Vanguard's established exchange-traded funds and mutual funds have been a long mainstay in 401(k) plans, retirement plans, IRAs, and managed portfolios.
But longevity isn't the only reason Vanguard has become a benchmark for pension plan managers and individual investors. The company's forward-thinking and conscious approach to fund management, particularly the launch of the first publicly available index mutual fund, has helped its clients achieve a significantly higher return on investment than mutual funds managed traditionally.
Vanguard Mutual Fund Definition
Vanguard mutual funds are investments that combine investors' money to buy stocks, bonds, and other assets. Vanguard Mutual Funds offer a convenient way to build a diversified portfolio where your money is spread across various investments, rather than going into a single stock, without having to choose and manage assets on your own.
Vanguard funds: Active vs. Passive
If you're looking for Vanguard's selection of mutual funds, an important distinction is between actively and passively managed funds.
Actively managed funds are based on investment professionals who analyze and choose stocks to hold in an attempt to beat average market returns. Actively managed funds tend to have higher management fees than passively managed funds. But despite these higher fees, actively managed funds often underperform the market benchmark.
Passively managed funds are on the lookout to match the returns of a broad market index (such as the S&P 500). Passively managed funds often outperform their active counterpart, but passive funds should be average. Since these funds are managed without too much oversight, their fees tend to be lower than those of actively managed funds.
Why are Vanguard mutual funds so popular?
That is because it excels at the three main things that make investors happy:
Choice
Vanguard's stable and comprehensive mutual fund allows you to cover all niches of an investor's asset allocation needs. In addition to passive and active mutual funds, Vanguard offers funds with targeted data and exchange-traded funds.
Target date pension funds contain a combination of Vanguard's broader indexed funds, which gradually shift to more conservative investments as the retirement date approaches. These funds are well accepted in employer-sponsored retirement plans, such as 401(k)s.
ETFs or Exchange-traded funds are bought and sold in the form of individual stocks. These funds offer investors the opportunity to buy a small stake in most Vanguard funds at a much lower entry price, the cost of a single share, compared to the higher minimum investment of the Vanguard fund.
Lower Fees
All mutual funds and ETFs have administration fees, known as the fund's expense ratio. This is a percentage of the total fund balance that is automatically deducted from the return on investment each year to cover administrative expenses, administrative salaries, and other overhead costs.
According to Vanguard, the average spend rate for mutual funds and ETFs is 0.07%, which is slightly below the industry standard.
Vanguard's expense rates are known to be below the industry average for all major types of retirement savings investments. Lower taxes mean more money stays invested in the market. Although some percentage fractions might not seem like a big difference, they add up over time.
Competitive Long-Term Returns
The low-fee management approach has allowed Vanguard Mutual Funds to outperform other similar mutual funds over time. In fact, over the past decade, 223 of Vanguard's 300 funds have outperformed.
How to Buy Vanguard Mutual Funds
Check your employer-sponsored pension plan
The easiest and fastest way to buy Vanguard mutual funds is through 401(k) or 403(b) if they are part of your investment options. This allows you to sidestep Vanguard's investment minimum. But due to pension taxes, the expense rates may be higher than what you would pay if you purchased the same funds directly through Vanguard or even another discount broker.
Invest in a brokerage account with tax advantages
If there is no way to get Vanguard funds through a 401(k), or you just want more access to some Vanguard funds, you can buy them through an IRA. IRAs offer tax advantages. You can open an Individual Retirement Account directly through Vanguard or by opening a brokerage account with another provider.
An advantage of buying direct: Like other self-funded financial companies, such as Fidelity, T. Rowe Price, and Charles Schwab, Vanguard does not charge trading fees for its funds.
The advantage of buying through another broker is that many have more solid investment instruments and favorable stock trading fees than Vanguard fund-focused online offerings.
Choose your funds
Vanguard offers many funds to choose from. This involves choosing between active and passive management, identifying the types of funds you're interested in (like those focused on stocks versus bonds), and making sure you meet the Vanguard mutual fund minimums.
The Vanguard mutual fund minimum value (the minimum amount of money needed to start investing in a fund) is trending high, so if you want to start with less, we recommend exploring Vanguard ETFs or looking for them on the other side. Here are Vanguard's minimums:
Mutual funds: $3,000
Funds per target date: $1,000
ETFs: $50 or more
If finding mutual funds to build a portfolio is out of your comfort zone, a low-cost option is to open an account with an automated advisor that selects and manages investments based on duration and risk tolerance risk.
What is the best Vanguard mutual fund?
Well, it depends. The best Vanguard fund is one (or more) aligned with your investment goal and budget. If you're not ready to spend $3,000 on an actively managed mutual fund, an index fund or ETF may be more appropriate for your risk, like bonds. Vanguard's Mutual Fund screener can help you narrow down exactly the funds you're looking for.
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