Investing In Vanguard Etfs: A College Student's Guide

Investing in Vanguard ETFs can be a great way to save for college, especially given their low costs, instant diversification, and the ability to trade shares during the trading day. Vanguard is a well-known and reliable company with a wide range of ETFs to choose from, including broad market ETFs and sector-specific ETFs. Vanguard's ETFs have consistently outperformed their peers, with competitive long-term returns and lower expense ratios.

When considering investing in Vanguard ETFs for college, it is important to start as early as possible to maximize the benefits of compound interest and give your investments time to grow. Additionally, it is crucial to assess your financial situation, risk tolerance, and investment goals before making any decisions.

Vanguard offers a variety of ETFs that can help you save for college, and by combining different ETFs, you can further diversify your portfolio and potentially increase your returns.

Vanguard's low fees and investment minimums

Vanguard is well-known for its low fees and low investment minimums. The company is renowned for its cost-effectiveness, with an average expense ratio of 0.08% for its mutual funds and ETFs, which is 82% less than the industry average.

Vanguard's mutual fund fees are also significantly lower than the industry average, with an average expense ratio of 0.09% compared to the industry average of 0.50%.

Vanguard's ETF fees are also highly competitive, with a minimum investment of just $1. The company offers commission-free trades when buying or selling ETFs online, and there is no minimum initial investment requirement. Account service fees range from $15 to $25 annually, depending on the account type.

Vanguard's low fees and minimum investment requirements make it an attractive option for investors looking to minimize costs and maximize returns.

Additionally, Vanguard's mutual funds have a $3,000 minimum investment requirement, and some funds have higher minimums to protect against short-term trading activity. The company also offers a fractional share program, allowing investors to buy a Vanguard ETF for as little as $1.

Vanguard's low-cost approach, combined with its diverse investment options, makes it a popular choice for investors seeking a balance between cost and performance.

The benefits of diversification

Diversification is a key concept in investing and is often touted as one of the golden rules for building a robust portfolio and creating long-term wealth. Here are some of the benefits of diversification:

Spreading Your Investments

The idea behind diversification is simple: by not putting all your eggs in one basket, you reduce the risk of significant losses if a single asset or asset class declines. Diversification ensures your portfolio is less susceptible to the impact or volatility of individual assets. For example, in certain years, growth assets like Australian small-caps and international equities may perform well, while in other years, defensive investments like fixed-interest and cash may shine as equities struggle with market volatility.

Increased Opportunities

Diversifying your portfolio across global markets can open up a world of investment opportunities. Australia, for instance, only accounts for around 2% of the global equity market. By diversifying internationally, you can take advantage of market cycles, where money flows into specific areas, causing some assets, sectors, or regions to outperform others. In the 2000s, Australian stocks thrived amid a commodities boom, while in the 2010s, international stocks led the way due to low-interest rates benefiting tech and growth companies.

Mitigating Emotional Impact

Diversification can also help to mitigate the emotional impact of investing. Loss aversion is a well-known behavioural bias where individuals feel a stronger aversion to losing money than they feel joy in gaining the same amount. Diversification acts as a 'safety net', alleviating anxiety over a single underperforming asset because other investments in your portfolio may be able to cushion those losses, providing more peace of mind and potentially leading to better risk-adjusted returns over time.

Reducing Risk

Diversification is particularly beneficial in reducing risk when investing in ETFs, as ETFs themselves are already diversified investment vehicles. An ETF is a collection of hundreds or thousands of stocks or bonds, providing instant diversification across various sectors, industries, or asset classes. This diversification benefit is further enhanced when you hold multiple ETFs in your portfolio, ensuring you are not overly exposed to any single ETF or the underlying assets it holds.

Cost-Effectiveness

ETFs are also a cost-effective way to achieve diversification. They have very low fees, especially if they are passively managed, and you can buy a fractional share of a Vanguard ETF for as little as $1. This makes it easy to build a diversified portfolio without requiring a large amount of capital.

Liquidity and Transparency

Another benefit of ETFs is that they trade throughout the day like stocks, providing higher liquidity and transparency compared to mutual funds, which can only be bought and sold at the end of the trading day. This feature also gives you the ability to trade shares during the trading day, allowing you to react to market movements in real-time.

In conclusion, diversification is a powerful tool for building a robust and resilient investment portfolio. By spreading your investments across different assets, sectors, and markets, you can reduce risk, increase opportunities, and improve your overall investment experience by mitigating the emotional impact of market fluctuations. ETFs provide an excellent vehicle for achieving diversification due to their inherent diversification benefits, low costs, and liquidity.

ETFs vs. mutual funds

While Exchange-Traded Funds (ETFs) and mutual funds are similar in many ways, there are some key differences between the two investment options.

Similarities

Both ETFs and mutual funds are professionally managed collections or "baskets" of individual stocks or bonds. They are both less risky than investing in individual stocks and bonds and offer a wide variety of investment options. They are also overseen by professional portfolio managers who choose and monitor the stocks or bonds the funds invest in.

Differences

ETFs can be traded intra-day like stocks, whereas mutual funds can only be purchased at the end of each trading day based on a calculated price known as the net asset value. ETFs can be bought for the price of a single share, while mutual funds have a flat dollar amount minimum investment, which is usually higher. ETFs are usually passively managed and track a market index or sector sub-index, while mutual funds are usually actively managed. ETFs are often cheaper to invest in, and their expense ratios are usually lower.

If you prefer lower investment minimums, more hands-on control over the price of your trade, real-time pricing, or are looking for an index fund, then an ETF could be more suitable for you. If you want to repeat specific transactions automatically, a mutual fund could be the better option.

Vanguard's ESG funds

Environmental, Social, and Governance (ESG) investing is a way to invest in funds that consider environmental, social, and governance issues. Vanguard offers seven ESG products, including four exclusionary index funds and three active funds.

The four exclusionary index funds are:

• ESG U.S. Corporate Bond ETF (VCEB)
• ESG U.S. Stock ETF (ESGV)
• FTSE Social Index Fund Institutional Shares (VFTNX)
• ESG International Stock ETF (VSGX)

The three active funds are:

• Global ESG Select Stock Fund Admiral Shares (VESGX)
• Baillie Gifford Global Positive Impact Stock Fund Investor Shares (VBPIX)
• Global Environmental Opportunities Stock Fund Admiral Shares (VEOAX)

For example, the VBPIX fund is actively managed and holds approximately 25-50 stocks from both U.S. and international companies. On the other hand, the VSGX fund is indexed and holds over 6,000 stocks from international companies.

The tax advantages of 529 plans

529 plans are a great way to save for education, offering several tax advantages. Here are the key tax benefits:

Tax-Free Earnings

Earnings in a 529 account grow free from federal taxes when the money is used for qualified higher education expenses. This includes tuition, fees, books, supplies, equipment, and room and board. Most other savings or investment accounts, like mutual funds, are usually subject to capital gains taxes upon withdrawal. With a 529 plan, contributions do not need to be reported on your federal tax return each year, and any investment earnings are not reportable until they are withdrawn.

Favorable Estate and Gift Tax Treatment

Contributions to a 529 plan are considered a completed gift to a student and are generally excluded from the account owner's taxable estate. For 2024, contributions of up to $18,000 per year, or $36,000 for married couples, are gift tax-free. Additionally, there are special 529 rules that allow a gift-giver to make a lump-sum contribution of up to five times the annual gift tax exclusion amount and spread it over five years, resulting in a tax-free gift of up to $90,000 ($180,000 for joint taxpayers) in 2024.

State Tax Benefits

Most states with an income tax offer tax deductions or credits for contributions to a 529 plan. While some states limit this deduction to residents who choose their home state's plan, others allow deductions regardless of which state administers the plan. Additionally, if you invest in your own state's 529 plan or live in a "tax parity state," you may benefit from state income tax deductions on contributions or exemptions on withdrawals.

Rollover Options

529 plans offer rollover options that can provide additional tax advantages. You can roll over a 529 plan to another 529 plan for the same beneficiary or a family member without triggering income tax. Beginning in 2024, beneficiaries can also roll over funds from a 529 plan to a Roth IRA, up to a lifetime total of $35,000, subject to certain restrictions.

Effect on Financial Aid

When applying for financial aid, it's important to consider how a 529 plan may impact eligibility. A 529 plan owned by a student's parent or the student is considered an asset on the Free Application for Federal Student Aid (FAFSA), but only the portion above $10,000 reduces aid eligibility by up to 5.64% of the plan's value. Additionally, qualified distributions from a 529 plan owned by a parent or student are not counted in determining aid eligibility.

Frequently asked questions