Closed Vanguard Funds: How To Invest Wisely

Investing in closed Vanguard funds can be a tricky business. In January 2019, Vanguard announced the passing of its founder, John Clifton Bogle, and the closure of its Convertible Securities Fund. Vanguard funds are top of mind when it comes to index investing, and the company has a history of closing funds to new investors. In 2019, several Vanguard funds were closed to new investors, including VTSMX, NAESX, and VFWIX. However, these funds were replaced by new Admiral Shares with the same $3000 minimum investment and lower expenses.

Vanguard has a history of making changes to its fund lineup to strengthen its offerings, meet investors' evolving needs, and adapt to shifting market dynamics. In August 2020, Vanguard announced changes to its taxable money market fund lineup, including the reopening of its Treasury Money Market Fund, which had been closed to new investors in April 2020.

Vanguard's actively managed funds feature low fees, just like its passive investment options, making them a popular choice for long-term investors. The company's flagship active mutual fund, the Vanguard PRIMECAP Fund Admiral Shares, has generated an impressive average annual return of 11.2% since 2001.

While investing in closed Vanguard funds can be challenging, the company's history of making changes to its fund lineup and offering low-cost investment options makes it a popular choice for many investors.

Understand the difference between investor and admiral shares

Understanding the difference between Investor and Admiral Shares

Vanguard offers two classes of shares to individual investors: Admiral Shares and Investor Shares. The former were introduced to pass on savings to investors who committed more money to a fund.

Admiral Shares have a higher minimum investment threshold than Investor Shares. For most index funds, the minimum investment for Admiral Shares is $3,000, while for actively managed funds, it is $50,000. Certain sector-specific index funds even require a minimum investment of $100,000 for Admiral Shares. On the other hand, Investor Shares have a minimum investment of $3,000 for most actively managed funds, and $1,000 for Vanguard Target Retirement Funds and the Vanguard STAR Fund.

The key difference between the two share classes is the expense ratio. Admiral Shares have, on average, 52% lower expense ratios than Investor Shares and 72% lower than the industry average. This means that Admiral Shares offer greater cost savings, helping investors build more wealth over time.

It is important to note that mutual funds are frequently offered in different share classes, but their objectives, management, and underlying investments remain identical across all classes. Therefore, the main differences between Investor and Admiral Shares are the minimum initial investment requirements and the expense ratios.

If you already own Investor Shares and meet the minimum investment criteria for Admiral Shares, you can convert your shares online, by phone, or in writing. Converting to Admiral Shares is a straightforward process and will not affect the value of your investment.

Know when funds reopen

When it comes to knowing when closed Vanguard funds will reopen, there are a few key points to keep in mind. Firstly, Vanguard regularly evaluates its active fund lineup to monitor investment capacity and cash flow to ensure funds can continue to meet their investment objectives. If a fund is closed, it is usually to protect existing investors by slowing or stopping the flow of new money that the fund's manager must put to work. This can happen when a fund's asset base becomes too large to effectively execute its investing style, which is more common for smaller-cap funds or funds that invest in emerging markets and other less liquid areas.

Vanguard will typically announce when a fund will be available for purchase again, and you can check the status of a fund by searching for it on the Morningstar.com homepage. In the case of Vanguard's Primecap Mutual Funds, the Vanguard Primecap and Vanguard Primecap Core funds were reopened to new investors in June 2024, after being closed for 15 years. The Vanguard Dividend Growth Fund was also reopened on August 1, 2019, after being closed for over three years.

It's important to note that there is no magic number or formula for when a fund will reopen. Vanguard considers various factors, including the size and capacity of the research team and the liquidity of the area the fund invests in. Additionally, funds don't have to close, and some may remain open longer to maximize profits over protecting investor interests.

Compare Vanguard's active and passive funds

When comparing Vanguard's active and passive funds, it is important to understand the fundamental differences between these two types of investment strategies.

Active Funds

Active funds aim to beat the market by actively selecting investments that are expected to outperform a particular index. Vanguard's active funds are managed by analysts and stock pickers who conduct in-depth research and make decisions about specific companies, countries or regions, and industries to invest in. These funds offer investors the potential for higher returns but also come with higher risks. One of the key advantages of Vanguard's active funds is their low fees, which increase the chances of beating the market by reducing the break-even point. As of April 2023, Vanguard had over $7.7 trillion invested in active funds worldwide.

Passive Funds (Index Funds)

Index funds, on the other hand, are designed to mirror certain market segments and keep pace with market returns. They try to match the performance of a specific market index as closely as possible by buying all or a representative sample of the stocks or bonds in that index. While these funds may distribute fewer taxable capital gains due to less frequent trading, they also align directly with the risks of the specific market they track.

Comparison

The choice between active and passive funds depends on an investor's risk tolerance and investment goals. Active funds offer the potential for higher returns but come with higher fees and the risk of underperformance. Index funds, on the other hand, offer lower costs and direct alignment with market performance but may distribute more taxable capital gains if the portfolio manager trades more frequently.

Vanguard's Approach

Vanguard offers both active and passive funds, and the company believes that each strategy can complement the other when combined in a well-diversified, balanced portfolio. With over 40 years of experience in active fund management and a focus on keeping costs low, Vanguard has made its active funds incredibly popular. At the same time, the company also recognises the benefits of index funds and offers a range of over 85 funds, including LifeStrategy funds that balance risk and reward by mixing bonds and shares.

Learn about Vanguard's ESG funds

Vanguard offers a range of ESG (environmental, social, and governance) funds that allow investors to build or complement their portfolios with funds that reflect their personal preferences and values. These funds provide a way to invest in companies that consider ESG issues while also adhering to Vanguard's investing principles of clear goals, broad diversification, low costs, and a long-term view.

Vanguard currently offers seven ESG products: four exclusionary index funds and three actively managed funds. The exclusionary index funds omit companies that do not meet certain ESG criteria, such as those involved in the firearms, tobacco, or fossil fuel industries. These funds aim to reduce exposure to specific industries that pose heightened ESG-related risks or conflict with investors' ESG preferences.

The three actively managed funds, on the other hand, seek to generate excess returns by investing in companies with leading or improving ESG practices. These funds allocate capital to companies that the fund managers assess as demonstrating strong ESG performance, consistent with each fund's ESG mandate.

• ESGV ESG U.S. Stock ETF
• VFTAX FTSE Social Index Fund
• VSGX ESG International Stock ETF
• VCEB ESG U.S. Corporate Bond ETF
• VBPIX Baillie Gifford Global Positive Impact Stock Fund
• VEOIX Global Environmental Opportunities Stock Fund
• VEIGX Global ESG Select Stock Fund

It is important to note that investing in Vanguard's ESG funds, like any other investment, carries risks. These funds are subject to ESG investment risk, which means that the screened stocks or bonds may underperform the market or trail returns of other ESG-screened funds. The companies included in the funds may not align perfectly with an investor's beliefs and values, and there is a chance of a negative or no impact on the issues the funds aim to address.

Find out about Vanguard's plans for the future

Vanguard has a history of refining its fund offerings to meet investors' needs and adapt to shifting market dynamics. Here are some insights into Vanguard's plans for the future, based on its recent announcements and initiatives:

• Focus on Environmental, Social, and Governance (ESG) Investments: Vanguard has been expanding its ESG fund offerings in recent years. In 2024, the company introduced two active municipal ETFs, the Vanguard Core Tax-Exempt Bond ETF (VCRM) and the Vanguard Short Duration Tax-Exempt Bond ETF (VSDM), managed by Vanguard's Fixed Income Group. In 2022, Vanguard launched the Baillie Gifford Global Positive Impact Stock Fund, aiming to provide global equity returns while positively impacting environmental and social challenges. The company also added Ariel Investments to its roster of external advisors for the Vanguard Explorer Value Fund, reflecting a continued commitment to ESG investing.
• Digital Innovation and Blockchain Technology: Vanguard has been at the forefront of exploring blockchain technology to streamline various financial processes. In 2022, they introduced Digital Advisor, a robo-advisor service with a reduced minimum asset requirement of $100, making digital advice more accessible. Additionally, Vanguard has been piloting the use of blockchain technology in partnership with Symbiont and other financial institutions to enhance the distribution of index data and improve the efficiency of asset-backed securities markets and foreign exchange forwards.
• Expansion of Investment Options: Vanguard continues to expand its investment offerings to cater to diverse investor needs. In 2023, they announced the launch of the Vanguard Intermediate-Term Tax-Exempt Bond ETF (VTEI) and the Vanguard California Tax-Exempt Bond ETF (VTEC), providing investors with access to municipal bond portfolios. Vanguard also introduced the Vanguard Ultra-Short Bond ETF (VUSB), offering a low-cost option for investors seeking limited price volatility.
• Enhancing Retirement Planning Services: Vanguard is committed to helping individuals plan for retirement effectively. They offer resources to learn the basics of saving and planning for retirement, as well as tools like the "Will I have enough to retire?" calculator. Vanguard also emphasizes the importance of Social Security in retirement planning and provides guidance on maximizing these benefits.
• Commitment to Low Fees and Transparency: Vanguard prioritizes keeping costs low for investors. They have consistently reported expense ratio changes and reductions across various funds, returning value to shareholders. Vanguard also emphasizes transparency by sharing information on fees that investors can avoid. This approach ensures that investors know what they are paying for and enables them to make informed decisions.
• Global Expansion: Vanguard has been expanding its global presence and investment offerings worldwide. In 2021, they announced plans to introduce the Vanguard China Select Stock Fund, providing qualified investors with access to actively managed, high-alpha-target equity exposure in the Chinese market. Additionally, Vanguard has been broadening access to its low-cost institutional target-date funds, making them more widely available to 401(k) and 403(b) plan sponsors.

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