7 Best Vanguard Funds for Beginning Investors

Ellen Chang
·5 min read

Time is a great ally when it comes to investing.

Vanguard, a retirement provider that is well known for its low-cost funds, offers many diversified equity and bond funds. "Time is your greatest ally in investing," says Greg McBride, chief financial analyst at Bankrate, a financial data company. "For those in their 20s, every dollar you put away now can be worth $20 or $30 by the time you retire. That is the power of compounding doing the heavy lifting -- you put in $1 and compounded growth over a long period of time does the rest." Here are seven Vanguard funds to consider adding to your portfolio if you're new to investing.

Vanguard Total Stock Market Index Fund ETF (ticker: VTI)

The fund tracks the performance of the CRSP U.S. Total Market Index, which represents 100% of the investable U.S. stock market. The expense ratio is only 0.03%, which means that if you invest $5,000, $4,998 would be put to work and only $2 would go to fees, says Robert Johnson, a finance professor at Creighton University. Since it is an exchange-traded fund, there is no minimum investment required. A mutual fund or ETF provides diversification, and the volatility is much less than that of the average single stock. "The best thing for most investors is to invest in a low-fee, broadly diversified stock market index fund," he says. "Buying an individual stock is subject to tremendous risk."

Vanguard Global Equity Fund (VHGEX)

Too often investors focus solely on their home country market, Johnson says. Investors who want a broader, international exposure could add the Vanguard Global Equity Fund since it has nearly 50% of its portfolio in U.S. equities and has an affordable expense ratio of 0.48% with a fairly low turnover of 22%. "This fund would be an ideal fund to serve as an anchor for an investor who desires international exposure," he says. Low fees are critically important because the less you pay in costs, the more you keep in investment returns, McBride says. "But also consider that index funds are your lowest cost investment options and the overwhelming majority of active managers underperform the broad market indexes over time," he says. "So paying more doesn't guarantee better returns and often assures you earn less."

Vanguard Russell 2000 Index ETF (VTWO)

Many investors also simply concentrate the majority of their holdings in the large-cap space. Small-cap stocks outperformed both large caps and midcaps in 2020. The S&P 500 generated a 16.3% return, while the S&P MidCap 400 produced a 13.7% return. The Russell 2000, a small-cap index, generated a 20% return in 2020. The Vanguard Russell 2000 Index ETF gives investors small-cap exposure while charging an expense ratio of 0.1%. "Investment performance is uncertain, but fees are certain," Johnson says. "If you can minimize fees by investing in low-cost index funds, you put more of your hard-earned money to work."

Vanguard S&P 500 ETF (VOO)

The S&P 500 ETF includes the top 500 stocks of large companies and provides diversification, with a low expense ratio of 0.03%. The five-year annualized return is 16.27%. Investing regularly when you are younger will compound your returns to ensure a well-funded retirement, says Stuart Michelson, a finance professor at Stetson University. "Investing regularly returns a huge payback," he says. "Invest $5,000 today and let that single investment compound at 8% return and you will have $108,000 in 40 years after only investing $5,000 once. Invest $6,000 per year at 8% return and you will have an account valued at $1.54 million in 40 years. This shows that investing early and investing regularly will allow an investor to have millions at retirement."

Vanguard Mid-Cap ETF (VO)

The Vanguard Mid-Cap ETF gives investors broad exposure to mid-cap stocks. The three-year annualized return is 14.65%, with a low expense ratio of 0.04%. Another advantage of investing regularly is that an investor will benefit from averaging their investment returns through good market years and down market years, Michelson says. "Continuing to invest during down market years allows investors to purchase shares at a lower price, which will contribute to additional compounding through the years," he says. Saving 1% in fees directly benefits your total return by 1% a year as well. This savings in fees can save an investor $250,000 over the life of a 40-year investment, Michelson says.

Vanguard Balanced Index Fund (VBIAX)

The Vanguard Balanced Index Fund offers a moderate allocation with about 60% invested in stocks and 40% in bonds. The diversified fund provides growth and income while passive investing at a low expense ratio of 0.07%. "This is a fortunate time of year for households that want to jump-start retirement savings or boost whatever they've put away thus far," McBride says. "Between stimulus payments and tax refunds, many households will see one or two notable windfalls that can be put to work in an (individual retirement fund)."

Vanguard Total Bond Market ETF (BND)

The returns of bonds are less volatile than the stock market, which is beneficial for people who want to lower their risk. The fund tracks the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and has a 10-year trailing return of 3.8%, with an expense ratio of 0.035%. When an investor saves money through an IRA or 401(k) plan, they are also benefiting from tax-sheltered savings and compounding, Michelson says. "For those just starting to save for retirement, I would put together a portfolio of index funds that combine good returns with low costs (expense ratios)," he says. "The key takeaway is to invest early and invest often to build your multimillion-dollar portfolio."

Best Vanguard funds for beginning investors:

-- Vanguard Total Stock Market Index Fund ETF (VTI)

-- Vanguard Global Equity Fund (VHGEX)

-- Vanguard Russell 2000 Index ETF (VTWO)

-- Vanguard S&P 500 ETF (VOO)

-- Vanguard Mid-Cap ETF (VO)

-- Vanguard Balanced Index Fund (VBIAX)

-- Vanguard Total Bond Market ETF (BND)