cap equities are also included in the total stock market ETF. The fund owns neary 3,300 companies, with top sectors represented, including consumer discretionary, financials, health care, industrials, information technology and real estate.
Vanguard FTSE Emerging Markets ETF (VWO)
The U.S. is roughly 50% of the global stock market. To bolster diversification, it's wise to consider international investing. VWO offers exposure to the developing regions of the world like China, Brazil, Taiwan and South Africa. Holding VWO can offset extreme movements in U.S. stocks, says Randy Kurtz, chief investment officer at Upper Left Wealth Management. But with increased exposure to developing markets also comes additional risk as share prices may volley more than those of more developed countries.
Vanguard Total Bond Market ETF (BND)
For investors seeking a broadly diversified U.S. bond fund to add to their stock funds, BND does the job. This ETF provides exposure to the entire U.S. investment-grade bond universe and offers decent income potential with a 2.2% current yield. As is the case with bond investments, as interest rates fall, the bond fund value will rise, and vice versa. The fund's benchmark is the Bloomberg Barclays US Aggregate Bond Index.
Intermediate-Term Bond Index Fund ETF (BIV)
As stocks continue to soar and bonds offer paltry returns, bonds are getting a bad rap. But history shows that diversified portfolios that include both stock and bond assets offer less volatility than all-stock portfolios and cushion returns from market declines. Jon Dulin, CEO of Money Smart Guides, recommends BIV. "A smart investor should have some of their portfolio in this intermediate bond ETF to hedge against the possibility of a down market and increased volatility," he says. BIV tracks the investment returns of the Bloomberg Barclays US Gov/Credit Float Adjusted 5-10 Year Index.
Vanguard REIT Index (VNQ)
Real estate offers a diversification bonus to a stock and bond portfolio. REIT ETFs hold stocks issued by real estate investment trusts that own office buildings, hotels, residential realty, retail and other real property. The fund tracks the Real Estate Spliced Index. With nearly 190 stocks, VNQ is an easy way to gain access to a broad swath of the real estate market. The 3.1% yield provides cash flow along with appreciation potential. Expect the high yield to continue as the IRS requires REITs to pay 90% of their income as dividends.
Vanguard Communication Services Index Fund ETF Shares (VOX)
After the basic U.S. and international equities are covered, tweaking your Vanguard ETFs to capture sector performance is another way to capture returns of distinct market corners. The communications sector promises continuing growth as speedy 5G internet becomes a reality. For investors betting on the growth of telecommunications, VOX tracks the performance of the MSCI US Investable Market Index Communication Services. The sector includes companies in telephone, data transmission, cellular, wireless and other communication services.
Vanguard Consumer Discretionary ETF (VCR)
A top performer in 2019, VCR is another way to invest in companies that produce products and services that consumers buy with discretionary funds. The passively managed index fund replicates the Consumer Discretionary Spliced Index. This is a good Vanguard ETF sector pick for investors who think that consumers will continue to spend and propel U.S. economic growth. The fund subsectors include apparel, auto parts and manufacturers, casinos and gaming, computers, consumer electronics and other related discretionary purchasing categories. The top companies in VCR include Amazon.com (AMZN), Home Depot (HD), McDonald's Corp. (MCD), Nike (NIKE) and Starbucks Corp. (SBUX).
Top Vanguard ETFs to buy:
-- Vanguard Total World Stock ETF (VT)
-- Vanguard Total Stock Market ETF (VTI)
-- Vanguard Extended Market ETF (VXF)
-- Vanguard FTSE Emerging Markets ETF (VWO)
-- Vanguard Total Bond Market ETF (BND)
-- Vanguard Tax-Exempt Bond ETF (VTEB)
-- Intermediate-Term Bond Index Fund ETF (BIV)
-- Vanguard REIT Index (VNQ)
-- Vanguard Communication Services Index Fund ETF Shares (VOX)
-- Vanguard Consumer Discretionary ETF (VCR)