Cheap Funds At Vanguard

10/20/2014


It's no secret we favor Vanguard funds; 11 of our 20 recommended funds hail from the fund giant.

Part of the attraction is Vanguard's low fees, reflecting an uncommon corporate structure that allows the company to manage its funds at cost. Vanguard's mutual funds average expense ratios of 0.18%, versus 1.27% for all mutual funds. Importantly, expenses are among the best predictors of fund performance.

Well-heeled investors have even more reason to like Vanguard's "Admiral" share funds. Spanning 83 funds, Admiral shares boast lower annual expenses than Vanguard's "Investor" share class. Think of Admiral and Investor class funds as nonidentical twins; both of them invest in the same basket of securities, but Admiral shares have lower fees and higher minimums. For example, Vanguard 500 Index Admiral ($173; VFIAX) charges only 0.05%, versus 0.17% for the venerable Vanguard 500 Index ($173; VFINX) and 0.64% for the average S&P 500 Index fund.

Admiral shares, which typically cannot be purchased at a broker, require a minimum $10,000 investment for index funds and $50,000 for most actively managed funds. In contrast, Investor class funds typically require an initial deposit of $3,000.

Frugal investors should also consider exchange-traded funds (ETFs), which trade like stocks. But be mindful of brokerage commissions. For example, Vanguard S&P 500 ETF ($171; VOO) charges an expense ratio of 0.05%, equating to $5 per year on a $10,000 investment, matching the Admiral class and below the $17 for the Investor class fund. But you will likely pay a broker at least $10 for each ETF trade, while there is no charge to purchase directly from Vanguard.

Recommendation

Among our 11 recommended Vanguard funds, only two don't have Admiral shares — Vanguard Dividend Growth ($22; VDIGX) and Vanguard Selected Value ($27; VASVX). The nine Vanguard Admiral funds average expense ratios 48% lower than their counterparts. One of the best values and a top pick is Vanguard Growth Index Admiral ($49; VIGAX), which charges only 0.09%, versus 0.24% for its twin. Up 2.3% this year, the fund focuses on large-company growth stocks.

OUR RECOMMENDED MUTUAL FUNDS
If you want to mimic our recommended Growth or Conservative Portfolios, purchase the funds listed below in the proportion suggested by the target weights.
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Artisan International ($29; ARTIX)
(5.9)
B
9
9
85
Baird Core Plus Bond ($12; BCOSX)
6.1
A
6
0
94
Dreyfus Midcap Index ($36; PESPX)
(2.4)
C
0
0
49
Dreyfus Small Cap Stock Index
($28; DISSX)
(6.7)
C
0
0
83
Homestead Small Company
($34; HSCSX)
(6.6)
C
5
8
98
iShares MSCI EAFE Small-Cap ETF
($45; SCZ)
(10.1)
E
7
8
94
T. Rowe Price Divers. Small-Cap Growth
($23; PRDSX)
(6.0)
A
9
9
100
T. Rowe Price Value
($34; TRVLX)
1.2
C
10
11
84
Thompson Bond ($12; THOPX)
2.6
A
6
0
86
Vanguard 500 Index ($173; VFINX)
3.1
A
7
8
85
Vanguard Dividend Growth
($22; VDIGX)
2.0
B
10
10
80
Vanguard GNMA ($11; VFIIX)
5.8
A
0
0
95
Vanguard Growth Index
($49; VIGRX)
2.2
A
11
11
91
Vanguard High-Yield Corp. ($6; VWEHX)
3.6
A
5
6
84
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
7.3
B
0
0
92
Vanguard Selected Value
($27; VASVX)
(2.8)
D
7
10
85
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
2.2
A
0
0
99
Vanguard Total Bond Mkt. Index
($11; VBMFX)
5.5
B
0
0
48
Vanguard Wellesley Income
($25; VWINX)
4.8
A
0
0
99
Vanguard Wellington ($39; VWELX)
3.7
A
8
10
99

* Year-to-date ranks through Oct. 14 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%.
† Fund ratings are percentile ranks based on our fund-rating system.


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