Best Vanguard Funds For Your First Investment

Vanguard is a popular choice for investors, offering a wide range of investment products, including mutual funds, exchange-traded funds (ETFs), stocks, and more. Vanguard's mutual fund and ETF lineup currently spans 352 options, providing diversification across asset classes and regions, simplicity, and robust investor education resources. Vanguard is also known for its low costs, with an average expense ratio of 72% lower than the industry average for index mutual funds and ETFs. When choosing a Vanguard fund for your first investment, it's important to consider your investment goals, risk tolerance, and the fund's expense ratio. Some popular Vanguard funds for beginners include the Vanguard 500 Index Fund Admiral Shares, Vanguard Total Stock Market ETF, and Vanguard Target Retirement 2070 Fund. It's also worth noting that Vanguard offers a range of ESG (environmental, social, and governance) funds that allow investors to align their investments with their personal values.

Mutual funds vs. exchange-traded funds (ETFs)

Mutual funds and exchange-traded funds (ETFs) are two popular investment options for those looking to diversify their portfolios. While both are similar in many ways, there are some key differences to consider when deciding which is best for you.

Similarities

Mutual funds and ETFs are both professionally managed collections or "baskets" of individual stocks or bonds. They are both less risky than investing in individual stocks and bonds and offer built-in diversification. They also both offer a wide variety of investment options, giving investors access to a range of U.S. and international stocks and bonds.

Differences

Investment Minimums

Mutual funds typically have a higher minimum investment requirement than ETFs. While mutual funds require a minimum investment of hundreds or thousands of dollars, you can invest in an ETF if you have enough money to buy a single share.

Trading

ETFs can be bought and sold just like stocks, while mutual funds can only be purchased at the end of each trading day. ETFs are traded more like stocks and offer real-time pricing, giving investors more hands-on control over the price of their trade.

Management

Mutual funds are usually actively managed, meaning fund managers make decisions about how to allocate assets to beat the market. ETFs, on the other hand, are usually passively managed and track a market index or sector sub-index. Actively managed funds tend to have higher fees and expense ratios due to their higher operations and trading costs.

Taxation

ETFs also offer some tax advantages over mutual funds. As passively managed portfolios, ETFs tend to realise fewer capital gains than actively managed mutual funds, and investors only pay capital gains taxes when they sell ETF shares.

Vanguard Funds

Vanguard offers a range of mutual funds and ETFs to choose from, depending on your investment goals and preferences. Some popular Vanguard index funds include:

• Vanguard 500 Index Fund Admiral Shares (VFIAX)
• Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
• Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
• Vanguard Growth Index Fund (VIGAX)
• Vanguard Balanced Index Fund Admiral Shares (VBIAX)

Low fees and broad diversification

When it comes to investing in Vanguard funds, beginners should focus on two attributes to minimize risk: low fees and broad diversification.

Low Fees

Low fees are crucial because they minimize the predictable, constant drag on performance. The average expense ratio across Vanguard's index mutual funds and ETFs is 72% lower than the industry average.

Broad Diversification

Broad diversification is equally important as it reduces the risk associated with poor performance in any single geography, asset class, or sector. Vanguard's mutual fund and ETF lineup currently spans 352 options, offering diversification across asset classes and regions.

• Vanguard 500 Index Fund Admiral Shares (VFIAX)
• Vanguard Total Stock Market ETF (VTI)
• Vanguard Total International Stock ETF (VXUS)
• Vanguard Total Bond Market ETF (BND)
• Vanguard Dividend Appreciation ETF (VIG)
• Vanguard LifeStrategy Growth Fund (VASGX)
• Vanguard Target Retirement 2070 Fund (VSVNX)

Vanguard's mutual fund and ETF lineup

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

Mutual Funds

Mutual funds offer diversification and convenience. Vanguard pioneered low-cost mutual fund investing and currently offers a wide selection of both index funds and actively-managed funds. Most Vanguard mutual funds have a $3,000 minimum initial investment, but some allow a $1,000 opening investment.

ETFs

ETFs offer more flexibility than traditional funds, as they can be bought and sold throughout the day. You don't need thousands of dollars to purchase ETFs to enjoy their low-cost diversification. Vanguard offers over 80 ETFs, with prices per share ranging from $47 to $586 as of September 30, 2024.

Key Differences

The main difference between Vanguard's mutual funds and ETFs is tradability. Mutual fund shares are priced once per day at the end of the trading day, whereas ETFs can be bought and sold throughout the day. ETFs also tend to be more tax-efficient and have lower expense ratios than mutual funds. However, mutual funds allow for automatic investments and withdrawals, which ETFs do not.

Popular Vanguard Funds

• Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
• Vanguard 500 Index Fund Admiral Shares (VFIAX)
• Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
• Vanguard Total Bond Market Index Fund (VBTLX)
• Vanguard Balanced Index Fund (VBIAX)
• Vanguard Growth Index Fund (VIGAX)
• Vanguard Small Cap Index Fund (VSMAX)

How to decide which Vanguard fund to pick

When deciding which Vanguard fund to pick, there are a few key factors to consider. Here are some guidelines to help you make an informed decision:

Identify your investment goals and risk tolerance:

Before choosing a Vanguard fund, it is important to assess your investment objectives and risk tolerance. Are you investing for the short term or the long term? Do you prefer a more aggressive approach or a more conservative one? Vanguard offers a variety of funds, including index funds and actively managed funds, so understanding your risk tolerance will help you select the right type of fund.

Evaluate fees and expenses:

Vanguard is known for its low-cost investment options, but it is still crucial to consider the fees associated with each fund. Look at the expense ratio, which represents the ongoing cost of managing the fund. Lower expense ratios mean more of your money stays invested and working for you. Compare the expense ratios of different Vanguard funds to find the most cost-effective option.

Diversification:

Diversification is a key advantage of investing in Vanguard funds. Diversification reduces the risk associated with poor performance in any single geography, asset class, or sector. Vanguard offers funds that invest in a wide range of industries, sectors, and markets, allowing you to spread your investments across various areas. This helps protect your portfolio from significant losses if one particular investment or sector underperforms.

Performance and track record:

While past performance does not guarantee future results, it is important to consider the long-term track record of the Vanguard funds you are considering. Look at their historical returns and how they have performed during different market conditions. This can give you an idea of their potential for generating returns over time.

Investment minimums:

Vanguard funds have different minimum investment requirements. Some funds require a minimum initial investment of $3,000 or more, while others have lower minimums or no minimum at all. Consider your budget and choose a fund that aligns with your financial capabilities.

Tax efficiency:

When deciding between a Vanguard mutual fund and an exchange-traded fund (ETF), consider the tax implications. Mutual funds tend to be less tax-efficient than ETFs because they distribute taxable capital gains at the end of the year. ETFs, on the other hand, do not have this requirement, making them more tax-efficient in some cases.

Expert recommendations:

Consider seeking advice from financial experts or advisors who are familiar with Vanguard funds. They can provide insights and guidance based on your specific financial goals, risk tolerance, and investment horizon. Their recommendations can help you make a more informed decision about which Vanguard fund to choose.

Remember, investing involves risk, and it is essential to do your own research and consult with a qualified financial advisor before making any investment decisions.

How to purchase Vanguard index funds

Vanguard index funds are a popular investment option, offering over 60 index mutual funds to choose from. Here is a step-by-step guide on how to purchase Vanguard index funds:

Step 1: Open an Account with Vanguard

If you are not investing through a company-sponsored 401(k), the best way to invest in Vanguard's offerings is to invest directly through their website. You can choose from various account types, including traditional and Roth IRAs, SEP IRAs, and taxable brokerage accounts. Vanguard currently does not require any account minimums to open an account, although many of their index funds have a minimum investment amount.

Step 2: Link Your Banking Information

After opening your account, link your bank account details, including your account number and routing number. Vanguard will then ask you to verify your account information by confirming a small deposit made to your linked account. This process can take a few days to complete.

Step 3: Purchase Vanguard Index Funds

Once your bank account has been verified, you can start buying and trading shares. Click on the "Buy and Sell" link and enter the name of the fund you wish to purchase. If it is your first time purchasing a particular fund, you will need to search for it by entering the ticker, name, or symbol. For subsequent purchases, the fund will appear automatically on the buy page. Enter the amount you wish to invest, select your funding method, review the transaction details, and submit your purchase.

Step 4: Monitor Your Investments

Vanguard deals primarily with individual retirement accounts, which have annual contribution limits. After reaching these limits, remember to check in on your investments at least annually. You can set up regular contributions through Vanguard's website to maximise your investments without any additional effort. It is important to monitor your investments regularly to ensure they align with your financial goals and risk tolerance.

Additional Considerations:

When deciding which Vanguard index fund to purchase, consider the type of index you want the fund to track, such as industry, company size, location, or asset type. Also, evaluate the fees and costs associated with different funds tracking the same index. Vanguard index funds can be purchased through other brokers, so you may also want to compare these options before investing directly through Vanguard.

In summary, purchasing Vanguard index funds can be done in a few simple steps: open an account, link your bank, buy the desired funds, and regularly monitor your investments. By following these steps, you can access Vanguard's diverse range of index funds and work towards your financial goals.

Frequently asked questions