Investing can always seem like a daunting task. There are so many options to invest in; which one is the best? Those is the thoughts that roll through our heads as we think about investing. It is hard. One thing that makes it easy is the invention of the index fund. Vanguard created the index funds, so I want to explore what are the best Vanguard Index funds.
What is Vanguard?
Vanguard is a brokerage company created by John Bogle in 1975. John Bogle wanted to create a brokerage company owned by the people to make investing easy.
This company has been the leader in making index funds available to many people and allowing average joes a piece of the stock market pile.
Their fees are rock bottom. They have the largest market cap for any brokerage company. It is easier to have index funds, mutual funds, and ETFs to fit everyone's style. It is a great company, and I support them and the way they treat their investors.
The cool thing is that it was created to help make index funds.
What are Index Funds?
An index fund is a fund of companies created to mimic an index. So have you heard of the S&P 500? The index tracks the top 500 companies in the U.S. If there were a fund to have the same market cap as the S&P 500, that would be cool.
John Bogle was thinking the same thing. He famously said.
“Don't look for the needle in the haystack. Just buy the haystack!”
What he meant was to stop looking for the unicorn stock, just buy them all. Truthfully, he was right. He created the first index fund in 1976, which was a fund to copy the S&P 500. That fund is called VFINX. Now, this fund is no longer offered to investors, but the newer fund is VFIAX.
The best thing about these index funds is they are low-cost. Mutual funds in general,, are usually managed by a manager who picks and chooses. This comes out to have an expense ratio that can be close to 1%, like $100 for every $10,000 invested.
Index funds are passively managed. The expense ratios on these funds are quite low. VTSAX has an expense ratio of 0.04%, so that is $4 for every $10,000. Your choice is the passive fund or the actively managed one. Which one would you choose? Fees alone say the passive one is the better one.
Are there Pros and Cons to Vanguard Index Funds?
Of course, there are some good and bad things with any investment. Vanguard index funds are not the best for each person. So I took a look at some of the good and bad things that go along with them. First of all, as you look at it, there are plenty of pros:
1. Low Cost
With the expense ratios low, they beat almost everyone. There are plenty of other companies like Schwab and Fidelity that have lowered their expense ratios, but you just can't beat Vanguard index funds. Keeping the costs very low is a great thing for index funds, and it helps keep their performance high without costing you extra.
2. There Are ETFs
The great thing is that the Vanguard index funds have an ETF version of them. If you do not know what ETFs are, they are exchange-traded funds. So, they are like a stock version of a fund. This allows them to be traded throughout the day just like stocks can be traded. This also makes them very tax efficient.
One of the biggest cons to the Vanguard index funds is the minimum investments to start off. A minimum of $3,000 needs to be invested in getting into the Vanguard Index Funds. Using the ETF version is much easier since you pay for the price of the ETF.
Here are the 8 Best Vanguard Index Funds
As we take a look at some of the best Vanguard index funds, we see that there are many that allow us as the investor to invest in different sectors. There are Vanguard index funds on real estate, growth, S&P 500, bonds, and even tech. So take a look at some of these and see if they may fit into your strategy.
1. VTSAX: The Vanguard Total Stock Market Index Fund
This is one of the best index funds out there. It has the history, the price point, the recommendations from so many people, and it has a collection of over 3500 different companies that make up this fund.
It is truly one of the best index funds out there. The expense ratio is 0.04%, and it has a great ETF. VTI is the ETF of VTSAX. VTI and VTSAX are pretty similar, but they have some differences. It is like the same with ETFs and index funds. There is tax efficiency and being traded throughout the day.
The fund also pays quarterly dividends throughout the year. So this is an excellent way to have those dividends reinvested back in to buy more shares.
One of the biggest competitors to VTSAX is FZROX. They are both significant index funds that compete against each other, but VTSAX still stands strong as one of the best overall index funds on the market.
2. VFIAX: The Vanguard S&P 500 Fund
This is one of the original index funds. Initially, this was the admiral shares of the fund, but VFINX has been discontinued for new investors. That is good news because they have a lower investment threshold, starting with $3,000 and an expense ratio of 0.04%.
This is a great fund to get started in. It invests in the top 500 companies in the U.S. so that you will have a large-cap exposure within the U.S. economy.
The expense ratio is very low, saving you money in the long run.
VFIAX also has its own ETF, which is VOO. It is one of the best ETFs out there. VOO and VTI are some of the best ETFs out there, and they are both made by Vanguard. So this allows you to start off owning the S&P 500 with a lower threshold.
3. VBTLX: The Vanguard Total Bond Index Fund
When we think about bonds, it is seen as a stable investment. Typically, advisors and financial planners would suggest a certain percentage of bonds to help weather the bad times in the market.
VBTLX offers an index fund that has a broad range of bonds. There are stipulations. This index fund does not hold any junk bonds or any C-graded bonds, and this is a way to keep the bond index fund from fluctuation.
This fund has a mixture of exposure to U.S. Bonds, Corporate Bonds, and a whole array of other bonds. With an expense ratio of 0.05%, it is excellent to look for safe options in bonds.
The yield is not much right now, but if you want some safety in your investment portfolio, having bonds is paramount.
This index fund can be bought in the ETF, BND. It is a popular ETF when thinking of creating a 3-Fund Portfolio. That would be a portfolio consisting of VTI, VXUS, and BND.
4. VTIAX: The Vanguard International Index Fund
Diversification is key. Having some exposure to the world economy can help diversify your portfolio.
This index fund consists of thousands of companies worldwide. There are about 7000 different companies that help make up VTIAX.
The companies that are not in VTSAX are the ones that are abroad, and you can get exposure to TSMC, Samsung, Nestle, and Alibaba. These are just a few companies that make up the top 10 in this fund.
There is an expense ratio of 0.11%. You can also grab the ETF VXUS to make obtaining this fund at a lower price.
5. VGSLX: The Vanguard Real Estate Index Fund
VGSLX is the index fund that tracks REITs, real estate service companies, developers, and other real estate businesses. A REIT is a real estate investment trust that will own a good portion of real estate, and REITs can be those organizations that own shopping malls or nursing homes.
The great thing is that REITs is that they give out lots of dividends. These dividends are normally taxed as ordinary income, but they can add an excellent bit to your retirement if placed into a ROTH IRA. With a little over 5% of VGSLX being for other real estate services, this is not a true REIT index fund. It is just a real estate index fund that includes a majority of REITs.
The expense ratio is 0.12%, but you can get a much cheaper version with the ETF VNQ. This helps people get more exposure to real estate.
6. VIGAX: The Vanguard Growth Index Fund
This index fund is typically for those growth companies. Suppose you are young or looking for an index fund that tracks growth companies like Amazon, Google, or Facebook. This could be a good one for you. The is one of the best Vanguard index funds which allows you to have some of the most popular growth stocks out there.
Just because it is a growth fund does not mean it will outperform that general market. The expense ratio is 0.05%, and they do have dividends. The dividends are usually lower due to growth funds reinvesting their profits into the business and not paying their shareholders dividends. That is something to consider.
There is an ETF with this one as well, and it is called VUG. You can purchase this on the open market as well. Read More About VIGAX
7. VITAX The Vanguard Tech Index Fund
We talked about the growth index fund; now it is time to talk about the tech index fund. This is one of the better Vanguard index funds that track the Nasdaq, and it is comprised of over 300 different tech companies in the U.S.
It has a high percentage invested into Apple and Microsoft, but if you believe tech will continue to grow, this is an index fund that you could hold in your portfolio.
These companies are in VTSAX, but you can have a bit more exposure by buying some VITAX. The expense ratio is at 0.10%.
The ETF that goes with this fund is called VGT. This could be much easier to buy and more tax efficient.
As with VIGAX, VITAX also has low dividends. So expect this one to have higher growth over dividends. Read More About VITAX
8. VDIGX: The Vanguard Dividend Growth Fund
People do enjoy collecting dividends(these are payments to the shareholders). VDIGX is the Vanguard Dividend Growth Index Fund, and it is comprised of over 200 stocks, and it is trying to have high dividends for the investor.
This index fund has a much higher expense ratio of 0.26%. I would suggest going with the ETF version, which is VIG. The expense ratio is 0.06%, and that is a much better saving to me.
If you want a more diverse fund go with the ETF VYM, and it is another dividend ETF that can be added to your portfolio.
As people get older, they want to have more cash flow, and the more dividends that come in, the more positive cash flow will have. So VYM and VIG are significant funds to help you accomplish these feats.
Choosing the Right Fund For You.
There are many different Vanguard Index Funds to choose from, and there are a great variety of ETFs also to have a choice of as well. This is the time to figure out what works best for you.
We all have different thoughts and plans for our future. The funds we pick are based on our particular strategy, and my strategy is different than everyone's just because of the way I prefer things. As an expat, I choose ETFs because it is easier with brokerage companies and excellent tax efficiency.
VTSAX is a great way to get exposure to every company in the U.S. that is traded on the stock market. You cannot go wrong with owning a bit of VTSAX, and the ETF VTI is hands down one of the best.
The choice is yours.
Most people think of Vanguard Index Funds because of how Vanguard started the revolution in creating index funds. They started something to help the regular man succeed in investing. There are several different funds, and I suggest Vanguard because I enjoy their business model. It is a place owned by the investors, so they seek to do well for their investors.
Where else can you get a one-stop-shop for the best index funds in the world? People talk about these on Twitter, in books, on forums, and everywhere. There are, of course, naysayers, but we will not fault those folks. We all have our preconceived notions of what works and does not work. I have seen firsthand the success of index funds and continue to invest in them.
Vanguard index funds just help my investing journey be easy and tax-efficient. Plus they have low fees. What else could you want?
What are your favorite Vanguard Index Funds?
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.