Vanguard's Guide To Investing In External Etfs

Exchange-traded funds (ETFs) are a type of investment that combines the diversification of mutual funds with the pricing of stocks. ETFs are made up of hundreds or thousands of stocks or bonds, managed by experts, and traded on major stock exchanges. To invest in ETFs, you need a brokerage account. Vanguard offers a range of ETFs and brokerage accounts to choose from, including general investing accounts, joint and individual accounts, and retirement accounts. With a Vanguard Brokerage Account, you can buy and sell Vanguard ETF Shares commission-free online or through another broker for a fee. Before investing, it is important to understand the different types of accounts, the associated risks, and how online trading works.

Open a Vanguard Brokerage Account

To invest in an ETF (exchange-traded fund) through Vanguard, you need to have a Vanguard Brokerage Account. Opening a Vanguard Brokerage Account is a straightforward process and can be done online in about 10 minutes.

To open an account, you will need to have some information to hand, such as your Social Security and bank account numbers. There is no minimum investment for your settlement fund, and no account minimums to buy stocks in your Vanguard Brokerage Account.

Once you have opened your account, you can start investing. You can choose from a variety of Vanguard stock funds or other individual stocks of your choice. ETFs are commission-free at Vanguard Brokerage online, and you can also trade stocks online with no hidden fees.

If you are new to investing, you can use Vanguard's investor questionnaire to find the right asset mix of stocks, bonds, and cash for your needs. This will help you to understand your investing style and financial situation and guide you towards your goals.

If you are already an investor with Vanguard, you can enter the ETF trade path through the Buy & Sell page when you are logged in to your account.

Choose a Vanguard ETF

Vanguard has dozens of ETFs to choose from, including four total market ETFs that, when used in combination, cover nearly all aspects of the U.S. and international stock and bond markets. This level of diversification can help reduce your overall investment risk while making your portfolio easier to manage.

Vanguard's four total market ETFs are:

• BND Vanguard Total Bond Market ETF
• BNDX Vanguard Total International Bond ETF
• VTI Vanguard Total Stock Market ETF
• VXUS Vanguard Total International Stock ETF

You can also choose from a variety of Vanguard stock funds or individual stocks. Vanguard's ETFs can be purchased commission-free online through Vanguard Brokerage Services, or through another broker, who may charge commissions.

Vanguard's ETFs are built like mutual funds, investing in potentially hundreds or thousands of individual securities, but they trade on an exchange throughout the day like a stock. ETFs provide an opportunity to diversify your holdings, enjoy lower investment minimums (as little as $1 per share), and benefit from more transparent pricing.

Vanguard's average ETF expense ratio is 75-77% less than the industry average. Over the past 10 years, 83-88% of Vanguard ETFs beat the returns of their peer-group averages.

Diversify your portfolio

Diversifying your portfolio is a key part of investing. Diversification can help reduce your overall investment risk while making your portfolio easier to manage. Vanguard ETFs (exchange-traded funds) are a great way to diversify your portfolio. Vanguard offers dozens of ETFs to choose from, including four total market ETFs that, when used in combination, cover nearly all aspects of the U.S. and international stock and bond markets.

• Multiple asset classes: Spread your investments across different types of assets, such as cash, bonds, and stocks. This helps to reduce your risk by not putting all your eggs in one basket.
• Multiple holdings: Instead of investing in just one or a few stocks or bonds, consider investing in many. ETFs are a great way to do this, as they are a collection of hundreds or thousands of stocks or bonds in a single fund.
• Multiple geographic regions: Invest in a combination of U.S. and international markets. This can help reduce your exposure to risk in any one country or region.
• Environmental, Social, and Governance (ESG) criteria: Consider investing in companies with strong ESG track records. Vanguard offers a lineup of ESG investments that can help you achieve your financial goals while aligning with your values.

When investing in ETFs, it's important to have a strategy based on your goals, risk tolerance, and time horizon. Vanguard offers four total-market ETFs that can help you build a fully diversified portfolio:

• BND Vanguard Total Bond Market ETF: Offers broad exposure to U.S. bonds.
• BNDX Vanguard Total International Bond ETF: Offers broad exposure to international bonds.
• VTI Vanguard Total Stock Market ETF: Offers broad exposure to U.S. stocks.
• VXUS Vanguard Total International Stock ETF: Offers broad exposure to international stocks.

By using these four ETFs in combination, you can achieve a high level of diversification and reduce your overall investment risk. Remember, investing involves risks, and diversification does not ensure a profit or protect against loss. It's always important to do your own research and consult with a financial advisor before investing.

Understand investment types

Understanding the different types of investments is crucial when considering how to invest in an ETF (exchange-traded fund) outside of Vanguard. Here is an overview of some key investment types:

Stocks

Stocks represent part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits, and the value of your investment can change through fluctuations in share price or dividend payments. Stocks have historically provided higher returns compared to other investment options, but it's important to remember that higher rewards often come with higher risks.

Bonds

Bonds are different from stocks in that they do not give you ownership rights. Instead, they represent a loan from the buyer to the issuer of the bond, who agrees to pay back the loan by a specific date. Bonds are suitable for those seeking fixed income, such as retirees.

Cash Investments

Cash investments are short-term financial instruments with high liquidity, minimal market risk, and a short maturity period, typically less than three months.

Mutual Funds

Mutual funds are similar to ETFs in that they offer diversification. However, mutual funds are priced at the end of each day based on the closing prices of the securities they hold, whereas ETFs trade on exchanges with constantly shifting prices. Mutual funds are suitable for those seeking a "set it and forget it" investment option.

Hybrid Securities

Hybrid securities are complex investments that combine the characteristics of both stocks and bonds. They may not be suitable for everyone due to their high-risk nature.

Alternative Investments

Alternative investments are higher-risk and involve unconventional investment categories. They are not suitable for risk-averse investors.

When deciding on investment types, it's essential to consider your financial goals, risk tolerance, and time horizon. Diversifying your portfolio by investing in a mix of asset classes, such as stocks, bonds, and cash, can help manage risk.

Compare Vanguard ETFs with other investment options

Vanguard is one of the world's largest asset management firms, with about $7.2 trillion in assets under management (AUM) as of January 31, 2021. It has become a popular choice for investors due to its extensive list of low-cost mutual funds and exchange-traded funds (ETFs).

Vanguard ETFs vs Vanguard Mutual Funds

Most Vanguard index mutual funds have a corresponding ETF. Both products are similar in management style and returns, but there are differences that make each more appropriate for different investors.

ETFs offer more flexibility as they trade like stocks and can be bought and sold throughout the day, in transaction amounts as little as one share. Vanguard offered 86 ETFs as of October 11, 2024, with market prices per share ranging from approximately $46 to $580. ETFs also tend to be more tax-efficient and carry lower expense ratios than their mutual fund counterparts. However, ETF trades could incur brokerage commission fees.

Mutual fund shares, on the other hand, price only once per day at the end of the trading day but may benefit from economies of scale. Vanguard mutual funds offer up to three classes of shares—Investor Shares, Admiral Shares, and Institutional Shares—with each class offering progressively lower expense ratios in return for higher minimum investments.

Vanguard ETFs vs Individual Stocks

Vanguard ETFs provide a more diversified investment option compared to individual stocks. They are a collection of hundreds or thousands of stocks or bonds, managed by experts, in a single fund that trades on major stock exchanges. Vanguard ETFs also have a low investment minimum of just $1 and allow for fractional share investing.

Individual stocks, on the other hand, offer potential for higher returns but come with greater risk. They also provide ownership and dividends, allowing investors to become partial owners of the company and receive dividend payments.

Vanguard ETFs vs Other Investment Options

While Vanguard does not provide specific comparisons with other investment options, here are some general considerations when comparing ETFs with other investments:

• ETFs are typically more diversified than investing in individual stocks or bonds, as they hold a collection of various securities.
• ETFs are traded on stock exchanges and offer more liquidity than other investments that may be more challenging to buy or sell, such as real estate or commodities.
• ETFs generally have lower fees than actively managed mutual funds, as they are often indexed to a specific market or sector and passively managed.
• ETFs may offer more flexibility in buying and selling throughout the trading day, similar to stocks, while other investments like mutual funds may have more restrictions on trading.
• ETFs can be used to gain exposure to a specific market, sector, or asset class, allowing investors to target specific areas of the market.
• Some ETFs may be leveraged or inverse, offering more complex investment strategies for experienced investors.

Frequently asked questions