Best Vanguard Funds To Maximize Your 401(K) Returns

Vanguard funds are a popular choice for retirement investments, with their low-cost structure, high quality, and commitment to shareholders. Vanguard is unique in that it is a mutual company, meaning that when you invest in their funds, you become a partner and a customer. Vanguard offers a range of funds to suit different investment goals and risk tolerances, including target-date funds, actively managed funds, and index funds. Target-date funds, such as the Vanguard Target Retirement 2050 Fund (VFIFX), automatically adjust their allocation of stocks and bonds over time, becoming more conservative as the target retirement date approaches. Actively managed funds are managed by industry experts and follow sophisticated investment strategies. Index funds, such as the Vanguard 500 Index Admiral Shares (VFIAX), track the index of a particular market segment and offer low fees. When choosing a Vanguard fund for your 401k, it's important to consider your investment goals, risk tolerance, and the fees associated with each fund.

Target-date funds

TDFs are offered by many company 401(k) plans and are also an option for people investing in individual retirement accounts (IRAs). They are a popular choice for investors who don't have the time or inclination to review their fund's holdings annually and revise their investment strategy.

Vanguard, a mutual company, offers a range of TDFs with target dates through to 2070. Their target-date funds are designed to promote financial well-being for participants up to and through retirement, balancing risk and return. Vanguard's TDFs automatically grow more conservative as the target date gets closer, offering a complete portfolio in one fund.

TDFs are a "set it and forget it" retirement savings option, removing the need for investors to decide on a mix of assets and rebalance those investments over time. They aim to strike the right balance between the risk necessary to build wealth and safer bets to protect a growing nest egg. The funds automatically rebalance an investor's portfolio with the right mix of stocks, bonds, and money market accounts as they age.

TDFs are managed by a professional and provide a diversified mix of equities and fixed income that changes over time. They are designed to take the guesswork out of saving for retirement.

Actively managed funds

Vanguard International Growth (VWIGX) is one of the actively managed funds offered by Vanguard. It has been praised for delivering above-average returns with below-average risk. However, due to a key manager's departure and the impact of the Russia-Ukraine war on the European economy, it is worth monitoring this fund closely in the next year or two.

Vanguard Explorer (VEXPX) is another actively managed fund that focuses on small-company stocks. It has outperformed the Russell 2000 index over the past five full calendar years. With close to 750 stocks in its portfolio and $20.2 billion in total assets, it is the biggest actively managed small-company fund in the country.

Vanguard Equity-Income (VEIPX) is a steady dividend fund that has consistently delivered above-average returns with below-average volatility. While a key manager is retiring, the new manager, Matthew Hand, has expressed that the overall investment philosophy will remain the same.

Vanguard U.S. Growth (VWUSX) has delivered strong returns in certain years, such as a 59% return in 2020. However, recent changes in the management team and the underperformance of growth stocks may be causes for concern.

Vanguard Wellesley Income (VWINX) is a conservative fund with a heavy focus on bonds, making up two-thirds of its assets. It has delivered steady returns over the past 15 years, outperforming 96% of its peers.

Vanguard Wellington (VWELX) is a moderate-risk, all-in-one portfolio that holds both stocks and bonds. It has a strong long-term record, beating 82% of its peers with an 8.5% annualized return over the past five years.

Vanguard's actively managed funds offer a range of options for investors, from small-company stocks to conservative bond-focused funds. While some funds have experienced management changes, the overall investment strategies remain consistent, and Vanguard's low-cost structure makes them a compelling choice for long-term investing.

Index funds

Vanguard 500 Index Fund Admiral Shares (VFIAX)

Also known as the Vanguard S&P 500 Index fund, this fund gives investors exposure to 500 large US companies, making up 75% of the total US stock market value. It has a low expense ratio of 0.04% but requires a minimum initial investment of $3,000.

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

VTSAX is one of the largest and most popular Vanguard index funds. It tracks the performance of the CRSP US Total Market Index and invests in over 3,500 stocks across various sectors. With an expense ratio of just 0.04%, it has averaged returns of around 7% per year over the last decade.

Vanguard Growth Index Fund Admiral Shares (VIGAX)

This fund focuses on large US companies in sectors with higher growth potential, such as technology, consumer services, and financial services. It has a low expense ratio of 0.05%, making it an affordable option for investors.

Vanguard Small-Cap Index Fund Admiral Shares (VSMAX)

This fund targets smaller publicly held companies, providing investors with diversification away from larger public companies.

Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)

VTIAX offers investors exposure to international markets by tracking over 8,600 stocks from developed and emerging markets outside the US. It has a low turnover rate of 3.9% and a competitive expense ratio of 0.12%. The minimum investment requirement is $3,000.

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

VBTLX is a bond index fund that invests in a variety of high-quality US government, corporate, and municipal bonds. With an expense ratio of just 0.05%, it has averaged returns of around 4% per year over the last decade.

Vanguard Balanced Index Fund Admiral Shares (VBIAX)

VBIAX offers a balanced approach by investing approximately 60% in stocks and 40% in bonds. This mix of growth through equities and stability through fixed-income investments makes it a stable choice for investors.

Vanguard Target Retirement Funds

Vanguard's Target Retirement Funds are an excellent option for those seeking a set-it-and-forget-it investment strategy. These funds automatically adjust their asset allocation as you get closer to retirement, becoming more conservative over time. For example, the Vanguard Target Retirement 2055 Fund (VFFVX) is designed for investors retiring around 2055, with an expense ratio of 0.15% and averaged returns of 8% per year over the last decade.

Low-cost structure

Vanguard funds are a great choice for retirement investing, thanks to their low-cost structure. Vanguard is committed to providing the best investments for retirement at the lowest possible cost. This is because every dollar saved on costs is a dollar that goes towards an individual's future.

Vanguard's asset-weighted average expense ratio is 0.08%—less than one-fifth of the industry average of 0.44%. This low-cost structure is made possible by Vanguard's unique structure as a mutual company, meaning it is owned by the shareholders who invest in its funds. As a result, when you invest in Vanguard funds, you become a partner as well as a customer.

Vanguard's low-cost offerings include a range of funds with different investment styles to suit individual needs and goals. These include target-date funds, actively managed funds, and index funds.

Target-date funds are designed as a one-fund solution for retirement investing. These funds automatically adjust their allocation to stocks and bonds over time, becoming more conservative as the target retirement date nears. Vanguard offers a dozen target retirement funds with dates through to 2070.

Actively managed funds are built on sophisticated investment strategies from industry experts. Vanguard's in-house managers and external investment firms ensure that these funds are well-managed and competitive.

Index funds are investments that track the index of a particular market segment. Vanguard's index funds have an enduring record of offering tight index tracking and low fees, with $7.3 trillion invested in them.

Overall, Vanguard's low-cost structure is a key advantage for individuals looking to maximize their retirement savings. With a range of fund options available, individuals can choose the investment strategy that best suits their needs while taking advantage of Vanguard's low fees and reasonable expenses.

Investment styles

Active vs. Passive Management

Active management involves investors who want their holdings carefully selected by professional money managers. Actively managed funds typically have a dedicated staff of financial experts constantly seeking to maximise returns for investors. As a result, these funds tend to have higher expenses than passively managed funds. On the other hand, passive management is based on the belief that investing in a market index fund may produce potentially higher long-term results, as empirical research suggests that passive funds often outperform active funds over the long run.

Growth vs. Value Investing

Growth investing focuses on firms with high earnings growth rates, high return on equity, high profit margins, and low dividend yields. These firms are often innovators in their field, reinvesting their earnings to fuel future growth. Value investing, on the other hand, seeks to buy strong firms at a good price. Analysts look for low price-to-earnings and price-to-sales ratios, as well as higher dividend yields. Value investing is more concerned with finding strong companies trading below their intrinsic value.

Small Cap vs. Large Cap Companies

Market capitalization, or "market cap," is a measure of company size. Small-cap companies are often seen as having higher growth potential and agility, but they also carry more risk due to their limited resources and less diversified business lines. Large-cap companies, such as well-known names like GE, Microsoft, and Exxon Mobil, offer more dependability and lower risk, but their size may hinder their ability to grow as quickly.

Target-Date Funds

Target-date funds, such as Vanguard's Target Retirement 2050 Fund (VFIFX), offer a "set-it-and-forget-it" investment strategy. These funds automatically adjust their allocation to stocks and bonds over time, becoming more conservative as the target retirement date approaches. This approach simplifies the process of rebalancing a portfolio.

Actively Managed Funds

Actively managed funds, like those offered by Vanguard, are built on sophisticated investment strategies from industry experts. These funds aim to outperform the market and may include a range of investments, from fixed-income to high-growth opportunities.

Index Funds

Index funds, a key offering from Vanguard, track the index of a particular market segment. These funds have a strong track record of tight index tracking and low fees, making them an attractive option for investors seeking broad market exposure at a low cost.

Frequently asked questions