The Vanguard Group is the second-largest asset manager in the world, with more than $7 trillion in assets as of this year. What's more, it's still growing thanks to a powerful brand and some of the most popular and cost-effective index funds on the planet. But given its wide array of offerings, how do you find the best Vanguard ETFs?
The answer is simple: Follow the philosophy of its founder.
Vanguard was founded in 1975 by investing icon John C. Bogle, the man who many credit with popularizing index funds and "passive" investing instead of active trading. His most famous quotes include investment advice like, "Don't look for the needle in the haystack. Just buy the haystack!" and "Time is your friend; impulse is your enemy."
Bogle's practical and effective advice centered on long-term investment through patience over short-term speculation, as well as a focus on low-cost investing to ensure your profits aren't eaten up by hefty fees.
There are some Vanguard funds that veer a bit from this, with more tactical approaches that involve active management or higher cost structures. But the best Vanguard ETFs are true to this notion of low-cost, long-term investing.
What makes for the best Vanguard ETFs?
It's important to acknowledge that when it comes to investing, all decisions are personal. There is no one-size-fits-all approach to your current savings or your future retirement. That said, there are a few characteristics that nearly every investor should consider prioritizing.
A long-term, hands-off approach: There are many ETFs out there that claim to provide outperformance by overlaying complex screening methods onto the stock market, and changing out holdings based on the latest info.
But most research shows this "active management" approach is ineffective. According to data from S&P Dow Jones Indices, most actively managed funds involving large-sized stocks have underperformed the S&P 500 Index on an annual basis going back to 2010.
Minimize fees to maximize profits: Part of the challenge with active funds is that even if you do get a small amount of outperformance, the related expenses erode those profits. This includes all manner of costs including tax inefficiency and higher brokerage fees.
However, investors should consider the "opportunity cost" that higher fees are creating. Namely, every penny you pay in fees isn't just reducing current profits but it is also erasing cash that could potentially be invested – and thus grow over time to an even bigger amount. The best Vanguard ETFs put more of your cash to work for you instead of your overpriced asset manager.
Don't forget to DRIP: The acronym DRIP stands for "dividend reinvestment program." It involves taking the regular profit-sharing you get from your investments and reinvesting that cash, rather than letting it sit idle in your account.
The best Vanguard ETFs offer a no-fee, no-commission reinvestment program that allows you to reinvest your distributions and supercharge your returns over time.
There are, of course, exceptions to these three points, and some expensive and actively managed funds do find short-term pockets of success. But almost all the time, these investments eventually lose their brief edge and wind up underperforming a passive index ETF.
If you want to play the odds, then, consider the prior factors to guide your selection of the best ETFs to buy.
A case study on VOO
Once again, all investing is based on personal goals and risk tolerance. But a very popular fund that's among the best Vanguard ETFs overall is the Vanguard S&P 500 ETF (VOO).
As the name implies, this exchange-traded fund is benchmarked to the S&P 500, an index of the largest U.S. stocks. It doesn't get cute by picking special sectors or playing favorites – it's just those 500 stocks, copied and pasted onto its buy list without any fuss.
So what makes something so simple one of the best Vanguard ETFs to buy now? Well, let's revisit the three criteria we just covered.
For starters, the VOO fund is about as hands-off as you'll get because it doesn't try to beat the index … it is the index, with a fully diversified line of large, domestic stocks. After all, many pundits use the S&P 500 as a shorthand for the broader stock market as a whole. So if you believe in the long-term potential of stocks, there's no better way to gain exposure than to buy the preeminent index.
Regarding fees, the annual "expense ratio" of this Vanguard fund is 0.03%. That means on a sizable portfolio of $100,000, you'll pay a measly $30 per year. Not only is this a rock-bottom structure in general, with your total investment fees for the year adding up to less than a tank of gas, it's cheaper than other look-alike funds out there. Consider the SPDR S&P 500 ETF Trust (SPY) that charges 0.095% – or $95 annually on that same amount.
As for DRIP, if you have a Vanguard account, you're eligible to take advantage of its dividend reinvestment program free of charge. This takes the stress out of investing because you don't have to think about reinvesting, and your returns automatically compound over time. It doesn't cost you anything with a fund like VOO if you're working with Vanguard.
You should always do your own research, and invest based on your personal goals. But no matter the fund you're investigating, the best Vanguard ETFs for you should illustrate these key criteria the same way that the Vanguard S&P 500 ETF does. You can learn more about VOO at the Vanguard provider site.
Jeff Reeves writes about equity markets and exchange-traded funds for Kiplinger. A veteran journalist with extensive capital markets experience, Jeff has written about Wall Street and investing since 2008. His work has appeared in numerous respected finance outlets, including CNBC, the Fox Business Network, the Wall Street Journal digital network, USA Today and CNN Money.
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