7 Best Vanguard Funds for Beginning Investors

7 Best Vanguard Funds for Beginning Investors

Time is a great ally when it comes to investing.

Vanguard, a retirement provider that is well known for its low-cost funds, offers many diversified equity and bond funds. “Time is your greatest ally in investing,” says Greg McBride, chief financial analyst at Bankrate, a financial data company. “For those in their 20s, every dollar you put away now can be worth $20 or $30 by the time you retire. That is the power of compounding doing the heavy lifting — you put in $1 and compounded growth over a long period of time does the rest.” Here are seven Vanguard funds to consider adding to your portfolio if you’re new to investing.

Vanguard Total Stock Market Index Fund ETF (ticker: VTI)

This fund tracks the performance of the CRSP U.S. Total Market Index, which represents 100% of the investable U.S. stock market. The expense ratio is only 0.03%, which means that if you invest $5,000, $4,998.50 would be put to work and only $1.50 would go to fees. Since it is an exchange-traded fund, there is no minimum investment required. A mutual fund or ETF provides diversification, and the volatility is much less than that of the average single stock. “The best thing for most investors is to invest in a low-fee, broadly diversified stock market index fund,” says Robert Johnson, a finance professor at Creighton University. “Buying an individual stock is subject to tremendous risk.”

Vanguard Total World Stock ETF (VT)

Too often investors focus solely on their home country market, Johnson says. In reality, the U.S. accounts for around 41% of the global stock market, according to the Securities Industry and Financial Markets Association, a trade association for broker-dealers, investment banks and asset managers. Investors who want broader, international exposure could add the Vanguard Total World Stock ETF since it allocates nearly 40% of its portfolio to companies outside of North America. This includes more than 40 countries across Europe, Asia, South America, Russia, Australia, India and the U.K., covering both emerging and developed foreign markets. VT also boasts a low expense ratio of 0.08%. “Low fees are critically important because the less you pay in costs, the more you keep in investment returns,” McBride says. “But also consider that index funds are your lowest cost investment options, and the overwhelming majority of active managers underperform the broad market indexes over time. So paying more doesn’t guarantee better returns and often assures you earn less.” With nearly 9,300 stocks in all, you’re getting broad diversification, too, although being market-cap weighted means a few of the big names, such as Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Tesla Inc. (TSLA), Google’s parent Alphabet Inc. (GOOG, GOOGL), carry more weight than the foreign names.

Vanguard Russell 2000 Index ETF (VTWO)

Many investors also simply concentrate the majority of their holdings in the large-cap space. However, according to data gathered by Duff & Phelps, a diversified portfolio of small-cap stocks has, on average, returned 11.9% annually since 1926, while a diversified portfolio of large-cap stocks has returned about 10% annually. The Vanguard Russell 2000 Index ETF gives investors small-cap exposure while charging an expense ratio of 0.1%. “Investment performance is uncertain, but fees are certain,” Johnson says. “If you can minimize fees by investing in low-cost index funds, you put more of your hard-earned money to work.”

Vanguard S&P 500 ETF (VOO)

The S&P 500 ETF tracks the blue-chip stock index of 500 large companies and provides diversification, with a low expense ratio of 0.03%. The five-year annualized return is 18.41%. Investing regularly when you are younger will compound your returns to ensure a well-funded retirement. For example, a $5,000 investment that generates an 8% average annual return will be worth more than $122,600 in 40 years. If you add to that investment regularly over time by investing, say $500 per month during those 40 years, you’d have nearly $1.9 million 40 years from now. This is the power of investing early and consistently in funds like VOO that have high average long-term returns.

Vanguard FTSE Social Index Fund Admiral Shares (VFTAX)

Social responsibility is becoming increasingly important for many investors as they try to ensure their investments align with their personal values. If you want to make sure you’re investing dollars are benefiting both you and the world, consider owning VFTAX. The fund tracks the FTSE4Good U.S. Select Index, which screens companies for environmental, social and corporate governance, or ESG, criteria and excludes certain bad actors. This means you won’t be funding companies in industries such as alcohol, tobacco, fossil fuels, gambling, adult entertainment, weapons or nuclear power. The fund also excludes companies that have violated the standards of the U.N. Global Compact principles in areas such as human or labor rights and environmental practices. With an expense ratio of only 0.14%, VFTAX is a cost-effective way to invest responsibly.

Vanguard Balanced Index Fund (VBIAX)

The Vanguard Balanced Index Fund offers a moderate allocation with about 60% invested in stocks and 40% in bonds. It tracks two separate indexes: the CRSP US Total Market Index, which represents the whole U.S. stock market, and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which represents investment-grade, taxable U.S. fixed-income securities. Rather than copying these two indexes, VBIAX takes a sampling approach where it holds a range of securities that, when aggregated, approximate the full indexes. This leads to a highly diversified fund with more than 3,600 stocks and nearly 9,000 fixed-income securities and allows it to provide both growth and income. The passive approach keeps costs low with an expense ratio of 0.07%.

Vanguard Total Bond Market ETF (BND)

The returns of bonds are less volatile than the stock market, which is beneficial for people who want to lower their risk. The fund tracks the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and has a 10-year trailing return of 2.83%, with an expense ratio of 0.035%. The fund is designed to help investors meet their medium- and long-term goals by providing reliable income. When an investor saves money through an individual retirement account or 401(k) plan, they are also benefiting from tax-sheltered savings and compounding. The tax shelter makes retirement accounts advantageous places to hold income funds.

Best Vanguard funds for beginning investors:

— Vanguard Total Stock Market Index Fund ETF (VTI)

— Vanguard Total World Stock ETF (VT)

— Vanguard Russell 2000 Index ETF (VTWO)

— Vanguard S&P 500 ETF (VOO)

— Vanguard FTSE Social Index Fund Admiral Shares (VFTAX)

— Vanguard Balanced Index Fund (VBIAX)

— Vanguard Total Bond Market ETF (BND)

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