High-performing Vanguard funds for your 401(k).
Vanguard revolutionized the investing industry with index mutual funds. The company's founder and former CEO, John Bogle, was an avid fan of low expense ratios and passive investing, believing that it democratized investing for individuals, since the majority of active investment managers fail to beat market averages like the S&P 500. Passive investing along with the perception that it yields better returns is gaining in popularity among consumers, says Grant Easterbrook, co-founder of New York-based Dream Forward, which sells 401(k) plans. "Consumers looking for low-cost retirement options ask for Vanguard funds from financial advisors or buy them directly," he says. Here are seven top Vanguard funds for retirement portfolios.
Vanguard 500 Index Fund(ticker: VFIAX)
The 500 Index Fund Admiral Shares is a way to gain diversified exposure to the top 500 U.S. companies that make up about 75% of the U.S. stock market's value, and it's comparable to the Fidelity 500 Index Fund (FXAIX). "Everyone's portfolio should include a more diversified portfolio of just the 500 largest companies," says Gary Lemon, a professor of economics and management at DePauw University. This is an excellent fund for investors looking to gain low-cost exposure to large-cap stocks and use as a core equity holding, says Evan Kulak, co-founder of Polaris Portfolios. The downside is it does not include any international, mid- or small-cap stocks.
10-year returns: 15.9%
Net expense ratio: 0.04%, or $4 annually per $10,000 invested.
Vanguard Total Stock Market (VTSMX)
The Vanguard Total Stock Market Index fund contains most U.S. stocks and is extremely diversified. "If you want to own U.S. companies, a better option would be Vanguard's Total Stock Market Index, which essentially includes all U.S. stocks of about 3,600, not just the 500 largest companies," Lemon says. The top holdings include Microsoft Corp. (MSFT), Apple (AAPL), Amazon.com (AMZN) and Alphabet (GOOGL, GOOG). The technology sector is heavily represented in this fund at more than 20 percent of its holdings. When the stock market took a tumble at the end of 2018, its share price dipped to $58.17, but it has since rebounded to $73 per share.
10-year returns: 15.93%
Net expense ratio: 0.14%
Vanguard Star Fund (VGSTX)
The Vanguard Star Fund uses actively managed Vanguard funds and is a balanced fund. It offers exposure to 11 underlying domestic and international stock funds and U.S. bond funds. VGSTX has a 60% allocation for stocks and 40% for bonds and is more conservative. Investing in bonds yields in less volatility, but it can also stymie growth. The top holdings are Vanguard Windsor II Fund Investor Share consisting of large-cap stocks, Vanguard Long-Term Investment-Grade Fund Investor Shares includes corporate bonds with an average maturity of 15 to 25 years and Vanguard GNMA Fund Investor Shares which holds intermediate bond funds.
10-year returns: 10.9%
Net expense ratio: 0.31%
Vanguard Extended Market Index Fund (VEXAX)
The Vanguard Extended Market Index offers investors a low-cost way to gain exposure to U.S. mid- and small-capitalization stocks. VEXAX invests in all 3,000 U.S. stocks except the 500 largest companies. "This fund should outperform the S&P 500 over long periods of time, but has the potential to be more volatile, Lemon says. "This fund would be a complement to the Vanguard 500 Index Fund." Vanguard Admiral Shares "are always a good thing," he adds. "They do exactly the same thing as regular shares but at a lower cost. They require higher minimums than regular shares, but if you meet those minimums, you should always use Admiral Shares."
10-year returns: 16.59%
Net expense ratio: 0.08%
Vanguard Small-Cap Index Fund (VSMAX)
This fund invests in the smallest-cap companies in the U.S., or about 1,350 stocks. VSMAX's top sectors are financials, industrials and technology. Small-cap companies generate their earnings from the U.S. and are more volatile compared with large-cap stocks, which produce global earnings. "This fund should also outperform the S&P 500 over long periods of time but has the potential to be more volatile," Lemon says. In fact, the fund's 10-year return was 16.97%, beating the S&P 500's return of 15.92%. "This should be used as a complement to other funds and should not be used to place 100% of your money in this portfolio," he says.
10-year returns: 16.97%
Net expense ratio: 0.05%
Vanguard Mid-Cap Index Fund (VIMAX)
The Vanguard Mid-Cap Index Fund tracks an index of medium-sized companies, with stocks that tend to be more volatile than larger companies. An investor who purchased equal dollar investments of these five funds -- VFIAX, ,VTSMX, Vanguard Balanced Index Fund (VBINX), VIMAX and VSMAX -- would have a diversified portfolio, says Stuart Michelson, a finance professor at Stetson University. "These five funds show a great overall return, varying from 6% to 9.5% for a one-year annualized return and from 11% to 17% annualized 10-year return," he says. "Studies showed that actively managed funds returned 2.4% less than index funds compared to a 10-year annualized return."
10-year returns: 16.67%
Net expense ratio: 0.05%
Vanguard Target Retirement 2060 Fund (VTTSX)
Even for people retiring sooner, VTTSX is a good option for investors who want more stocks in their portfolio because of its higher returns. The fund is approximately 90% stocks and 10% bonds, while the 2020 fund holds 55% of its assets in stocks and 45% in bonds. "This change in allocation between stocks and bonds means that the risk in your fund declines as you approach the year that you have selected for your target date fund," Lemon says. "I own the 2060 fund when I would be well past 100 years old. I do this because I want the risk associated with the 2060 fund."
Five-year returns: 7.05%
Net expense ratio: 0.15%
The best Vanguard funds for retirement.
-- Vanguard 500 Index Fund (VFIAX)
-- Vanguard Total Stock Market (VTSMX)
-- Vanguard Star Fund (VGSTX)
-- Vanguard Extended Market Index Fund (VEXAX)
-- Vanguard Small-Cap Index Fund (VSMAX)
-- Vanguard Mid-Cap Index Fund (VIMAX)
-- Vanguard Target Retirement 2060 Fund (VTTSX)