The market for exchange-traded funds (ETFs) that help build bond ladders is growing. Bond laddering is a popular investing technique that staggers maturities across multiple bonds, or bond ETFs, in order to create a consistent income stream and minimize the impact of interest rate swings.

Now, low-cost fund giant Vanguard has filed paperwork with regulators to launch a line of target-maturity corporate bond ETFs.

They'll go up against iShares' line of iBonds, Invesco's BulletShares and State Street's MyIncome ETFs. Vanguard hopes to launch the funds in early 2026. (Investors should not confuse the firm's target maturity ETFs with its more familiar target-date funds, which are managed to become more conservative over time.)

In a traditional bond fund, a maturing or expiring bond gets replaced with a new one, and the fund lives on. These target-maturity ETFs instead hold a collection of bonds that all mature in the same year. Once the bonds mature, the fund ends and pays out its net asset value to its investors.

Perryne Desai, a Vanguard product manager, says investors can use the ETFs to save for future expenses such as a down payment on a home or college tuition, or use them to construct bond ladders.

The Vanguard filings are for corporate bond funds with maturities from 2027 to 2036. Each will be based on a bond index from ICE, known legally as the Intercontinental Exchange. Holdings are restricted to investment- grade corporates, and constituent weightings are limited for diversification. The funds will liquidate around December 15 of each year.

A lower-cost alternative

Vanguard says it plans to offer the funds with an expense ratio of 0.08%. That's less than the 0.10% charged by iShares and Invesco and the 0.15% charged by State Street, according to fund tracker Morningstar.

Jeff DeMaso, who publishes the Vanguard Investment Adviser newsletter, says the small cost edge that the Vanguard funds deliver may not be enough to persuade investors to switch from the iBonds or BulletShares offerings, but it is something to think about if you're considering setting up a new ladder.

We currently recommend Invesco BulletShares 2026 Corporate Bond (BSCQ), a member of the Kiplinger ETF 20, the list of our favorite exchange-traded funds.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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There are few certainties in life beyond death and taxes, but one of them is that you can always count on Vanguard Group to cut fees.

The nation's second-largest asset manager kicked off 2026 by once again cutting costs on a slew of exchange-traded funds (ETFs) and mutual funds. The move is part of a multiyear effort to save investors' hard-earned capital and boost their long-term returns.

This is what Vanguard does. The late, great Jack Bogle was keenly aware of the pernicious effects of costs on long-term performance. The Vanguard founder famously admonished folks never to allow the "tyranny of compounding costs" to overwhelm the magic of compound returns.

Put another way, Bogle said that when it comes to investing, "you get what you don't pay for."

No wonder Vanguard recently announced another sweeping round of cost reductions. The latest move slashes fees on a quarter of its U.S. funds. In total, 53 funds received a 27% fee reduction, on average, in early February, Vanguard said.

The firm now boasts an asset-weighted average expense ratio of 0.06%. That equates to 60 cents on every $1,000 invested.

Vanguard expects to deliver nearly $250 million in savings to investors this year. Combined with last year's fee cuts, investors are expected to save a staggering $600 million, Vanguard said.

"These fee reductions — set to deliver more than half a billion dollars in savings across 2025 and 2026 — are a clear expression of our purpose and commitment to our clients as owners," Vanguard CEO Salim Ramji said in a statement.

"When investors keep more of what they earn, the benefits compound over the long term, helping our clients achieve their most important financial goals."

Higher costs, lower wealth

Bogle's argument against costs was both elegant and elementary: every dollar you pay to an asset manager is a dollar that stops compounding for you.

Over a 50-year investment horizon, even a seemingly modest 1% annual fee can erode nearly half of your potential ending wealth. That's why Vanguard has cut fees and expense ratios more than 2,000 times since Bogle founded the firm in 1975. Expense ratios that started at 0.50% now average 0.06%. That's a very big deal.

Have a look at the table below to get a sense of the changes to some of Vanguard's biggest and most popular funds.

Vanguard's relentless attack on fees benefits all investors because other asset managers are forced to compete on price. The so-called Vanguard Effect has been revolutionary for retail investors. There's even an argument to be made that lower fees (and commission-free trading) boost equity valuations.

Vanguard notes that lower costs are directly correlated to the long-term performance of the firm's mutual funds and ETFs.

Need receipts? About 84% of Vanguard funds have outperformed their peer group averages in the past decade, including 88% of its active fixed-income funds, according to LSEG Lipper data.

If nothing else, Vanguard's latest cuts should prompt folks to double-check what they hold. If you own funds that charge, say, 0.50% for only market-matching returns, it's time to make some changes to your portfolio.

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The best mutual funds to buy operate on long-term optimism. At the same time, they stop well shy of implying that everything that trades will go up and to the right in a straight line higher.

Still, stock-market pundits entered 2026 with expectations for more double-digit gains after the S&P 500 finished 2025 with a total return in the high teens that easily surpassed its long-term annual average.

The destination was right, but the journey was much different than expected amid a flurry of tariffs, rapid policy shifts and other issues driving stocks within an inch of a bear market before a violent rebound put stocks back into flight.

Price action in 2026 has looked a lot like 2025 so far, including a steep spring sell-off triggered by big policy moves in Washington, D.C.

Lesson learned: As long as you look at market outlooks as a way to spot potential opportunities, rather than a laser-precise roadmap of every step to come, you should do all right.

What are mutual funds?

A mutual fund is a type of investment fund, a pool of money from several investors an investment firm uses to buy stocks, bonds and/or other assets. Exchange-traded funds (ETFs) and closed-end funds (CEFs) are other types of investment funds.

Mutual funds are largely defined by how they operate.

Actively managed funds are run by one or more investment managers, who research, buy, monitor and sell investments within the fund. While they typically operate under some general guidelines — a blue-chip fund manager likely won't invest in microcap stocks — they often have broad leeway to invest as they see fit.

Index funds, however, invest automatically based on a rules-based index, like the S&P 500. For instance, an index mutual fund might track an index of large-cap tech stocks. As stocks enter the index, the fund is required to buy them in a manner that matches their weight in the index — and as they leave, the fund is required to sell them under the same parameters.

Because index funds don't require human managers (who in turn require salaries), they're often able to charge much lower fund fees. And broadly speaking, index funds on average tend to outperform professional managers.

On the flip side, index funds are constrained — they must buy what the index says they must buy, even if it might make poor investment sense. They also can't, say, exploit a quick period of extremely cheap valuations in a stock — a human manager can be much more agile because they're not being held back.

Best mutual funds to buy

Let's look at some of the best mutual funds to buy for 2026 and beyond.

These funds have been selected for their ability to capitalize on emerging trends, as well as other vital considerations, such as fees, investment strategy, management track record and more.

Data is as of May 20, 2026. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds. SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.

Fidelity 500 Index Fund

• Fund category: Large blend
• Assets under management: $791.7 billion
• Yield: 1.1%
• Expense ratio: 0.015%, or $1.50 annually for every $10,000 invested

"The U.S. is set to remain the world's growth engine, driven by a resilient economy and an AI-driven supercycle that is fueling record capex and rapid earnings expansion."

That's what J.P.Morgan's Dubravko Lakos-Bujas had to say about America heading into 2026, and he's hardly alone. Numerous research firms provided bullish outlooks for U.S. GDP growth, reflected in general optimism about where the S&P 500 will end up by New Year's 2027.

Specifically, roughly a dozen research firms' price targets for the index averaged out to about 7,600. As of May 20, the S&P 500 had already reached 7,433. Bullish firms such as Yardeni Research now see year-end levels of 8,250, with ISI Evercore noting a 30% probability the index gets to 9,000.

As boring as it might be to lead with an S&P 500 index fund on our list of the best mutual funds to invest in … well, we're going to.

The Fidelity 500 Index Fund (FXAIX) is one of the most cost-effective ways to buy the S&P 500. Fidelity charges a skinflint 1.5 basis points (a basis point is one one-hundredth of a percentage point) that undercuts even the cheapest S&P 500 ETF.

Meanwhile, neither FXAIX nor most other Fidelity mutual funds require a minimum initial investment, so even investors with little cash to start with can dig in right away.

FXAIX is market cap-weighted, which means the fund allocates the most assets to the largest companies, which means that companies such as Nvidia (NVDA) and Apple (AAPL) have an outsize effect on performance.

While there are other actively managed Fidelity funds that can take advantage of continued growth in the U.S. economy, few funds in the large-cap space can do better than the S&P 500 in the long-term, especially once you include fees, which are virtually always cheaper for index funds. Why roll against the odds?

Learn more about FXAIX at the Fidelity provider site.

T. Rowe Price Financial Services Fund

• Fund category: Financial
• Assets under management: $1.8 billion
• Yield: 0.9%
• Expense ratio: 0.86%

Financial firms such as banks and insurers were among the most popular picks heading into 2026 from a sector standpoint.

"Several tailwinds are converging for financials and are not yet priced in," Deutsche Bank said in its 2026 look-ahead. Among them, according to independent research firm CFRA's chief investment strategist Sam Stovall, are "lower rates continuing through 2026; improving credit quality; expected M&A turnaround; declining credit spreads."

Not all those tailwinds have developed as forecast, and financial stocks have struggled year to date amid rising inflation and questions about the impact of AI on service industries. Still, generally speaking, financials are a big part of the economy, and it's hard to have a sustained bull market without their participation.

T. Rowe Price Financial Services Fund (PRISX) is one of the best-rated mutual funds to invest in this sector, boasting a Bronze Medalist rating (forward-looking) and a five-star Morningstar rating (based on performance).

Co-managers Matt Snowling and Greg Locraft have built a 100-stock-plus portfolio of financial stocks. That's almost exclusively made up of companies that are within the sector, such as Bank of America (BAC), Visa (V) and Chubb (CB), but the fund does have a carve-out for companies outside the sector (think providers of financial software) as long as they derive more than half of sales from doing business within financial services.

PRISX has been extremely productive over its history, including trailing 10- and 15-year average annual returns that are within the top 10% of its Morningstar category.

T. Rowe Price Financial Services requires at least $2,500 for an initial investment.

Learn more about PRISX at the T. Rowe Price provider site.

Dodge & Cox Emerging Markets Stock Fund

• Fund category: Diversified emerging markets
• Assets under management: $1.1 billion
• Yield: 1.8%
• Expense ratio: 0.70%

One of the more interesting stories of 2025 was the resurgence of international stocks, which commonly underperform their U.S. counterparts but excelled last year amid a weakening U.S. dollar and other drivers.

That goes not just for more developed markets, but riskier emerging markets, as well. The latter's good fortunes have continued into 2026.

"They remain attractively valued and under-owned," JPMorgan said in its 2026 year-ahead outlook. "We believe the combination of improving macro momentum, rising domestic liquidity and a shift in households' asset allocation toward equities should support a sustained recovery."

Dodge & Cox Emerging Markets Stock Fund (DODEX) is a roughly 300-holding portfolio of companies predominantly domiciled in emerging or "frontier" countries that the fund's five-member investment committee views as undervalued despite having a "favorable outlook" for long-term growth.

While it allocates about a quarter of assets to mid- and small-cap stocks, the lion's share of weight goes to mega-cap international firms such as Taiwan Semiconductor (TSM) and Alibaba Group (BABA).

It's a much larger basket of holdings than is typically found in a Dodge & Cox vehicle, but the young fund's strategy has been effective since its May 2021 launch; its 19.3% trailing three-year average annual return is more than 4 percentage points better than the category average and benchmark index.

"Dodge & Cox Emerging Markets Stock is proving the skeptics wrong," Morningstar Associate Director Tony Thomas says about the fund's Silver Medalist rating. "A modest tilt toward value stocks has helped, but it's also found winners benefiting from strong growth, such as Taiwan Semiconductor Manufacturing — the portfolio's top holding since mid-2023."

DODEX requires a $2,500 minimum investment.

Learn more about DODEX at the Dodge & Cox provider site.

Vanguard Global Minimum Volatility Fund Investor Shares

• Fund category: Large blend
• Assets under management: $2.0 billion
• Yield: 2.2%
• Expense ratio: 0.21%

CFRA's 2026 price target of 7,400 was among the more conservative estimates for the S&P 500. It suggested the index would only deliver mid- to high-single-digit gains in the year to come.

"Why so cautious?" Stovall says. "Still-high valuations, an elevated Buffett Indicator, a softening jobs market, and midterm elections present formidable headwinds."

Per the former, at the end of Q1, the S&P 500's market value was 219% of U.S. nominal GDP. "Historically, breaching 100% issued a cautionary signal, while eclipsing 120% raised a red flag," Stovall noted in November.

As for the latter, Stovall cited data since 1946 that shows the intra-year drawdown for midterm election years is 18%, which was the largest of all four years in the presidential cycle.

"The S&P 500 also experienced the weakest average annual price gain (3.8%) and rose in price only 55% of the time," he added.

Vanguard has plenty of funds to help hedge volatility, but the Vanguard Global Minimum Volatility Fund Investor Shares (VMVFX) is one of our favorite ways to approach it — even if it's not necessarily the purest way to go about it.

As the fund's name might indicate, this is a "global" (read: U.S. and international) fund, though it's split roughly 60/40 between domestic and international stocks. Manager Scott Rodemer holds more than 200 stocks of all shapes and sizes; large-cap stocks (70%) lead, but mid- (20%) and small-cap stocks (10%) are well-represented.

Rodemer isn't free-wheeling; he oversees a rules-based strategy that revolves around the FTSE Global All Cap Hedged Index. While he looks at each stock's own volatility, he also examines each one's role as it pertains to the broader portfolio's overall volatility — in other words, shades of both low- and minimum-volatility strategies.

As with other Vanguard funds, your initial investment in VMVFX will need to be at least $3,000.

Learn more about VMVFX at the Vanguard provider site.

T. Rowe Price High Yield Fund

• Fund category: Large blend
• Assets under management: $6.4 billion
• SEC yield: 5.9%
• Expense ratio: 0.70%*

Investors who want to offload their debt exposure to bond funds might do well to rely on actively managed funds whose leaders can adjust to shifts in the credit markets. That's generally true, though doubly so in times when the environment for bonds isn't exactly concrete.

One area of debt that BNP Paribas favored in its 2026 credit outlook is high-yield debt, aka noninvestment-grade debt, aka junk.

"The credit market, like the economy, is K-shaped and the lower half isn't experiencing ultra-fast growth, doesn't have aggressive capex or bond issuance plans and is deleveraging. Until that changes, the cycle can run longer, and returns stay positive," BNP Paribas' analysts said.

"Most things that are good about credit are in high yield: Spreads are decompressed, there's no supply problem, and the asset class typically outperforms as the cycle matures," they concluded.

T. Rowe Price High Yield Fund (PRHYX) is one of the bigger and better names in the high-yield space. Fund manager Rodney Rayburn invests predominately in U.S. corporate junk (90%), though the 430-bond portfolio also provides a little exposure to international corporate debt, U.S. convertible debt and other below-investment-grade securities.

PRHYX allocates about 45% of assets to single-B bonds (BNP Paribas' preferred rating in the space right now), another 33% in BB, and most of the rest in below-B debt.

Mike Della Vedova, who helped make decisions in PRHYX, has left the firm. Sole responsibility for the strategy is with Rayburn, but Morningstar isn't concerned.

"While Della Vedova's expertise will be missed, we believe Rayburn is well-equipped to continue leading the strategy. He has been involved with the strategy since 2019 and has established a solid track record," Senior Analyst Elbie Louw wrote.

PRHYX requires a $2,500 minimum investment to get started.

* 0.80% expense ratio is reduced by 10 basis points until at least July 31, 2027.

Learn more about PRHYX at the T. Rowe Price provider site.

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With the S&P 500 index of the largest U.S. stocks rising about 26% on a total return basis (price change plus dividends) in 2023, many folks are looking for smart ways to invest in 2024. 

But as the old saying goes, past performance is no guarantee of future returns. It's important to take stock of the current economic environment as well as your personal risk tolerance before plowing your hard-earned cash into what's popular.

The good news is that there are plenty of smart ways to invest your money this year. In fact, for most investors with a modest amount of cash, it's easier than ever before to put just a few hundred dollars to work and improve your personal finances significantly.

Smart ways to invest your money: CDs

With the recent increase in interest rates, it's easier than ever before to tap into safe returns that are nearly guaranteed. One of the most rock-solid options out there is a CD, or certificate of deposit. CDs are similar to high-yield savings accounts – these vehicles are basically just bank accounts where you get a fixed rate of return – only can't withdraw your money before a deadline without penalty. 

"For disciplined consumers, CDs can be a great way to set aside money while earning higher interest rates on their balances," writes Kiplinger contributor Seychelle Thomas in her feature on whether or not CDs make a good investment. "However, it's critical to have a readily accessible form of savings even if the rates aren't as high compared to a CD." 

If you don't need your cash immediately, a 1-year CD can offer as much as a 5.5% return right now. Rates, minimum deposits and durations may vary, so make sure to shop around for the best option that fits for you.

Smart ways to invest your money: Bond funds

If you want more "liquid" interest-bearing assets that are low-risk, bonds are a good option. Bonds are investment vehicles where investors give some cash to governments or corporations in exchange for repayment plus interest. Think of it as you, the investor, acting as the bank, and getting paid for the service of loaning out your money.

Rather than do the research for individual bonds, many investors prefer bond funds – which can include both traditional mutual funds or bond ETFs (exchange-traded funds). Both of these options are baskets of hundreds or even thousands of bonds, offering built-in diversification and a structured way to invest your money on Monday but get it back out on Tuesday if you really need it.

The largest bond fund at present is the Vanguard Total Bond Market ETF (BND), with more than $300 billion in total net assets. As the name implies, it holds a wide array of bonds from corporate debt to U.S. Treasury bonds to mortgage-backed securities. 

There are other more tactical options, but with almost 11,000 individual bonds in BND, you get easy access to the totality of this marketplace in a single holding. Right now, this Vanguard bond fund yields 4.3% – meaning the investment offers a slightly smaller rate of return than CDs, but more flexibility.

BND also trades as a mutual fund, the Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX). It requires a $3,000 initial investment.

Smart ways to invest your money for growth: Stocks

If CDs are all but guaranteed to give you your principal investment back, and bonds offer low volatility but more liquidity, stocks round out the list of smart ways to invest your money with a more aggressive but also potentially more profitable option to invest your money.

Stocks are investment stakes in publicly traded companies. And unlike the prior two options, stocks don't deliver a fixed rate of return. Instead, they generally deliver profits by appreciating in value based on those companies achieving better results.

The big success story many folks talk about is Tesla (TSLA). If you invested just $1,000 in its stock on the first day it traded back in 2010, you would have about $140,000 today! Of course, predicting future performance is easier said than done. There are plenty of horror stories, too. Some companies ultimately do go bankrupt and investors lose everything.

So, as with bonds, the safer route is typically to invest in a diversified basket of stocks via an ETF or mutual fund. The largest and most popular vehicle out there is the SPDR S&P 500 ETF Trust (SPY) with almost $500 billion in assets. Tied to the popular S&P index of the 500 largest U.S. stocks that includes Apple (AAPL) and other popular names, this S&P 500 ETF gives you exposure to the biggest companies on Wall Street in one holding that's easy to buy and sell.

Just remember that stocks are much riskier than bonds or CDs. So make sure you assess your own goals and risk tolerance before investing in SPY or any other stock market investment.

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International stocks have long been out of favor and somewhat volatile, which has some investors skittish about venturing overseas. But a new actively managed fund focused on companies that are committed to raising their dividends may offer a more stable ride. 

The Vanguard International Dividend Growth (VIDGX) launched in November. It's run by the same Wellington Management team that's behind Vanguard Dividend Growth (VDIGX), the longtime standout U.S. stock fund, and the two mutual funds share the same investment philosophy and approach. The new fund is designed, in fact, to be paired with the U.S.-focused Dividend Growth fund.

Homing in on dividend growth is a way to find superior businesses, says manager Peter Fisher, who as of the end of 2023 heads both Dividend Growth and International Dividend Growth. "Companies committed to paying and raising a dividend are disciplined about how they allocate capital," he says. "They tend to be less risky and less cyclical businesses, and they have clean balance sheets." The end result is a portfolio of high-quality companies that tends to do relatively well when markets are weak. 

Fisher is not a new hand at foreign stock investing or dividend growth stock investing. He has been working with Wellington's dividend growth strategy team since 2012. And he has run a global dividend growth strategy since 2016, as well as an international dividend growth strategy since 2019, geared for both wealthy clients and institutional clients. 

The fund, which charges a 0.54% expense ratio, is too new to talk about many specifics, including performance. But Fisher says the portfolio will hold about 40 stocks in well-known, multinational companies based in Europe, Japan, Hong Kong and Canada. 

He expects the fund to yield roughly 3% and that companies in the portfolio will boast annual dividend increases of 10%, on average. 

And there will be little turnover of names in the portfolio. "We're buying to own for the life of the fund," says Fisher. "We want to find businesses that we can be partners with and owners of for the long term." We'll be watching it carefully for now, until it has a longer track record. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Americans have the power to decide how much to save and how to invest in their 401(k) plan. But too often, they start late, save too little and invest poorly. We can't help you save, but we can point you toward good investments.

Every year, we analyze the most popular actively managed funds — measured by assets — in employer-based retirement savings plans, according to financial data firm BrightScope, and we make recommendations to "buy," "sell" or "hold."

We exclude index funds from our analysis because they tend to do their job, and the decision to invest in one rests largely on what kind of market exposure you seek — large companies or small, say, or foreign stocks.

Read on for our take on the 10 most popular active 401(k) funds, summarized below in order of assets in defined-contribution plans. All returns are through October 31, 2025.

Where to invest your 401(k)

Vanguard Target Retirement: BUY

Target-date funds are built for investors who want an expert to handle their retirement investing. Vanguard Target Retirement funds charge a low expense ratio, 0.08% per fund, and use a simple approach. The portfolios hold just four index funds, covering total U.S. and total foreign stock and bond markets. Five years before retirement, a short-term inflation-protected bond fund is added as an inflation hedge.

If we had one gripe, it would be that the "glide path" — the mix of stocks and bonds through the life of the fund — is a little less aggressive than we'd like at the start and end.

Funds in the series begin with 90% in stocks and 10% in bonds. Fifteen years later (roughly age 40 for its typical investor), the portfolio starts to lower the risk, until it hits 50% in stocks at retirement. After retirement, the portfolio continues to lighten its stock exposure until its endpoint, a 30% stock, 70% bond mix, seven years after the target year.

The funds in the series have done well: Over the past 10 years, they rank mostly in the top quartile or better of their respective peers.

American Funds Eupac: BUY/HOLD

Eupac (AEPGX), formerly known as EuroPacific Growth, invests in developed and emerging-markets stocks — an "all-you-can-eat buffet" of international holdings, says David Polak, leader of the stock team at Capital Group, the parent company behind American Funds. The U.K., Japan and Germany are the fund's biggest country exposures, but 15% of assets are in emerging markets.

Eupac's 13 managers divide the assets and run their sleeves individually, in keeping with the firm's approach to managing funds. Over the past 15 years, they beat the fund's benchmark — albeit by a slim margin — with a 6.6% return.

Dodge & Cox Stock: BUY

Dodge & Cox Stock (DODGX), a true-blue value-oriented fund, has delivered competitive returns, even though its investment style has long been out of favor. Over the past 15 years, the fund, a member of the Kiplinger 25, our favorite no-load mutual funds, has returned 12.7% annualized, which is respectable, but falls short of the S&P 500 Index's 14.5%. The fund has beaten 93% of all large-company value funds, too.

Six managers hunt for U.S. stocks that trade at a discount to their growth potential. Lately, the managers have been beefing up stakes in the struggling health care sector, including Regeneron Pharmaceuticals (REGN) and UnitedHealth Group (UNH). Health is now the fund's biggest sector, at 27% of assets.

Value funds play a key role in any diversified portfolio, and these days they can be a hedge against the growth-tilting S&P 500. The fund tends to hold up well in down markets, too. In 2022, when the S&P 500 lost 18%, Dodge & Cox Stock lost just 7%.

JPMorgan Large Cap Growth: BUY

The JPMorgan Large Cap Growth Fund (OLGAX) is a pure growth strategy, which in practical terms means that Nvidia (NVDA) makes up an even bigger chunk of the portfolio than it does in the S&P 500. That's partly why this fund may best be used in concert with a core U.S. stock index fund, at least, and maybe even a value-oriented fund as well.

To keep risk in check, longtime manager Giri Devulapally and his four cohorts pay heed to valuation, tracking stocks against their historical measures and trimming when they appear overextended, says Morningstar analyst Andrew Redden. And the group buys on dips, adding stakes to Amazon.com (AMZN) in early 2023, for instance, after shares had declined in previous months.

That approach has helped the fund hold up better in bad times compared with peers. In 2022, JPMorgan Large Cap Growth lost 26%, while peers lost 30%. The fund's 10-year record, 18.5% annualized, beats 92% of all large-growth funds.

Vanguard Primecap: BUY

The celebrated managers behind this 40-year-old fund favor growing, value-priced companies with a catalyst to drive earnings and stock prices higher. But the fund lagged the broad market in four of the calendar years between 2019 and 2024.

Be patient. The fund managers' penchant for buying at a discount has been a disadvantage of late. And health care stocks, a 24% chunk of the fund, have struggled in recent years. Despite the recent draggy performance, over the past 15 years, the fund's 14.8% annualized return beats the S&P 500 and 95% of its peers.

The Vanguard Primecap Fund (VPMCX) is best for investors with long time horizons. The managers have an average holding period of 10 years. "In order to benefit from the portfolio managers' stock picks, you should match your time horizon with the time horizon of the manager," says Ryan Barksdale, head of active stock funds at Vanguard. .

Vanguard Wellington: BUY

This nearly century-old balanced fund — it holds roughly 65% of assets in stocks and 35% in bonds — is a reliable performer, and moderate-risk investors looking for a one-stop core holding should waste no time adding it to their portfolio. Vanguard Wellington (VWELX) is also a member of the Kiplinger 25.

Dan Pozen picks the stocks and Loren Moran chooses the bonds. Both are with Wellington Management, the fund's subadviser. Pozen holds mostly U.S. large-cap stocks with durable businesses and good earnings growth potential. Moran focuses on high-quality corporate debt, government IOUs and asset-backed securities. Over the past five years, the pair's 11.1% annualized return has beaten 85% of the fund's peers.

The fund has a quality tilt, so it tends to lag in momentum-driven rallies, says Vanguard's Barksdale. But when the stock market gets jittery, Wellington shines. During the tariff-related swoon in early 2025, Wellington lost 12%, in line with a benchmark of 65% S&P 500 and 35% Bloomberg U.S. Aggregate Bond index (the S&P 500 lost 19%).

American Funds Target Date Retirement: BUY

Retirement savers often think about target-date funds for the accumulation phase, but many target-date series also aim to help retirees preserve wealth and cover their costs well past retirement age. American Funds Target Date Retirement funds, for instance, keep working until you hit age 95. The glide path starts with 90% in stocks, hits 45% stocks at retirement age and levels out at the end at 30%.

One distinctive trait of this target series is its "glide path within a glide path," says Kelly Campbell, multi-asset solutions lead at Capital Group. When you're 30, for instance, growth stocks command the stock side. But dividend stocks dominate holdings for older investors. "A 25-year-old shouldn't own the same kinds of equities as an 85-year-old," she says. Actively managed strategies from American Funds fill the target-date portfolios.

The end result is a target-date series that ranks well above average over the long haul. Funds with target years between 2030 and 2060 boast 10-year returns that rank among the top 12% of their respective peers or better.

Fidelity Freedom: BUY

Each target-date series glide path is a little different. For savers in their mid-twenties with 40 years of work ahead of them, this series starts with 90% in stocks — and most importantly, it stays that way for the next 20 years. Indeed, a significant scaling back in stocks doesn't start until age 50.

By the time savers hit 65, the Fidelity Freedom target-date funds hold about 55% of assets in stocks. And the de-risking continues for another 20 years, when the funds hit their most conservative allocation of 24% in stocks (backed by a 46% slug in bonds and 30% in short-term funds). That's more aggressive in the early years of the glide path and more conservative at the end compared with other target-date series we've highlighted here.

The biggest pluses with the Freedom series, however, are the underlying funds, which are run by some of the firm's star managers, including Will Danoff of Fidelity Contrafund, Ford O'Neil of Fidelity Total Bond and Steve Wymer of Fidelity Growth Company. Each has won a Morningstar award for portfolio management at some time or another.

Fidelity Freedom funds were laggards in the early 2000s. But since a retooling in the 2010s, they're clicking on all cylinders. All of the funds boast solid one-, three-, five- and 10-year records. At times, however, those above-average returns can come with above-average volatility, too.

Fidelity Contrafund: BUY

Will Danoff, who has skippered the Fidelity Contrafund (FCNTX) for 35 years, favors "best of breed" businesses that hold up better during periods of uncertainty, and he isn't afraid to let winners run. Berkshire Hathaway (BRK.B) has been in the fund since 2002 and provided some ballast in early 2025. It accounts for 7% of the fund's assets. "Betting big when you have a good idea is a core tenet" of the fund, he says.

Contrafund has consistently turned in above-average returns with below-average volatility over the past three, five and 10 years compared with its large-company growth fund peers. That makes it a good option for young investors who want an aggressive fund. But its relatively low volatility means older savers could consider it for money they don't need in the near or medium term.

Vanguard Equity Income: BUY

The Vanguard Equity Income Fund (VEIPX), a Kip 25 member, is the only actively managed dividend-stock fund in the top ranks of 401(k) funds. It's a good choice for moderate- to low-risk investors looking to maintain some exposure to the stock market. It yields 2.2%.

New managers took over in 2021, but so far, so good. Matthew Hand, a Wellington Management stock picker, runs two-thirds of the assets, and Sharon Hill, of Vanguard's in-house quantitative stock group, runs the rest. Since they started managing the fund together, Equity Income has returned 10.3% annualized — better than the typical large-company value fund, with less volatility, too.

Hand favors stable dividend payers trading at reasonable valuations. Hill leans into a customized computer model that emphasizes dividends and free cash flow (the money left over after operating expenses and spending to maintain or upgrade long-term assets). The managers' different approaches, says Vanguard's Barksdale, offset each other over the short term, but over the long term, the result is a smoother ride.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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If you have never given a child shares in a publicly traded company as a gift, that's probably just as well. Presents are supposed to be fun. Investing in equities — as remunerative over the long haul as they have proven to be — isn't much fun a lot of the time.

That said, the desire to give stocks as a gift to a youngster is understandable, even noble. We want children to develop critical life skills around money as early as possible.

And the more they learn about saving and investing — to say nothing of compound interest, dividends and the economic cycle — the better. We know how important this will be for them in ways they can't yet imagine.

Stocks even have a singular appealing quality as a gift: they're dynamic. A child can follow a company and its stock. Hopefully, the stock's value will appreciate over time. Perhaps you and your grandchild will bond as you study corporate developments and stock charts together.

A gift that allows the two of you to spend time together, while learning something and maybe even making a little money, too? Sounds lovely.

Just be aware that if your only goal with this gift is for your grandchild's new investment to beat the market, you are almost certain to be sorely disappointed. Indeed, it's nearly impossible to beat the market every year, year after year.

Over the past 15 years, 93% of all U.S. actively managed domestic equity funds underperformed the S&P Composite 1500, according to Standard & Poor's SPIVA Scorecard. About 90% of all U.S. large-cap funds trailed the S&P 500 over the same time period.

Consider indexing vs buying stocks

The vast majority of full-time professional investors can't beat the market, so why should you?

The simple fact is that most pros can't beat the market because most stocks can't beat the market. Between 1990 and 2020, more than 55% of all U.S. stocks underperformed risk-free one-month U.S. Treasury bills, according to Hendrik Bessembinder, a finance professor at Arizona State University. These stocks didn't just fail to beat the market, they failed to beat cash.

Even more damning, the professor found that the entirety of the $76 trillion in net global stock market wealth created between 1990 and 2020 was generated solely by the top-performing 2.4% of stocks.

Finding winning stocks is like finding needles in haystacks. That's why Vanguard founder and indexing evangelist Jack Bogle always advised clients to "buy the haystack."

So if part of the purpose of giving stocks as a gift is to teach your grandkids about investing, you should probably start by discussing the advantages of indexing. You might also want to let them know about the miracle of compounding. Between the two, passive investors have done quite well for themselves over the years.

If you can achieve an annualized return — also known as a compound annual growth rate — of 7.18%, your initial investment will double every 10 years. Happily for all of us, the S&P 500 has generated an annualized return of at least 7.1% over the past 10, 15, 20 and 30 years — and that's after inflation. The market has basically been doubling our money or better in real terms for decades.

You could explain these facts to your grandchildren as you give them some shares of an S&P 500 ETF, such as the SPDR S&P 500 (SPY) or the Vanguard S&P 500 (VOO). An ETF is probably an even more disappointing present for a kid than stock (or underwear), so it's bound to make an impression. The important part is that the child learns that indexing is generally the best way to go for most retail investors.

The best stocks to buy your grandchildren

If the point of this gift, be it for a holiday, birthday or graduation, isn't to teach your grandchild about the wonders of indexing, then here are some general guidelines for picking equities.

If you give shares in a company to your grandkids as a gift, they probably don't care about dividend yields or price-to-earnings (P/E) multiples or trailing-12-months levered free cash flow. If you must buy individual stocks as a gift, be sure to invest in high-quality companies your grandchild recognizes and maybe cares about.

Blue chip stocks with fortress-like balance sheets and a decent chance of beating the market over the next, say, five to 10 years, are easy enough to screen for. Have a look at what industry analysts believe are buy-rated blue chips with interesting businesses.

Nvidia (NVDA), Amazon (AMZN), Microsoft (MSFT) and Apple (AAPL) are all Buy-rated Dow Jones stocks — and they can be fun (or at least fun-ish) to follow. Walt Disney (DIS) is a Buy-rated Dow stock that likely holds relevance for your grandkid, as is Walmart (WMT).

Wall Street also happens to be bullish on Dow stock McDonald's (MCD) these days. Perhaps your grandchild would like a side of fries with her shares in the Golden Arches?

If you really want to teach your grandkids about investing, it's best to start with indexing. If you want to have fun playing around with individual stocks, go ahead. Just know that you're going to have lots of ups and downs.

After all, volatility is the price of admission. If you put $1,000 into Nvidia stock 20 years ago, it would today be worth a small fortune. Take a look at the chipmaker's chart, however, and you'll see that buy-and-holders experienced plenty of sickening drawdowns along the way.

Bottom line: make sure the stocks you gift are relevant to the person receiving them. If you want this present to hold a kid's attention longer than most gifts do, that's the only hope you've got.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

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Have you ever wondered how to find the best 401(k) investments? If you work for a company, most likely you have access to a 401(k) retirement plan. But for many people, this corporate benefit did not come with much explanation – you were either handed a thick folder or received an email with instructions on how to join the company's 401(k), along with the name and email of a contact in HR for any questions.

The result of folks not knowing how to find the best 401(k) investments is that they are not maximizing the benefits of their retirement plan. That's unfortunate because 401(k)s are an easy way to accumulate wealth and is a source of free funds; most employers match their workers' contributions up to typically 6% of their pay. 

It is also a way for many people to build wealth painlessly by contributing a monthly amount that is taken out of their paycheck and invested in available funds in the 401(k) plan.

For those who aren't familiar with what a 401(k) is, it is simply a retirement plan in which a set amount designated by the employee is taken out of their salary before taxes. This monthly amount is invested in several funds inside the company's 401(k) plan, which the employee gets to choose. 

Vanguard and Fidelity are two popular mutual fund companies that administer and offer funds in 401(k) plans. These mutual funds can be stocks, bonds, money market securities or other investments.

A note about employer matching funds: Often you have to stay an employee for five to six years for the funds to be fully vested, meaning that's when all of the company's matching money actually becomes yours.

Contribute enough to your 401(k) to at least match the employer contribution. If your company matches 50% of your contribution up to 6% of your salary, then aim to invest at least 6% of your pay. A good rule of thumb is to invest at least 10% to 15% of your pay – it could even be higher if you're investing late in life. Strive to increase your contributions every year. Some 401(k) plans will even automatically increase it for you.

If you choose a traditional 401(k) vs a Roth 401(k), you don't pay taxes on the funds or its earnings until you withdraw it. If you do so before turning 59½, you will have to pay a 10% penalty in addition to the applicable taxes. You are required to withdraw a minimum amount after 72 years of age.

How to find the best 401(k) investments for your retirement plan

Age and risk tolerance: If you are not retiring in a few years, consider being more aggressive in your investments because you theoretically will have more years to recoup your money if the accounts go south. This means allocating a larger portion of your money into stocks. Being more aggressive also means the potential to earn is even greater. Otherwise, aim for an allocation of stocks and bonds. It won't be as volatile, but the return potential is also typically less.

Simplify: Many 401(k) plans offer target date funds. These funds are structured based on your retirement year. For example, a target date fund for 2050 means it is structured for folks retiring that year. How far you are from 2050 will determine your mix of stocks and bonds in that fund, which rebalances over time as you get closer to retirement.

If you want to pick your own funds, make sure to diversify. While mutual funds by nature are technically diversified since they have to hold many securities, these investments might all be in the same country, sector or region. For example, there are tech mutual funds that hold dozens of individual company stocks but it is all in one sector. Thus an event that affects the sector impacts all the companies in it.

Also ensure that you don't invest only in funds that buy large company stocks, or large-cap funds. (Large-cap stands for large capitalization, referring to companies that have a market capitalization above $10 billion.) Make sure to have some exposure to mid-cap and small-cap funds as well. And see to it that you have a good balance of growth (fast-growing companies) and value (companies whose stocks are selling at a discount). Warren Buffett is a well-known value investor.

How to research mutual funds

There are two general investing styles in mutual funds: passive and active. Passive funds are those that invest in an index such as the S&P 500. These are considered passive because they simply buy and hold all the securities in an index for a long time with minimal turnover. Actively managed funds are run by portfolio managers who select certain securities in hopes of beating the market. However, research has shown that passively invested funds have consistently outperformed actively managed funds.

When you are a researching fund, look at its fees, performance over three, five or 10 years, and tenure of its managers if it's an actively managed fund.

Here are some websites for you to researching the best 401(k) investments:

Your 401(k) administrator's website (Vanguard, Fidelity or others) will typically offer research and educational tools for plan members to access. For example, Fidelity has an extensive stocks and funds research site to screen for mutual funds.

Morningstar: A respected name in personal finance, the site offers detailed fund profiles, performance history, and ratings. There is free, basic access and a subscription plan for more detailed information.

Yahoo Finance: It offers real-time quotes, historical stock data, analyst ratings and news. Most data is free.

Zacks Investment Research: It offers mutual fund rankings based on its proprietary scoring system plus detailed analysis. Some information is free and others are behind a paywall.

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Why struggle to find a needle in a haystack when you can buy the haystack? That was Vanguard founder Jack Bogle's argument for indexing nearly half a century ago when he launched the first index fund for individual investors.

The investment approach was easy to execute and offered instant diversification, all for a low fee. As it turns out, returns have been tough to beat.

Index mutual funds and exchange-traded funds (ETFs) have done better, on average, than most actively managed funds for years. The Vanguard 500 Index Fund (VOO), which mirrors the S&P 500 Index, has outpaced 90% of similar U.S. stock funds in the past 15 years, according to Morningstar.

Today, index funds account for more than half of assets in diversified U.S. stock mutual funds and exchange-traded funds, up from one-third of assets a decade ago. Now, "there's an index-based strategy for whatever an investor wants to get exposure to," says Todd Rosenbluth, head of research at financial data firm VettaFi.

We're still fans of active funds, of course, albeit selectively. But on average, active managers have found it tough to beat the S&P 500, which has made indexing a popular strategy. "That's why we prefer index investing over active," says Alvin Carlos, an adviser in Washington, D.C. "We don't want to invest in a losing strategy."

In recent years, however, this simple investing strategy has become more complicated, and education has failed to keep up.

"Fifteen years ago, indexing was about just measuring the broad market," says Aniket Ullal, head of exchange-traded fund data and analytics for CFRA Research. Then came designer index funds, or funds that track customized benchmarks with the goal of beating the traditional bogeys. Now, complex options-based strategies are hitting the market.

Some index funds "can be tricky even for the most sophisticated investors to understand," says Ullal.

To help you master the art of indexing, use our guide to explore different parts of the indexing world for both stocks and bonds. The choices range from traditional broad-market funds to funds that zero in on certain investing styles and strategies or particular market themes to complex offerings that bear little resemblance to Bogle's big idea.

Traditional stock index funds

Funds in this category have two defining traits: They track a broad, well-known index, such as the S&P 500, the Nasdaq-100 or the MSCI EAFE, and they weight portfolio holdings by stock market value. The bigger a company's market capitalization, the bigger its position in the fund.

What you see in the index is what you get in the fund, which is why traditional index funds are good choices for your core portfolio. "That's the nice thing about indexing," says Chris Huemmer, senior investment strategist at FlexShares ETFs. "It's all rules-based, so there's no strategy drift."

Even so, take the time to understand exactly what kind of index fund you're buying, the rules that govern its underlying holdings and how it has behaved in past markets.

"Two products may have similar names and objectives but own different stocks," says Rachel Aguirre, head of product and portfolio strategy at Vanguard.

Consider, for example, three small-company index funds: the iShares Russell 2000 ETF (IWM), the State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM) and the Vanguard Small Cap Index Fund ETF (VB). Each fund tracks a different index, so performance varies.

Companies in the Vanguard portfolio, for instance, are, on average, twice as large by market value as those in the other two funds. That's helped the Vanguard fund perform better on an annualized basis in the past five and 10-year time frames because bigger companies outperformed small ones.

Similarly, companies in the SPDR fund are more profitable overall compared with holdings in the other two funds because its index, the S&P SmallCap 600, limits constituents to firms with profits. That helped the SPDR ETF outperform the other two small-company funds in 2021.

Another tip: Stick with the same index family if you're buying individual funds to get large-, small- and midsize-company exposure. Pair an S&P 500 index fund, for instance, with an S&P SmallCap 600 index fund to avoid any overlap in stock holdings. We did that in the Kiplinger ETF 20, our favorite exchange-traded funds, matching the iShares Core S&P 500 ETF (IVV) with the iShares Core S&P Mid-Cap ETF (IJH) and the iShares Core S&P Small-Cap ETF (IJR).

Investors who prefer mutual funds should consider the Fidelity 500 Index (FXAIX) or the Schwab S&P 500 Index (SWPPX) for large-cap exposure. Otherwise, invest in a total market fund, which owns nearly every publicly traded stock. The Vanguard Total Stock Market trades as a mutual fund (VTSAX) and an ETF (VTI).

Strategic index funds: thematic funds

These funds also aim to beat a broad benchmark, but they come with a twist. Funds that aren't weighted by market cap fall into this category, for instance. The main types of strategic funds are focused on factors (defined as stock or company traits that have been proven to drive returns), company fundamentals or a thematic trend.

We'll start with factor funds. There are six main factors: value (inexpensive stocks), size (small-cap stocks, say), momentum (stocks with upward-trending prices), volatility (stocks with low price fluctuations), quality (financially healthy firms) and yield (dividend-paying stocks). Invest in these funds alongside your core holdings to enhance returns or reduce risk.

Factors can take years to pay off. That's why these funds are best considered long-term, buy-and-hold investments, says Nick Kalivas, head of factor and core equity product strategy for Invesco ETFs. Size and value, for instance, win over multiple decades. "Ten years is too short," he says. Quality, value and momentum, on the other hand, can reward in five-plus years.

But factor investing has some quirks. The strategies don't all work — as in outperform the indexes — at the same time. When the economy is contracting, low-volatility, value and quality factors outperform, and momentum and size tend to lag. During an economic recovery, size, value and quality fare best; momentum and volatility lag.

You can find funds that focus on a single factor — Fidelity and BlackRock's iShares each have several, to name just two shops. Some funds group factors because they pair well. Momentum and low volatility, for instance, work well together. Quality and value are good pairs, too.

But the jury is out on whether you should own all the factors at once — Invesco's Kalivas says yes because it adds diversification benefits; FlexShares' Huemmer says no because it could water down returns.

That's why we favor a flexible approach. The Invesco Russell 1000 Dynamic Multifactor ETF (OMFL) stresses different factors depending on whether the economy is expanding, slowing down, contracting or recovering. The fund has outpaced the S&P 500 since its November 2017 inception and boasts a better risk-adjusted return, but it has been more volatile, too.

Equal-weight funds are factor funds because they emphasize size, in a way — every company, small or large, gets an equal share of assets. They're a way to avoid overweighting the most popular stocks of the day.

Remember, over shorter periods, performance can be choppy. In the past 12 months, the Invesco Russell 1000 Equal Weight ETF (EQAL) and the Russell 1000 Index are neck and neck in terms of returns, but in late March, the two were roughly nine percentage points apart for the year to date.

Although the Invesco S&P 500 Equal Weight ETF (RSP) has beaten the S&P 500 Index since its April 2003 inception, it has lagged in the past three, five, 10 and 15 years.

With fundamentals funds, business metrics, such as revenue and free cash flow (a company's cash from operations after capital expenditures), matter most.

The Invesco S&P 500 Revenue ETF (RWL), for instance, ranks stocks by trailing 12-month revenue and rebalances every quarter. Walmart (WMT) and Amazon.com (AMZN) are top holdings. The fund has slightly outperformed the S&P 500 since its February 2008 inception.

The WisdomTree U.S. LargeCap Fund (EPS) holds profitable large stocks ranked by earnings. The fund has slightly lagged the S&P 500 in the past three, five and 10 years.

Companies that throw off cash are the focus of the Pacer U.S. Cash Cows 100 ETF (COWZ). Stocks are ranked by trailing 12-month free cash flow. In the past five years, the fund has underperformed the S&P 500 by 2 percentage points.

Finally, the Schwab Fundamental U.S. Large Company Index (ETF ticker symbol FNDX; mutual fund symbol SFLNX) tracks an index that ranks stocks using a combination of sales, cash flow and dividends plus buybacks. The fund lagged the Russell 1000 in the past three and 10 years, but it beat on a one- and five-year basis. Fit funds such as these into your portfolio as complements to your core holdings to boost returns.

Strategic index funds: factor funds

Funds that fall into the thematic subcategory let you follow your passion. These days, whatever your interest, you can find an ETF that captures the trend.

There's one for music lovers, the MUSQ Global Music Industry Index ETF (MUSQ), and one for pet care — the ProShares Pet Care ETF (PAWZ). There are several clean-energy offerings such as the iShares Global Clean Energy ETF (ICLN) and the Invesco Solar ETF (TAN).

Several are technology related, including the Global X Robotics & Artificial Intelligence (BOTZ) and the Global X Autonomous & Electric Vehicles ETF (DRIV). Some market watchers, including Invesco's Kalivas, count funds that invest according to environmental, social and corporate governance principles in the thematic category.

In most cases, thematic funds are best reserved for money you can afford to set aside for the long haul. "These funds tap growth drivers that will play out over a long time period," says iShares's Aguirre.

Buckle up, because they can be volatile. The Ark Innovation ETF (ARKK), for instance, soared 153% in 2020, only to lose 23% in 2021 and another 67% in 2022. It rose 35% in 2025 but is flat so far in 2026 through mid-April after being down as much as 17% for the year to date in March.

Quasi-index funds

The lines between index funds and active funds are blurring. Some consider the strategies we describe below as actively managed. But their outcomes are tied to an index, so we consider them quasi-index funds.

Buffered ETFs. Investors who want to stay invested in stocks but can't afford — or stomach — big downdrafts are flocking to "defined outcome" funds, also called buffered ETFs, which invest in options tied to a broad index.

The ETFs offer some protection from stock market losses over a 12-month period in exchange for a cap on potential gains. How much you give up in returns (the cap) depends in part on the amount of downside protection (the buffer) the fund offers. The bigger the buffer, the lower the cap.

Most buffered ETFs are linked to the S&P 500 Index, but some are tied to the Nasdaq-100, the Russell 2000 or the MSCI EAFE, among others. At the end of the one-year period, the fund resets by buying new options that will define the buffer and cap parameters in the next 12-month period. That's why these funds typically have a month tied to their name. But you can buy and hold these funds if you like; there's no termination date.

Look for buffered ETFs from Innovator, First Trust, AllianzIM, TrueShares and Pacer. Be sure to buy shares in a defined-outcome ETF within a week of the start of its 12-month stretch to benefit from the fund's full downside buffer.

In late April or early May, for example, buy a May-dated ETF. Stay invested for at least the full year. For investors who don't buy at the start of the period, the buffer and cap shift a bit depending on the fund's net asset value each day.

Direct indexing. This strategy once was reserved for high-net-worth individuals, largely to goose after-tax returns. It's now accessible to regular investors, thanks to free and fractional-share stock trading, as well as lower minimums to invest.

In direct indexing, also called "personalized indexing," you directly own the individual stocks of an index (or a representative set; more on that later). Plus, you can tweak your holdings to suit your needs or values. If you work for Apple (AAPL), say, and don't want or need added exposure to the stock, you can exclude it from your personalized index.

Tax-loss harvesting, which aims to reduce your capital gains tax, is key to direct indexing. Say you're tracking the S&P 500, and Exxon Mobil (XOM) shares trade at a loss in your portfolio. With tax-loss harvesting, you would sell the shares — locking in losses to offset gains in other investments — and replace Exxon with a stake in a different but similar index stock, say Chevron (CVX), to maintain proper allocation in your portfolio.

"The end result is less of your money goes to taxes, and more stays invested and working for you," says Eric Walters, an adviser in Greenwood Village, Colorado. You wouldn't own every stock in the benchmark index when you use direct indexing — otherwise you'd limit your options to reinvest in a similar security, according to IRS rules.

Tax-loss harvesting can add up to 0.5 to 1.5 percentage points a year in returns by reducing taxes, adds Walters. The more money you have in the portfolio, the more effective the strategy, and it only works in a taxable account.

Not everyone is a believer. "You can gain tax benefits, but you risk underperforming, too," says Carlos, the Washington, D.C., adviser. Some advisers say you need to invest at least $2 million to make direct indexing worthwhile. Others say only the wealthiest investors — those in the highest tax bracket or those who know they will leave the account to their heirs — should consider it. Fees are between 0.2% and 0.4% of assets per year.

If you're interested, consider going with an adviser who offers the service. Not all do. "It's an extra expense and takes time, so the client has to really care about it," says Eric Figueroa, a certified financial planner in Folsom, California. Minimums range from $25,000 to $250,000 or more. Figueroa prefers that clients have at least $50,000.

Some brokerage firms offer personalized indexing services, too. Fidelity's Managed FidFolios have a minimum of $5,000 and charge a 0.4% fee. At Schwab, the minimum is $100,000, and fees are 0.4% for balances below $2 million. You must work with a Schwab financial consultant.

Bond indexing

Indexing with bonds hasn't received as much attention as stock indexing. That might be because historically, most actively managed bond funds have outpaced their benchmark, at least over long hauls.

But that's changing. In 2022, the worst year for fixed income in decades, bond index funds fared better than their active counterparts. In more recent years, investors rushed headlong into bond funds, particularly passive ones, as higher yields made fixed-income investing more attractive.

That said, bond indexing comes with some caveats. Rather than hold every security in the bogey they track the way stock index funds do, bond index funds hold a sampling. Sometimes, that can drive up tracking error (the divergence between the return of the fund and the return of the index it tracks).

Unlike an individual bond that you buy and hold to maturity, bond fund yields can shift as the mix of securities in the portfolio changes and as interest rates fluctuate (because bond prices and yields move in opposite directions).

Traditional offerings. Traditional bond index funds are weighted by market value of debt. The U.S. bond market yardstick is the Bloomberg U.S. Aggregate Bond Index, better known as the Agg.

It was "never meant to be a comprehensive market benchmark," says Jason Bloom, Invesco's director of global ETF strategy. It's not diversified, for a start. Nearly 70% of the index is made up of government and government-agency bonds. and it excludes some key sectors, including high-yield debt.

That said, an Agg-based index fund works as a core holding. Our favorites are the Fidelity U.S. Bond Index Fund (FXNAX), which yields 4.3%, and the iShares Core U.S. Aggregate Bond ETF (AGG), which yields 4.4%.

Fill in the gaps of the Agg by peppering your portfolio with small doses of bank loans, high-yield corporate credit and even preferred securities (bond investments with stock-like features) to boost your return over time.

For high yield, we favor the State Street SPDR Portfolio High Yield Bond ETF (SPHY), which yields 7.1%. Our favorite floating rate fund is the Invesco Senior Loan ETF (BKLN). It yields 6.6%. For preferred stock ETFs, we like the iShares Preferred and Income Securities ETF (PFF), which yields 6.3%.

Factor funds for bonds. It's a new-ish category, so there aren't many factor-based bond funds. But we found a few we like.

The FlexShares High Yield Value-Scored Bond Index Fund (HYGV) and the iShares High Yield Systematic Bond ETF (HYDB) emphasize securities that score well on quality and value measures, though their approaches are different. In the past five years, both funds outpaced the typical high-yield bond fund. The FlexShares fund yields 8.0%; the iShares fund, 6.8%.

Securities in the ultra-short-term bond fund Fidelity Low Duration Bond Factor ETF (FLDR) are weighted by interest rate sensitivity. Over the past year, the fund's 5.3% return outpaced 93% of other ultra-short bond funds. It yields 4.1%.

The Invesco Fundamental Investment Grade Corporate Bond ETF (PFIG) relies on book value (assets minus liabilities), sales, dividends and cash flow to weight securities. Over the past five years, the fund beat 70% of corporate bond funds. It yields 4.2%.

Laddering for income. To smooth out current income, some investors build a bond ladder, which involves buying bonds that mature at increasing intervals, say, every year in the next 10 years. As each bond matures, you reinvest the principal in the long end of the ladder.

Now, thanks to Invesco and iShares, you can build a bond ladder with index ETFs. These target-maturity funds, dubbed Invesco BulletShares and State Street MyIncome, offer instant diversification and more liquidity than you'd get by buying individual bonds.

You can invest in a ladder of investment-grade corporate debt or high-yield IOUs with Invesco BulletShares funds. Maturity dates stretch through 2035. The State Street MyIncome suite has a Treasury track or an investment-grade corporate debt track, with maturity dates that fall through 2035.

Should you choose an ETF or mutual fund?

Should you go with an exchange-traded or mutual index fund? It's largely a matter of personal preference.

Mutual funds and ETFs are both easy to trade and offer diversified exposure to a swath of the market in one step. They both pool assets from shareholders and invest in diversified baskets of stocks or bonds or other assets. Both ETFs and mutual funds charge an annual expense ratio. But they differ in key ways, too.

Trading. Mutual fund trades are executed once a day, after the market closes. In some cases, you might have to pay a transaction fee to purchase shares in a mutual fund. ETF shares trade during the trading day, just as stocks do, for no fee at most brokers.

Minimums. Some mutual funds have no minimums. But the initial investment for a Vanguard index fund is $3,000. No ETF is that pricey — the minimum is the price of one share.

Expense ratios. ETFs have lower expense ratios than mutual funds, generally speaking. Part of the reason is that most ETFs are index funds, which are less expensive to run than actively managed funds. But ETFs also don't incur certain expenses that mutual funds do, such as fees paid to list the mutual fund on a brokerage firm's no-transaction-fee platform, for instance.

Capital gains distributions. ETFs are structured to be more tax-efficient than mutual funds. ETFs don't actually buy and sell the underlying securities in their portfolios; third parties called authorized participants do it for them. Because an ETF isn't making actual cash transactions, it's less likely to make capital gains distributions to share­holders. (You still owe capital gains taxes when you sell shares.)

That's not the case with a mutual fund. If a mutual fund sells a security in its portfolio and pockets a profit, it is required to pass on those gains to shareholders at least once a year in the form of a capital gains distribution. This doesn't apply if you hold the fund in an IRA or a 401(k). These investments are shielded from tax until you withdraw from the account. But if you hold the fund shares in a taxable account, you're vulnerable to an unexpected tax bill.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance, but has since been updated. Subscribe to help you make more money and keep more of the money you make here.

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Vanguard is the No. 2 asset manager in the world. The best Vanguard ETFs are among the largest and most respected investment vehicles on Wall Street. With roughly $12 trillion in assets under management, the revolutionary firm trails only BlackRock.

Vanguard founder John C. Bogle is credited with popularizing low-cost, passive funds, and the best Vanguard ETFs are generally index funds that stick to a fixed list of components rather than engage in costly or complex strategies.

The funds aren’t flashy, and a consistent and predictable approach might bore some investors with a higher risk tolerance. But it's hard to argue with the long-term outperformance of the low-cost, index-fund-based strategy.

What makes for the best Vanguard ETFs?

A long-term, hands-off approach: Many exchange-traded funds claim to provide outperformance by overlaying complex screening methods onto the stock market and changing out holdings based on the latest info.

Most research shows this "active management" approach is ineffective, however. According to data from S&P Dow Jones Indices, the majority of actively managed funds involving large-cap stocks have underperformed the S&P 500 Index on an annual basis going back to 2010.

Minimize fees to maximize profits: The challenge with active funds is simple. Even if you do get a small amount of outperformance, the related expenses — tax inefficiency and higher brokerage fees, for example — erode those profits.

Investors should consider the opportunity cost that higher fees create. Every penny you pay in fees reduces current profits, and it erases cash that could be invested to grow over time.

The best Vanguard ETFs put more of your cash to work for you instead of your overpriced asset manager.

Don't forget DRIP: A dividend re-investment program, or DRIP, re-invests profits from your investments rather than having it sit idle in your account. The best Vanguard ETFs offer a no-fee, no-commission reinvestment program that allows you to reinvest your distributions and supercharge your returns over time.

The best Vanguard ETFs to buy now

The Vanguard funds included here all feature rock-bottom fees, large asset bases and long trading histories.

Data is as of June 6.

Vanguard S&P 500 ETF

• Assets under management: $1.7 trillion
• Expense ratio: 0.03%, or $3 per year for every $10,000 invested

The State Street SPDR S&P 500 ETF Trust (SPY) is the oldest S&P 500 index fund out there, but the Vanguard S&P 500 ETF (VOO) recently surpassed it as the largest ETF as measured by assets.

VOO remains the go-to option for most long-term investors, thanks to its low-cost structure and its exposure to the biggest names on Wall Street.

SPY charges 0.09% annually vs just 0.03% for VOO. Both are passively managed funds tied to the S&P 500 Index of the largest U.S. corporations.

There's no reason for most small-time investors to pay more for exposure to the exact same holdings. That list is led by must-own names such as Nvidia (NVDA), Apple (AAPL) and Microsoft (MSFT).

If you want to play the U.S. stock market through the years to come and do it efficiently, this is one of the best Vanguard ETFs to buy right now.

Vanguard Total Stock Market ETF

• Assets under management: $1.3 trillion
• Expense ratio: 0.03%

Nearly as large but just as cheap, the Vanguard Total Stock Market ETF (VTI) is a one-stop shop for investors who want exposure to the whole U.S. stock market in a single vehicle. More than 3,500 different stocks make up this fund, representing all sectors up and down the market-cap scale.

The Vanguard Total Stock Market ETF doesn't treat every component equally, however. It's weighted heavily toward the largest stocks, so no small start-up is going to sink your portfolio.

It's the largest ETF by assets outside the massive S&P 500 index funds such as VOO.

A well-established, more diversified option for buy-and-hold investors, VTI is one of the best Vanguard ETFs to buy right now.

Vanguard High Dividend Yield Index ETF

• Assets under management: $78.8 billion
• Expense ratio: 0.04%

Slightly smaller than VTI but still with tens of billions of dollars under management, the Vanguard High Dividend Yield Index ETF (VYM) is one of the best Vanguard funds to buy for investors looking to reduce their risk profile and tap into long-term income potential.

VYM focuses on stocks that pay above-average dividends, with a total yield of about 2.2% right now that's about two times the dividend yield of the S&P 500.

Apart from the regular income, dividend investment strategies highlight companies capable of consistent profit and payout growth. These businesses generate ample cash flow, often based on operational excellence.

VYM is well-diversified, with 618 total holdings. But it’s biased toward the financial sector, with about a fifth of assets in banks and insurers.

Top holdings include chipmaker Broadcom (AVGO), megabank JPMorgan Chase (JPM) and energy icon Exxon Mobil (XOM). These blue-chip names are good ballast for one of the best Vanguard ETFs.

Vanguard Information Technology ETF

• Assets under management: $149 billion
• Expense ratio: 0.09%

The flip side of low-risk dividend investing is speculating in high-growth tech stocks, with an emphasis on plowing cash into future opportunities rather than returning profits to shareholders.

That's what the Vanguard Information Technology ETF (VGT) has to offer: tech exposure to the exclusion of all others.

VGT's portfolio is composed of roughly 320 different stocks in the sector, ranging from the big names you know and love, such as Microsoft and Apple, as well as Nvidia, plus smaller hardware manufacturers and software firms.

If you take a long view of the stock market, it's difficult to imagine tech stocks won't continue to be the biggest and most successful companies. Their business models are light on raw materials and employees, and they're satisfying what seems an ever-expanding appetite for disruption.

If you're bullish on the high-tech future of AI, cloud computing and similar processes, VGT is one of the best Vanguard ETFs to buy now.

Vanguard Total International Stock ETF

• Assets under management: $628.1 billion
• Expense ratio: $0.05%

Each of the four funds we've discussed so far slices up the U.S. stock market in different but efficient ways.

But businesses beyond America's borders have a lot to offer, too, which became especially clear in 2025, when Asian and European stocks outperformed U.S. big tech and blue chip stocks.

The Vanguard Total International Stock ETF (VXUS) gets you that overseas exposure. VXUS is an "ex-U.S." offering designed to exclude companies in the United States and to ensure holdings don't overlap with any domestic stock ETFs.

A massive portfolio of more than 8,800 stocks includes plenty of familiar names, such as Taiwan Semiconductor (TSM), China-based Tencent Holdings (TCEHY), Germany-based SAP (SAP) and Netherlands-based ASML Holding (ASML).

Big international businesses such as these often provide just as much upside as U.S. names. Broadening your exposure via these overseas stocks can help smooth out volatility for you and your portfolio.

VXUS is one of the best Vanguard ETFs to buy because it accomplishes those worthy objectives.

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Rebalancing your portfolio regularly is one of the basic fundamentals of sound long-term investing. The good news for long-term investors is that if you regularly give to charity, there is a tax-efficient way to rebalance your portfolio — the donor-advised fund.

Why rebalance? Over time, higher-risk assets, like stocks, will dominate a portfolio, leading to higher volatility. Without rebalancing, it is too easy for portfolios to drift significantly from the risk-reward balance that is right for your personal financial goals. But if you rebalance too often, you can hurt your long-term returns with higher trading costs and by triggering expensive capital gains taxes.

Some of the best research to date on how to rebalance a multiasset portfolio has come from Vanguard, which looked at a wide variety of approaches and thresholds. Their conclusion? Most investors would be better off by rebalancing their portfolios once per year, with a 1% or 2% threshold for variation.

Unfortunately, that research did not take into account the donor-advised fund, one of the most useful and rapidly growing types of tax-advantaged accounts available to investors.

The Problem with Rebalancing and Taxes

Most people follow a relatively simple process for rebalancing their portfolios, and robo advisors and target-date funds do this automatically for investors. However, one of the fundamental problems with rebalancing is the drag introduced by triggering capital gains taxes.

By definition, rebalancing a portfolio involves selling assets that have outperformed the overall portfolio and buying assets that have underperformed. This makes sense, as the performance year-to-year of various asset classes is unpredictable, and rebalancing forces investors to periodically “buy low and sell high.”

The problem is that selling assets that have outperformed inevitably leads to realizing capital gains, which means capital gains taxes. In a high-tax state like California, that can mean taxes of up to 37.1% on long-term capital gains (20% federal rate + 3.8% Medicare surcharge + 13.3% California rate). 

While this issue is not a problem for tax-deferred accounts like 401(k)s or IRAs, it can seriously impact the performance of a taxable brokerage account.

How to Use Charitable Donations to Rebalance

Between 60 million and 70 million households in the United States donate to charity every year. If you are one of those households, there is a better and more tax-efficient way to rebalance your portfolio and support the charities and causes you care deeply about.

In the traditional method, rebalancing a portfolio involves two sets of transactions. First, you sell off the excess amount of the assets that have outperformed the portfolio. Second, you use the cash to purchase shares of the underperforming assets.

But if you regularly give to charity, you can save taxes by changing the first step of this process.

To understand this new method, you need to recognize only two simple insights:

• When you donate stocks, ETFs or mutual funds that have long-term capital gains, you get the full income tax deduction (up to 30% of your AGI) for the market value of the securities.
• There is no “wash sale rule” for donating securities.

As a result of these two facts, you can dramatically increase your tax savings every year when you rebalance by donating appreciated shares instead of selling them, and then using the cash that you would have normally donated to charity to purchase the underperforming assets.

Let’s look at a simple example to illustrate. Imagine an investor who has a $100,000 portfolio made up of 60% stocks and 40% bonds, as represented by Vanguard Total Stock Market Index Fund (VTI) and Vanguard Total Bond Market Index Fund (BND).

This investor has been holding their portfolio for a few years without rebalancing, and in that time period, stocks have outperformed bonds, so the portfolio is now a $120,000 portfolio made up of 70% stocks ($84,000) and 30% bonds ($36,000). To rebalance this portfolio back to the desired 60/40 split, the investor would normally sell $12,000 of VTI and use those funds to purchase $12,000 of BND.

Unfortunately, that would trigger $12,000 of long-term capital gains, which at top rates could mean a $4,452 tax bill for federal and state taxes.

But if this investor normally donates $6,000 per year to charity, they can save half of that tax bill.

Instead of selling $12,000 of VTI, they can donate half of those shares ($6,000) to charity instead. They get the same charitable deduction they would have received for donating cash, and they never trigger those capital gains taxes. Since they did not use the $6,000 in cash they normally donate to charity, they can use that money to buy $6,000 of BND to help rebalance their portfolio, saving up to $2,262 in taxes.

That’s a huge number. $2,262 is a 1.9% drag on a $120,000 portfolio. Think of how many investors work diligently to lower their investment expenses by even 0.5%, and these annual savings could be several times bigger!

This sounds too good to be true, so if you are looking for a catch, there are a couple. First, most charities do not accept securities donations. In fact, out of the over 1.7 million registered charities in the U.S., only a few thousand accept securities. Second, you may want to spread out your charitable donations to organizations over months or even years.

Fortunately, donor-advised funds solve both of these problems. A good donor-advised fund will accept securities donations and let you invest the proceeds of that donation tax-free until you are ready to recommend a grant to a specific charity.

Donor-advised funds used to have high minimum balances and even higher fees, but there are now modern, low-cost options, like Daffy.org, which charge as little as $3 per month.

So rest assured. You no longer have to choose between sound long-term investing and lower taxes. By taking advantage of the ability to donate your appreciated securities, you can now rebalance your portfolio annually and save money on taxes.

Assumptions that were used in the above graphic: Prices for rebalancing VTI and BND are set based on their value on December 31 each calendar year. The annualized return for the portfolio is 7.85% without taxes and 7.28% with taxes, a difference of 0.57% in annualized returns. Tax drag is calculated by estimating the capital gains from rebalancing each year, assessing a 37.1% marginal tax rate (20% federal rate + 3.8% Medicare surcharge + 13.3% California rate), and taking the resulting taxable value out of the portfolio at the time of rebalance. This example is for educational purposes only. To assess your specific situation, please consult with a tax professional. 

The information provided is for educational purposes only and should not be considered investment advice or recommendations, does not constitute a solicitation to buy or sell securities, and should not be considered specific legal investment or tax advice. To assess your specific situation, please consult with a tax and/or investment professional.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The exchange-traded fund (ETF) industry is in full bloom now.

According to ETF Central, a platform that tracks ETF markets and issuer data, there were more than 5,000 U.S.-listed ETFs as of June 16. That's explosive growth compared with January 22, 1993, when the first U.S.-listed ETF, the SPDR S&P 500 Trust (SPY), launched and kicked off the modern exchange-traded-fund era.

The expansion has reached a point at which U.S.-listed ETFs now outnumber individual stocks, according to Bloomberg. A great example is Strategy (MSTR), the software company turned bitcoin treasury formerly known as MicroStrategy.

If you search for MSTR in most brokerage apps, you'll find dozens of ETFs offering leveraged, inverse or income-oriented exposure to the stock. That level of proliferation speaks to how deeply ETFs have saturated every corner of the market.

It also reflects a broader trend. ETF issuers are increasingly catering to Gen Z's appetite for high-beta and yield-focused strategies, often built with derivatives or concentrated exposures.

Yet it helps to step back and remember why ETFs became popular in the first place. Their core appeal is transparency, liquidity and tax efficiency. Those features are why ETFs are one of the easiest ways to start investing.

Keeping these traits in mind is essential when deciding the best ETFs to include in a long-term portfolio.

How we picked the best ETFs to buy for 2026 and beyond

There is no clean or perfectly objective way to determine which five ETFs are the "best" out of more than 5,000 options. Focusing on a single metric would create a lopsided and unfair list.

For example, we could simply choose the five largest ETFs by assets under management, but that would reflect factors such as time in the market rather than inherent quality. SPY has had almost three decades to grow, and the largest issuers, including Vanguard, iShares, State Street and Invesco, have enormous marketing budgets that help keep their flagship ETFs in front of investors.

Ranking solely by historical returns has similar problems. ETFs don't share common inception dates, and results are heavily dependent on rolling periods. An ETF that shines in the last decade might look much weaker if the start or end date changes slightly. More important, past returns don't predict future performance, especially when market leadership rotates.

To keep the process fair, we selected one ETF that represents the "best in class" for its category. We chose five broad asset classes that nearly every investor encounters: equities, fixed income, commodities, cryptocurrency and multiasset. The goal was to highlight ETFs with structural traits that make them durable buy-and-hold candidates rather than temporary fads.

From there, we relied on a universal attribute that Morningstar and other research firms have repeatedly identified as the single most reliable predictor of fund returns: fees.

An ETF's expense ratio is deducted from the fund's assets throughout the year. You don't pay it out of pocket, but it reduces your net returns every day. Through long stretches, this drag compounds, which is why low-cost funds consistently outperform more expensive peers with similar strategies.

Asset managers understand that. In the past decade, fee compression has been one of the most important trends in the industry. ETF issuers have either held expenses flat or cut them to remain competitive, benefiting investors and reshaping competition across categories.

For each best-in-class pick, we also emphasized ETFs with robust assets under management for longevity and scale. Finally, we focused on low bid-ask spreads to ensure efficient trading for investors of all sizes.

• Type: Large stock blend
• Assets under management: $76 billion
• Expenses: 0.06%, or $6 on every $10,000 invested annually
• 30-day median bid-ask spread: 0.01%

The Vanguard Total World Stock Index Fund ETF (VT) offers one of the strongest value propositions in the equity ETF space. For $6 per $10,000 invested, you gain exposure to more than 10,000 stocks that represent the global stock market.

Its benchmark, the FTSE Global All Cap Index, spans U.S. stocks, international developed markets, emerging markets and the full market-cap spectrum across all 11 sectors.

VT is the ultimate buy-and-hold ETF for hands-off investors. There’s no need to predict which countries, sectors or company sizes will lead. The market-cap-weighted approach keeps turnover low and lets winners rise naturally.

Investors receive maximum diversification in a single position, making VT a highly efficient core equity allocation.

Learn more about VT at the Vanguard provider site.

• Type: Intermediate core-plus bond
• Assets under management: $42 billion
• Expenses: 0.06%
• 30-day median bid-ask spread: 0.02%

Many of the most popular bond ETFs track the same Bloomberg Aggregate Bond Index, which holds thousands of U.S. Treasurys, agency mortgage-backed securities and investment-grade corporate bonds. It represents the traditional "buy the market" approach for high-quality fixed income.

The iShares Core Universal USD Bond ETF (IUSB) takes this idea a step further. Its benchmark, the Bloomberg U.S. Universal Index, combines the familiar aggregate exposure with a modest allocation to high-yield corporate bonds.

High-yield bonds are less liquid and harder for individuals to access directly, but they can enhance diversification and increase yield. IUSB blends these exposures at low cost and creates a more complete core bond portfolio.

Learn more about IUSB at the iShares provider site.

• Type: Commodities focused
• Assets under management: $29.6 billion
• Expenses: 0.10%
• 30-day median bid-ask spread: 0.01%

The SPDR Gold MiniShares Trust (GLDM) was not the first gold ETF, but it set a new standard for low-cost access to physical gold. Investors can bypass the wide dealer spreads associated with buying bullion and trade GLDM in a regular brokerage account, including tax-advantaged accounts such as a Roth IRA.

The trust is physically backed, with gold stored at JPMorgan Chase Bank locations in London, New York and Zurich.

Since its launch, competing products have appeared, but few have matched GLDM's combination of size, liquidity and cost, especially during the recent surge in gold prices.

One notable structural detail is that GLDM is a grantor trust governed by the Securities Act of 1933 rather than the Investment Company Act of 1940, which affects how it holds and stores metal.

Learn more about GLDM at the State Street provider site.

• Type: Digital assets
• Assets under management: $12 billion
• Expenses: 0.25%
• 30-day median bid-ask spread: 0.05%

In January 2024, the Securities and Exchange Commission (SEC) approved the first spot bitcoin ETFs, opening the floodgates for cryptocurrency investing through traditional brokerage accounts.

Spot ETFs hold actual bitcoin rather than futures contracts, which was a major shift. However, most of the new ETFs rely on Coinbase (COIN) for custody, creating a single point of operational risk.

The Fidelity Wise Origin Bitcoin Fund (FBTC) stands out because it stores its bitcoin directly with Fidelity. Fidelity began building digital asset infrastructure in 2014 and has developed in-house capabilities that few traditional firms possess.

While FBTC is not the cheapest or the most traded, its independent custody model makes it a noteworthy option for serious cryptocurrency investors looking for a trustworthy bitcoin ETF.

Learn more about FBTC at the Fidelity provider site.

• Type: Moderate allocation
• Assets under management: $6.9 billion
• Expenses: 0.33%
• Bid-ask spread: 0.03%

Balanced portfolios were once dominated by mutual funds built around the classic 60/40 mix of stocks and bonds. These funds often generated annual capital-gains distributions, creating tax inefficiencies.

In ETF form, balanced strategies avoid many of these issues, and the Capital Group Core Balanced ETF (CGBL) has quickly become a standout for this category.

CGBL is actively managed and holds a mix of Capital Group fixed-income ETFs and direct stock positions. It typically keeps between 50% and 75% of assets in equities, with the remainder in bonds.

It also uses Capital Group's long-standing system in which multiple managers run separate sleeves of the same portfolio, bringing their own research and best ideas.

Learn more about CGBL at the Capital Group provider site.

Compared with other fund types such as mutual funds and closed-end funds (CEFs), ETFs have grown far faster and have taken in steady inflows for years.

A big reason is structural. ETFs solved several problems that plagued both mutual funds and CEFs, and they did it through the in-kind creation and redemption process.

Mutual funds are open-ended, which means the fund company creates or cancels shares based on investor demand. The challenge is capital gains distributions. In a high-turnover mutual fund, or one that realizes gains and losses throughout the year, investors can receive a capital gains tax bill even if they never sold their own shares.

The buying and selling activity of other investors, along with portfolio rebalancing by the manager, forces the fund to realize gains that get passed through to every shareholder. This is why many mutual fund investors get hit with taxable distributions at the end of December despite doing nothing.

ETFs avoid this issue because the fund manager doesn’t create new shares. Instead, authorized participants work directly with the ETF issuer to create or redeem shares using a basket of the underlying securities. Creation and redemption in kind keeps the buying and selling activity outside the fund, preventing the realization of taxable gains within the ETF itself.

CEFs have a different issue. They’re publicly traded funds, but they have a fixed pool of shares. As a result, the market price can trade above or below the value of the underlying holdings. A price above the net asset value is a premium, and a price below is a discount.

For investors, the entry point isn’t always intuitive. A good CEF can trade at a steep premium, while a struggling CEF can trade at a discount for years. ETFs solved this by allowing arbitrage between the market price and the net asset value.

If the ETF trades above its underlying value, an authorized participant can deliver the underlying basket, receive ETF shares and sell them for a quick profit. If the ETF trades below its underlying value, the process reverses. These arbitrage incentives keep ETF prices close to their net asset values and prevent persistent premiums or discounts.

There are also practical benefits. ETFs offer greater liquidity and usually trade with much narrower bid-ask spreads than CEFs. Unlike mutual funds, which are priced once after the market closes, exchange-traded funds trade throughout the day like stocks. Most ETFs also disclose their full portfolios daily, while mutual funds typically report only a handful of times per year.

Given the number of ETFs now available across every asset class, geography and strategy, it’s easy for investors to get lost in the sheer variety. It helps to step back and remember the mechanics that made ETFs popular in the first place and to use those traits as a foundation when deciding which ones are worth owning.

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Exchange-traded funds (ETFs) continue to gain in popularity, but the divide between ETFs and mutual funds is becoming a little murky. 

In recent years, for instance, several fund companies, including T. Rowe Price and Fidelity, have launched actively managed ETFs that are modeled after their best actively managed mutual funds. And in late 2025, the Securities and Exchange Commission (SEC) said dozens of asset managers could offer ETF share classes for existing mutual funds.

ETF index strategies, meanwhile, have been around for decades. The oldest, the State Street SPDR S&P 500 ETF Trust, known as SPY (for its ticker symbol), is more than 33 years old and has nearly $702 billion in assets under management — roughly $63 billion more than the biggest index mutual fund, the Vanguard 500 Index (VFIAX), which holds $639 billion.

When faced with a choice between buying shares in an ETF and buying shares in a mutual fund that follows a similar strategy, which is the better option for you?

"The choice isn't always black and white," says Charles Rotblut, a vice president and financial analyst at AAII, a nonprofit organization that helps individual investors. The answer may depend on several factors, including how you typically trade investments and in what type of account you plan to hold the asset, among other things. In certain cases, it may come down to a matter of personal preference.

Look-alike ETFs and mutual funds — similar, but not the same

ETFs and mutual funds have much in common. "There are many more similarities than differences," says Molly Concannon, head of national sales at Vanguard.

Both are easy to trade and offer diversified exposure to a swath of the market in one go. They both pool assets from shareholders and invest in diversified baskets of stocks, bonds or other assets. There are actively managed and index-based strategies in both ETF and mutual fund structures. And both ETFs and mutual funds charge an annual fee, known as an expense ratio.

But these types of funds differ in key ways, too. When you buy or sell mutual fund shares, trades are executed once a day, after the market close. In some cases, you may pay a transaction fee to buy shares in a mutual fund. But you can buy or sell ETFs throughout the trading day just as you would a stock, and they trade commission-free at most brokerage firms. 

ETF share prices fluctuate throughout the day, and there is a bid-ask spread — the difference between the highest price a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept. What's more, an ETF's share price may deviate from its net asset value — the actual value per share of its underlying holdings — during the trading day.

Many certified financial planners prefer ETFs over mutual funds. "I exclusively place my clients in ETFs as opposed to mutual funds," says Alexis Hongamen, a certified financial planner in Orlando, Florida. And Vanguard's Concannon says ETFs are where most of the firm's individual investors have been putting their money in recent years.

But it doesn't have to be an either-or decision. "ETFs are better in most situations because they are more tax efficient and generally less costly — there are no transaction fees," says Thomas Stapp, a CFP in Olympia, Washington. But he invests in mutual funds, too, particularly when he finds a strategy that is "notably better than any ETF option" or when a strategy isn't available in an ETF.

ETFs and mutual funds: which structure works best for you?

Consider the investing scenarios below to see which fund structure works best in certain circumstances.

You have less than $1,000 to invest. A workplace retirement plan, such as a 401(k) or 403(b), makes it easy to set aside small contributions from your paycheck to your investment account. But outside of a retirement plan — you're investing on your own at a brokerage firm, say — you're better off with an ETF if you only have small sums to invest.

That's because the minimum investment for most retail mutual funds is more than $1,000, but you can buy ETFs for much less. A single share of the iShares Core S&P 500 ETF (IVV), one of the biggest U.S. stock ETFs in the country, was priced near $688 in early 2026, and most brokerages allow you to buy fractional shares with dollar amounts as low as $1 to $10.

But there may be workarounds to mutual fund minimums, too. At Charles Schwab, brokerage customers can make an initial investment of $100 in any of the thousands of mutual funds on its OneSource network of no-transaction-fee mutual funds.

You want to invest in a broad-based index fund. Either an ETF or mutual fund works here. "It's largely a matter of preference," says AAII's Rotblut. That's because both are low-cost and inherently tax-efficient. (Index funds tend to buy and hold stocks, distributing fewer capital gains than more actively traded funds do.)

You're investing in a taxable account and you're tax wary. Go with an ETF. "My basic rule of thumb is to use ETFs in taxable brokerage accounts," says Keith Spencer, a certified financial planner in Spokane. Tax efficiency has long been a draw for investors to ETFs. It has to do with the way that ETFs are structured compared with mutual funds.

ETFs don't actually buy and sell the underlying securities in their portfolios. Instead, third parties called authorized participants do it for them. Because the ETF itself isn't making any cash transactions, it is less likely to make a capital gains distribution to shareholders. (You still owe capital gains taxes when you sell shares.)

In contrast, mutual funds buy and sell the actual securities in their portfolios. If a mutual fund pockets a profit when it sells a holding, it is required to pass on those gains to shareholders at least once a year, triggering a surprise capital gains tax bill. That's why holding an ETF in a taxable account will likely generate less tax liability than a mutual fund with a similar strategy.

You're investing in a tax-deferred account. Opt for whichever is cheaper — the ETF or the mutual fund — in annual expense ratio plus any transaction fees you may pay to buy and sell shares.

In a retirement account such as an IRA or 401(k), capital gains distributions don't create any sort of taxable event because these accounts are shielded from tax until you withdraw the money from the account.

You're an active trader. ETFs are nimbler than mutual funds because they trade intraday. Mutual fund trades settle once a day, after the market closes. You can also sell shares short (a bet on falling prices) or buy or sell options on an ETF.

But be forewarned: When markets get volatile, the difference between an ETF's share price and its net asset value may widen, as will the bid-ask spread. That means the cost of buying or selling ETF shares may rise during choppy trading days, according to State Street Investment Management. In 2010 and 2015, for instance, ETF prices fell well below the net asset value of their underlying assets during flash crashes, which occur when market prices plunge and then recover almost immediately.

During rough market periods, consider limiting your trades to the largest and most widely traded ETFs, such as the SPY ETF.

Other U.S. stock ETFs with high average daily trading volumes are the Invesco QQQ Trust (QQQ) and the iShares Russell 2000 ETF (IWM). At the very least, set limit orders on your transactions, which allow you to trade shares at a specific price.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance, but has since been updated. Subscribe to help you make more money and keep more of the money you make here.

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Vanguard funds are known as practical tools for the buy-and-hold-forever crowd. Their straightforward strategies, broad portfolios and generally low costs are conducive to investors who want to sit back and let the rule of compounding do the work for a decade or two.

In a pinch, the safest Vanguard funds can also be used to play a little defense.

How we chose the safest Vanguard funds

To find the safest Vanguard exchange-traded funds (ETFs) and mutual funds for a volatile market, we looked for those that represent some of the most useful defensive sectors and strategies, including those that contain the best dividend stocks or the best health care stocks.

We also targeted funds that boast Vanguard's below-average expenses. "True, some competitors can now match or even undercut Vanguard on fees for broad market exposure," writes Alec Lucas, director of manager research and active funds research for Morningstar. "But Vanguard's burgeoning advice business could help it keep or even extend that lead."

Remember that when it comes to positioning your portfolio for volatility, markets eventually stabilize. If you do jump into the safest Vanguard funds for short-term defense, pay attention and be nimble.

With that in mind, here are five of the safest Vanguard funds to own in a volatile market. When applicable, we'll let you know when these portfolios come in both ETF and mutual fund form.

Data is as of April 8. Dividend yields represent the trailing 12-month yield, a standard measure for equity funds.

• Type: Sector (Health Care)
• Assets under management: $17.7 billion
• Dividend yield: 1.4%
• Expenses: 0.09%, or $9 annually for every $10,000 invested
• Also available as: Vanguard Health Care Index Fund Admiral Shares (VHCIX, 0.09% expenses, $100,000 minimum investment)

Health care stocks are known for their defensive qualities because of the essential services they provide. If money's tight, you can put off buying a virtual reality headset or a trip to the Bahamas, but you can't exactly go off your medications and avoid the doctor.

Health care spending is projected to grow at a rate that far outpaces inflation. According to the Centers for Medicare & Medicaid Services (CMS), national health expenditures are expected to grow at an average annual rate of 5.6% through 2032.

That's why the Vanguard Health Care ETF (VHT) is one of the safest Vanguard funds to own in a volatile market. Among the best Vanguard ETFs, it's an extremely cost-efficient way to diversify, giving you access to 400 health care stocks for a mere nine basis points in annual fees.

VHT is market cap-weighted, which means the larger a company is by market capitalization, the more assets the fund will invest in its shares. Mega- and large-cap stocks have the biggest impact on performance, at nearly 70% of the fund's weight.

But you also enjoy some exposure to mid- and small-cap stocks, which allows you to benefit from explosive smaller biotech and biopharma names that can take off on events such as drug-trial results and mergers and acquisitions.

Top holdings include pharmaceutical names Eli Lilly (LLY) and AbbVie (ABBV) as well as Johnson & Johnson (JNJ).

Learn more about VHT at the Vanguard provider site.

• Type: Sector (Consumer Staples)
• Assets under management: $8.4 billion
• Dividend yield: 2.2%
• Expenses: 0.09%
• Also available as: Vanguard Consumer Staples Index Fund Admiral Shares (VCSAX, 0.09% expenses, $100,000 minimum investment)

Consumer staples is another sector that tends to be more resilient during volatile markets for the same reason as health care.

If you're in a money crunch, you'll look at a lot of different ways to cut back. You might go to the movies less. You might not go out to restaurants as much. Maybe you'll pare down your five streaming services to four.

You'll look at spending less on just about anything before you cut back on consumer staples such as toilet paper, toothpaste and basic grocery essentials.

That's why the Vanguard Consumer Staples ETF (VDC) is among the safest Vanguard funds for market uncertainty.

This ETF provides exposure to more than 100 companies that specialize in human necessities. Procter & Gamble (PG) tackles everything from facial care to tushy wipes. Mondelez International (MDLZ) sells a bevy of cheap snacks — think Chips Ahoy! and Ritz Crackers — that are mainstays in American pantries.

It also holds Walmart (WMT), Costco Wholesale (COST) and Target (TGT), which sell all of these items.

You'll also find companies such as Marlboro parent Altria (MO) and alcohol giant Constellation Brands (STZ). While you might not consider cigarettes and alcohol to be "necessities," people are just as loath to cut back on them as they are other staples.

As with many Vanguard ETFs, VDC can be had at an absolute song: Expenses are just nine basis points per year.

Learn more about VDC at the Vanguard provider site.

• Type: Dividend stock
• Assets under management: $75.4 billion
• Dividend yield: 2.4%
• Expenses: 0.04%
• Also available as: Vanguard High Dividend Yield Index Fund Admiral Shares (VHYAX, 0.08% expenses, $3,000 minimum investment)

The best dividend stocks have historically outperformed their non-dividend-paying counterparts during market uncertainty.

According to Merrill, dividend stocks can be "particularly useful when markets are volatile." For one, the private wealth management firm says, they provide investors with income, which can help meet their liquidity needs.

Additionally, "dividend-focused investing has historically demonstrated the ability to help to lower volatility and buffer losses during market drawdowns," Merrill adds.

With this in mind, investors might want to consider the Vanguard High Dividend Yield ETF (VYM), which tracks an index of high-yielding dividend stocks. On a total-return basis (price plus dividends), the S&P 500 is down 0.6% since the start of the year, while VYM has gained 6.6%.

This Vanguard fund boasts a wide portfolio of 560 or so high-yielding stocks that collectively yield 2.4% at present. (That's roughly double the S&P 500.)

It's worth noting that, at 19.4% of assets, financial stocks — not really considered safety plays — are the best-represented sector in VYM. But the traditionally defensive health care (12.9%) and consumer staples (9.4%) sectors also carry significant weight in the portfolio.

Top dividend payers in the portfolio right now include blue chip stocks such as Broadcom (AVGO), JPMorganChase (JPM) and ExxonMobil (XOM).

Learn more about VYM at the Vanguard provider site.

• Type: Minimum-volatility global stock
• Assets under management: $1.9 billion
• Dividend yield: 2.1%
• Expenses: 0.21%

Among the most popular ways to fight off a turbulent market are low-volatility (low-vol) and minimum-volatility (min-vol) ETFs.

What's the difference? Low-volatility ETFs evaluate a universe of stocks and pick out the ones that have shown the least volatility over a certain period of time, hoping to create the lowest-volatility portfolio it can.

Minimum-volatility ETFs typically try to minimize volatility within a certain benchmark while still resembling the original benchmark in some way.

For instance, an S&P 500 low-vol fund that picks the 20 lowest-volatility stocks in the index might end up holding nothing but utility stocks.

However, an S&P 500 min-vol fund might try to identify low-volatility stocks, but it might be forced to have at least some percentage invested in all 11 sectors, resulting in a portfolio that's not as volatile as the S&P 500 but possibly not as calm as a low-vol fund.

Vanguard doesn't have many options for investing in either type of strategy, but one that does its job is the Vanguard Global Minimum Volatility Fund Investor Shares (VMVFX). This actively managed fund aims to provide minimum volatility compared with the global equity market.

Like most global funds, VMVFX dedicates the bulk of its assets (56.7%) to American stocks, with the rest spread across several other countries such as the U.K., Canada and Taiwan.

From a construction standpoint, VMVFX exemplifies the minimum-volatility mindset. Its sector allocation looks somewhat similar to the category average but with a few tweaks reflecting its goal of reducing volatility.

For instance, it holds a few more percentage points of health care (13.4%) and consumer staples (10.3%) than the category averages, but a little less technology (21.5%) and consumer discretionary (8.0%).

There is a $3,000 minimum investment for this Vanguard fund.

Learn more about VMVFX at the Vanguard provider site.

• Type: Ultra-short bond
• Assets under management: $8.2 billion
• SEC yield: 4.3%*
• Expenses: 0.10%

We mentioned earlier that when the market's a mess, investors seek income. That can include dividend stocks, but it often includes bonds, too.

Bonds don't hold a candle to stocks when it comes to long-term returns, but they provide much more stability, serve a vital role in protecting your savings and can produce a decent return from their interest payments.

One of the safest bets you can make in bonds, if you're looking to protect your money in a down market, is short-term debt.

Typically, the shorter the payback term for a bond, the less uncertainty there is that debt will be paid off — a lot more can happen during the life of a 30-year bond than during the life of a one-year bond.

Enter the Vanguard Ultra-Short Bond ETF (VUSB), which holds bonds that mature in less than two years.

The Vanguard Ultra-Short Bond ETF is an ultimate example of how useful cheap index funds are. Individual bonds are extremely difficult to research, and they're not exactly easy to buy, either.

But with VUSB, you're plugged into a Vanguard-run portfolio of some 1,260 different debt issues — an instant diversified fixed-income portfolio for just 10 basis points a year.

Another reason VUSB is on this list of safest Vanguard funds? Virtually the entire portfolio boasts investment-grade ratings, which basically means there's an extremely high likelihood that these bonds will be fully repaid.

How steady is VUSB? Shares are up 0.8% for the year to date.

Learn more about VUSB at the Vanguard provider site.

* SEC yield reflects the interest earned for the most recent 30-day period after deducting fund expenses. SEC yield is a standard measure for bond funds

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Summary: The best growth ETFs to buy are those that hold companies expected to grow faster than peers based on one or more fundamental measures, including earnings per share and return on equity. Growth ETFs tend to have outsize exposure to stocks in the technology, communication services and consumer discretionary sectors. Seek out large-cap growth ETFs with low costs and high liquidity.

Besides segmenting by size, such as small-cap stocks or large-cap stocks, and the sector type, including those defined under the Global Industry Classification Standard (GICS), investors can distinguish between two investing styles: value vs growth.

Value investing is associated with legendary investors such as Benjamin Graham and Warren Buffett. The approach has deep academic roots thanks to Eugene Fama and Kenneth French, who studied the value factor.

But growth has dominated performance since the Great Recession. Even broad, core benchmarks like the S&P 500, designed to blend value and growth, lean heavily toward growth today.

Nowhere is this clearer than in the outsized role of tech stocks, representing more than 30% of the index. And then you have top-heavy composition driven by the so-called Magnificent 7 stocks: Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA).

For investors looking to double down on the growth style, options exist outside of broad market indices. Growth exchange-traded funds (ETFs) are one of the simplest ways to capture this factor tilt.

How do growth ETFs work?

Growth ETFs can be rules-based, tracking an index with objective criteria for screening and weighting stocks or actively managed by analysts using research and models. In either case, the goal is to select companies expected to grow faster than peers based on one or more fundamental measures.

A common screen, for instance, is historical or forecasted earnings-per-share (EPS) growth. It's popular because earnings growth often drives long-term stock performance.

But it's not foolproof. Backward-looking EPS may reflect cyclical booms rather than durable growth, while forward-looking EPS depends on analyst forecasts and company guidance that can prove optimistic.

Another frequently used metric is return on equity (ROE), which measures how effectively a company generates profit from shareholders' equity. ROE is calculated by dividing net income by shareholder equity, with growth-oriented companies often sustaining double-digit ROE, signaling strong profitability and efficient capital use.

Valuation also comes into play. Growth investors often look at the price-to-earnings growth (PEG) ratio, which adjusts the traditional P/E ratio by factoring in expected earnings growth.

A PEG around 1.0 is often considered reasonable — suggesting a stock is fairly priced for its growth rate — while much higher ratios may indicate overvaluation.

Growth vs value

The line between growth and momentum investing can blur. Some growth ETFs incorporate technical analysis, targeting stocks trading above moving averages or relative strength indicators. The idea is that the "trend is your friend" and that investors should "let winners run."

Growth ETFs over the past decade have tended to share several characteristics:

• Heavy concentration of large-cap and mega-cap stocks in the top holdings.
• Overweight to cyclical yet innovative sectors such as technology, consumer discretionary stocks and communication services stocks.
• Lower or nonexistent exposure to dividend-paying stocks and dividend yields, because many growth companies prefer to reinvest cash into expansion rather than pay shareholders.

They hold regardless of which investing style — growth or value — is used.

How we picked the best growth ETFs

The first step in narrowing the universe of growth ETFs was deciding what to exclude. Actively managed growth funds were taken off the list. While some can beat their benchmarks in hindsight, the odds are stacked against doing so consistently.

S&P's SPIVA study shows that nearly 90% of large-cap growth funds underperformed the S&P 500 Growth Index over a 15-year period. Much of this gap is explained by higher fees, which compound year after year and create a structural drag on performance.

We also limited our picks to large-cap growth ETFs. Academic research and investing experts, including Larry Swedroe, have described small-cap growth strategies as "a black hole." This is an anomaly, since the size factor typically implies stronger returns.

But small-cap growth stocks often combine the worst traits of both categories: limited profitability, stretched valuations and higher volatility without the historical return premium of small value.

From there, we applied three practical filters:

Fees. We set a maximum expense ratio of 0.20%. Growth funds are a highly competitive category in 2026, so there is little justification for paying higher fees.

Liquidity. We focused on ETFs with 30-day median bid-ask spreads of 0.1% or less. This ensures investors can trade efficiently without losing performance to transaction costs.

Assets under management. Finally, we required at least $1 billion in assets for economies of scale and investor trust.

Here are five of the best growth ETFs to consider for your portfolio.

Data is as of June 6.

• Assets under management: $93.6 billion
• Expense ratio: 0.15%
• 30-day median bid-ask spread: 0.01%
• 3-year annualized total return: 26.5%

The Invesco NASDAQ 100 ETF (QQQM) is the smaller, buy-and-hold counterpart to the Invesco QQQ Trust (QQQ). It trades at a lower price per share and carries a 0.05% lower expense ratio, making it better suited for long-term investors rather than active traders, since it doesn’t offer the same robust options market as QQQ.

Both ETFs track the Nasdaq-100 Index, which consists of the 100 largest non-financial companies listed on the exchange and weights them by modified market capitalization using listed shares rather than float-adjusted shares, with caps to limit concentration.

In practice, that results in a heavy tilt toward technology stocks, though the Nasdaq's history of attracting innovative listings means a notable presence of healthcare names, particularly in biotechnology.

Learn more about QQQM at the Invesco provider site.

• Assets under management: $393.8 billion
• Expense ratio: 0.03%
• 30-day median bid-ask spread: 0.01%
• 3-year annualized total return: 27.26%

The Vanguard Growth ETF (VUG) holds 153 stocks that make up the CRSP US Large Cap Growth Index. Unlike QQQM, it does not exclude financials, so investors gain exposure to names such as Visa (V) and Mastercard (MA).

The growth tilt is clear in its fundamentals, with an average return on equity of 36.1% and average earnings growth of 33.4%.

Still, valuations run high. On average, portfolio companies trade at 35.2 times earnings and 11.7 times book value.

The fund also has a pronounced technology bias, with 67.8% of assets in the sector. Apple, Nvidia and Microsoft account for more than 33% of the ETF's total weight.

Learn more about VUG at the Vanguard provider site.

• Assets under management: $126.9 billion
• Expense ratio: 0.18%
• 30-day median bid-ask spread: 0.01%
• 3-year annualized total return: 26.24%

Many older growth mutual funds use the Russell 1000 Growth Index as their benchmark to beat, making iShares Russell 1000 Growth ETF (IWF) a popular "buy the haystack" option for ETF investors. The portfolio includes 386 companies, offering similar exposures and metrics as VUG but in a slightly more diversified format.

The familiar growth tilts remain. Technology stocks make up 53.38% of assets, and Nvidia, Apple and Microsoft together account for 34.19% of the ETF's weight. Still, performance has been strong.

IWF carries a four-star Morningstar rating, reflecting how it has historically outperformed most of its large-cap growth peers on a risk-adjusted basis.

Learn more about IWF at the iShares provider site.

• Assets under management: $53.57 billion
• Expense ratio: 0.04%
• 30-day median bid-ask spread: 0.01%
• 3-year annualized total return: 29.24%

The same S&P 500 Growth Index that many active managers struggle to beat can be accessed at minimal cost through the SPDR Portfolio S&P 500 Growth ETF (SPYG).

SPYG elects the growth half of the S&P 500, resulting in 147 holdings best aligned with growth criteria. The fund projects an estimated 3- to 5-year EPS growth rate of 21.2%.

The familiar style tilts are present but less pronounced than in other growth ETFs. Nvidia, Apple and Microsoft together account for almost 31% of assets, while technology makes up 52.8% of the portfolio.

A modest 0.42% SEC yield also helps make SPYG a relatively tax-efficient option for taxable accounts.

Learn more about SPYG at the SPDR provider site.

• Assets under management: $58.78 billion
• Expense ratio: 0.04%
• 30-day median bid-ask spread: 0.03%
• 3-year annualized total return: 26.55%

The Schwab U.S. Large-Cap Growth ETF (SCHG) delivers broad growth exposure similar to IWF but at a much lower cost.

SCHG tracks the Dow Jones U.S. Large-Cap Growth Total Stock Market Index, which includes 198 holdings. On average, portfolio companies show a return on equity of 33.86%, reflecting strong profitability.

As with other growth ETFs, familiar tilts remain, though less extreme than in VUG or IWF. Nvidia, Apple and Microsoft together account for almost 29% of the fund, while technology stocks make up just under 45% of assets.

Tax efficiency is also decent. Schwab estimates a three-year after-tax, pre-liquidation return of 33.36% compared with a 26.53% three-year NAV return.

Learn more about SCHG at the Schwab provider site.

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On the morning of Thursday, October 13, as the Dow Jones industrial average plunged more than 500 points, a gathering of 370 investors and financial advisers—who were, as a group, losing tens of millions of dollars that very moment—calmly noshed on oatmeal and Danish. “Don’t just do something, stand there!” cheered the meeting’s speakers, quoting the inspiration of the conference, the late Jack Bogle, founder of Vanguard and early proselytizer of the index mutual fund. 

During a three-day conference at a Chicago-area hotel, the self-described “Bogleheads” did indeed just stand there. And sit there. Cell phones were muted. Nobody called their broker. Instead, on what turned out to be one of the most volatile days in the stock market’s history, they recalled Bogle-isms about ignoring short-term blips. Through presentations, meals and afternoon treats of ice cream sandwiches, they reassured each other that low-cost, long-term passive investing would eventually pay off better than chasing hot tips or panic selling. 

Their adages about patience, discipline, simplicity and bargain hunting may well strike a chord with any investor worried about today’s volatile investing environment.  

Stay the course. Over the long term, the U.S. stock market has more than recovered from every bearish slump, notes Jim Dahle, a physician-turned-investing guru and author of The White Coat Investor. “I expect to live through 17 bear markets as an investor,” Dahle told the crowd. In October 1987, “the stock market had the biggest one-day drop ever, but it still finished positive for the year,” he noted. He summed up his advice with the title of one of Bogle’s books: “Stay the course.”

Bogle, who died in January 2019, founded Malvern, Pa.–based Vanguard in 1974. Two years later, he launched the first publicly available index fund, which followed the S&P 500 index. Wall Street professionals and money managers scoffed at what they called “Bogle’s folly.” Bogle stayed the course, and Vanguard’s low-cost index funds attracted a growing fan base because they generally out-earned expensive funds managed by professionals who actively tried to beat the market.

In 1998, a small group of cost-conscious investors who called themselves “Vanguard Diehards” formed a group chat on a Morningstar electronic forum. Two years later, 22 Diehards met Bogle for dinner at a member’s Florida house. The gatherings turned into annual events and grew in popularity. They became multiday Bogle-cons, featuring action toys (such as a Bogle bobblehead) and presentations by Morningstar analysts, popular investing authors such as William Bernstein (who wrote The Four Pillars of Investing and several other books) and Bogle-minded financial advisers.

By 2007, the group had evolved into Bogleheads. Discussion group leaders, including Taylor Larimore, a retired IRS officer and financial manager whom Bogle nicknamed “the King of the Bogleheads,” and Mel Lindauer, a retired graphics company CEO (dubbed “the Prince”), began publishing advice books including The Bogleheads’ Guide to Investing. One of the central tenets: Investors should just stick with a basic, low-cost, three-fund portfolio of Vanguard’s Total Stock Market Index (VTSAX), Total International Stock Index (VTIAX) and Total Bond Market Index (VBTLX).

At the most recent assembly, longtime Boglehead Allan Roth, a fee-only financial adviser based in Colorado, told attendees that the three-fund portfolio is his core recommendation because it is boring. Roth, whose Twitter handle is @Dull_Investing, says one reason a largely hands-off port-folio works is that investors who use it don’t go astray by chasing returns. Morningstar research has shown that individual investors tend to pour money into funds right after they’ve notched record gains, he says, and that means investors often end up buying fund shares at high prices-, which leads those investors’ personal returns to underperform the funds they invest in by an average of 1.7 percentage points a year. By putting your portfolio on autopilot, you “minimize expenses and emotions and maximize diversification and discipline, which means you lose less money than most other people,” Roth says. 

But many Bogleheads are also open to some market timing—as long as investors are buying low. “International stocks are a screaming deal right now,” Dahle told the group. The average holding of Vanguard Total International Stock was selling at a price-earnings ratio of a little more than 10 in early November. By contrast, even after the 2022 plunge in stock prices, Vanguard Total U.S. Stock Market holdings were selling at an average P/E of about 16. 

The drop in Treasury bond prices in 2022 has created an opportunity for safety-conscious investors to lock in higher yields and decent long-term returns, Roth says. Long-term Treasury inflation-protected securities recently yielded more than 1.5% above the inflation rate. Putting a portion of your portfolio in TIPS is a great way to diversify and protect your retirement savings, he says. That’s especially apt now, when he worries that U.S. investors have become used to what some have called “teddy bear” downturns, in which stock prices tend to rebound quickly. But “grizzly bears” could be lurking—perhaps even now, says Roth. “I’m a pessimist.” 

Cheap, boring and sexy. The focus on simplicity and safety is what attracted Maggie Oldham, a Nashville-based nurse, to her first Boglehead convention this fall. Oldham, who had never read any of Bogle’s books, says she spent the first 40 years of her life in a “financial coma,” paying too much for everything from her mortgage to investments. Whenever she’d talk to friends or relatives about investing, they’d suggest “you should see my guy”—typically a commission-based broker who often pushed expensive or complicated strategies. Searching online led her to several “financial independence” proponents. Some of them recommended the Boglehead books and website.  

After reading and interacting with the forum (and putting her taxable savings in the three-fund portfolio),  Oldham had finally found her tribe. At home, her focus on simple saving and investing makes her feel like a bit of a loner. But at the Boglehead conference, she says, “I fit right in—and I got validation that I am on the right path for me.” By the end of the conference, Oldham was strategizing ways to talk up Boglehead values in Nashville to help create a community and “make it sexy to be cheap and boring,” she says. 

Rick Ferri, an hourly-fee financial adviser who is the president of the group that held the conference, the John C. Bogle Center for Financial Literacy, warned the attendees that not all investors they meet will be kindred spirits—at least not right away. But the markets that week seemed intent on converting at least a few. After a Thursday morning federal data release confirmed continuing high inflation, the stock market opened down more than 2%. For some reason, that set off a buying spree that pushed the overall stock market up about 5% by the close of trading. The next day, most of that gain disappeared. By the time the Bogleheads’ planes landed in their hometowns on Friday, much of their portfolio holdings were also back home—at almost exactly the value they’d been at the start of the week.

Warren Buffett's Berkshire Hathaway (BRK.B, $303.20) cut its stake in longtime holding U.S. Bancorp (USB, $44.87) by more than half.

Buffett, who serves as Berkshire Hathaway's chairman and CEO, has been slashing his holding company's exposure to financial stocks – and bank stocks in particular – for years. And although the U.S. Bancorp position hasn't been immune to some recent downsizing in the Berkshire Hathaway equity portfolio, Buffett has left it mostly intact.

That is, until now. 

Berkshire Hathaway sold 56% of its position in the nation's fifth largest bank by assets, a new regulatory filing revealed. Buffett's conglomerate now holds 52.5 million USB shares, or 3.5% of the regional lender's shares outstanding. That's down from an ownership stake of 8.1% prior to the sales. 

Berkshire Hathaway's USB stock was worth $2.4 billion as of Thursday's close, and now accounts for just 0.7% of the Berkshire Hathaway equity portfolio. That's down from 1.8% before Buffett slashed the stake. 

Berkshire, formerly the bank's largest shareholder, now drops to fourth place behind asset management giants Vanguard, BlackRock and State Street Global Advisors.

Buffett First Bought USB in 2006

Not to get sentimental or anything, but U.S. Bancorp is one of the oldest holdings in the Berkshire Hathaway portfolio. Warren Buffett first bought shares in the nation's largest regional lender in the first quarter of 2006. And while he has always been tight-lipped about the USB position, Buffett's actions over the past few quarters have hinted that something like this might be in the offing.

After all, Buffett clipped Berkshire Hathaway's USB stake by 5%, or 6.6 million shares, in the second quarter of 2022. He also pared the stake in each of the first three quarters of 2021.

True, Buffett had been gradually reducing Berkshire Hathaway's exposure to USB. But those scissorings stood in stark contrast to what he's done with so many of Berkshire's other bank stocks.

Mostly, he's taken a hatchet to them.

In just a sample of moves, Berkshire Hathaway dumped what was left of its stake in Wells Fargo (WFC) in the first quarter of 2022, and exited positions in JPMorgan Chase (JPM), Goldman Sachs (GS), PNC Financial Services (PNC) and Travelers (TRV) over the past couple of years. 

To be sure, Warren Buffett is by no means done with big bank stocks. Bank of America (BAC) is Berkshire Hathaway's second largest holding after Apple (AAPL). The nation's second largest bank by assets accounts for 10.2% of Berkshire's total portfolio value. 

Berkshire Hathaway also owns 55.2 million shares in Citigroup (C), a position that Warren Buffett initiated in the first quarter of 2022. At 0.8% of the portfolio, Citigroup is one of Berkshire Hathaway's 15 largest investments. 

Other financial sector stocks in the Berkshire Hathaway equity portfolio include American Express (AXP), Bank of New York Mellon (BK), Mastercard (MA), Visa (V) and Ally Financial (ALLY), among others.

What This All Means

The bottom line is that U.S. Bancorp stock is a long-time market laggard, and so perhaps we shouldn't be too surprised that Warren Buffett decided it was time to dramatically lighten up on the position. We'll learn more of what the world's greatest long-term investor has been up to when Berkshire Hathaway reports its third-quarter buys and sells on Monday, Nov. 14.

For now, all we can say for certain is that Berkshire Hathaway stock has been a market-beating buy this year. Operating earnings expanded 20% in the third quarter, helping to bolster BRK.B's case as one of the best stocks to buy for a bear market. 

It's also fair to assume that this isn't good news for USB stock. If Warren Buffett's recent history with big banks stocks offers any sort of guide, Berkshire Hathaway might be putting even more USB shares on the market soon.

Fractional shares, increasingly available at online brokers including Schwab, Fidelity and Robinhood, allow you to buy a portion of a stock you might not otherwise be able to afford. You can even put together a portfolio of stock snippets, giving you a diversified ownership stake in the best of corporate America, even if you're just starting out and your budget is limited.

Say you had $1,000 to invest and wanted to buy stock in NVR (NVR), a homebuilder recently rated Strong Buy by investment research firm CFRA. You'd be out of luck, considering the shares recently traded for about $4,200 a pop. But at Schwab, for example, you'd be able to buy what the company calls a Stock Slice – a single slice or up to 30 slices at a time of any S&P 500 stock for as little as $5 per slice, commission-free. With Fidelity's Stocks by the Slice program, you can access more than 7,000 U.S. stocks and exchange-traded funds (ETFs) for as little as $1.

You can also trade fractional shares at Robinhood and InteractiveBrokers, each with programs starting at $1. Eligible stocks and ETFs at Robinhood trade for more than $1 per share and have a market value of more than $25 million. InteractiveBrokers allows trading in U.S. and European stocks and ETFs. Vanguard is testing fractional trading of Vanguard ETFs for launch later this year. The rules and eligible investments for fractional share-buying differ by broker, so be sure to compare options.

Investing by dollar amount rather than by number of shares makes it easy to dollar cost average – a strategy of investing a set amount at regular intervals which ensures that you buy more shares (or a bigger fraction of a share) when prices are low than when they are high. The process also helps to take the emotion out of investing.

You'll receive dividends on a pro-rated basis, but as a partial shareowner, you typically have no voting rights. And although you can sell anytime you want, you likely won't be able to transfer fractional shares to a new brokerage.

In the latest Kiplinger's Personal Finance Magazine, our editors offer advice on how to spend, save and invest $1,000. Get other smart tips:

• Add small-caps to your portfolio
• Open an account with a low-cost roboadviser
• Expand career options with online courses
• Lend money to a good cause

Which investments you hold matters (and in what proportions), but so, too, does where you hold them, whether it's in a tax-advantaged account or a taxable one. A recent lawsuit against Vanguard Group reveals how important such a decision can be.

Earlier this year, three investors sued Vanguard for negligence and breach of fiduciary duty after the investment company's target-date funds made a substantial capital gains distribution in late 2021, generating an unexpected tax bill for the plaintiffs (and other Vanguard investors). (Mutual funds are required to pass on any realized net gains to fund shareholders at least once a year.) But if the investors had held those mutual fund shares in tax-sheltered accounts instead of in taxable ones, the unwelcome tax bill could have been avoided.

Just as taxable and tax-advantaged investment accounts get different tax treatment, so do certain types of investment income. The strategy of divvying up your assets into certain types of accounts to lower your tax bill is called asset location. The general advice is to hold less-tax-efficient investments in tax-sheltered or tax-free accounts, such as an IRA, an employer-sponsored 401(k) or a Roth version of either, and to put tax-efficient assets in a taxable account.

Of course, much may depend on how much money you have, your time frame and cash needs, and whether you're a buy-and-hold investor or an active trader, among other things. Tax considerations shouldn't drive every decision, says Boston, Massachusetts, certified financial planner Jay Karamourtopoulus, but ultimately, "a well thought out asset location plan can reap many benefits and should be addressed."

Below, we tackle the strategy with a long-term view and break down which investment assets are best, generally speaking, for tax-deferred accounts, tax-free ones and, of course, taxable accounts. Tax rules guide the advice, which we'll get into in each section.

Tax-Deferred Accounts

In a tax-deferred account, such as a traditional IRA or 401(k), you sock away money pretax and it grows tax-free. You'll pay income tax on the money only when you withdraw it (as long as you’re at least 59½ years old; otherwise, penalties usually apply).

Because all taxes are deferred until your retirement years, including any realized gains from the sale of stock shares, bond income or mutual fund capital gains distributions, more of your money works for you, compounding over time. It's a key reason Los Angeles certified financial planner John C. Pak says, "Having all your money in tax-deferred or tax-free retirement accounts is the best asset location."

So, for example, capital gains distributions from mutual funds won't trigger a taxable event in a tax-deferred account. That's why mutual funds make sense for these accounts, especially actively managed strategies with a history of large capital gains distributions or high turnover (a measure of how often the underlying assets in a specific fund are bought and sold).

Bond income is taxed as ordinary income, so income-oriented taxable bond mutual funds, including closed-end funds, are best held in tax-sheltered accounts as well. Interest rates are on the rise, says Shaun Williams, a Denver-based certified financial planner, and that will boost payouts.

Shares in a real estate investment trust (REIT) work well in a tax-deferred account; the majority of REIT dividends are taxed as ordinary income. You should park alternative funds here, too, because they tend to generate a lot of capital gains distributions.

Finally, the tax treatments vary for the types of assets held in commodity funds, which can get complicated. This makes them prime candidates for a tax-deferred account. That includes funds that are free of Schedule K-1 forms. (A K-1 form is an annual form issued by the IRS for an investment in a partnership, which is the structure for some commodity funds.) Even outside the partnership format, "These new K-1-free commodities investments convert capital gains into ordinary income and don't allow an investor to offset gains with losses," says Williams.

Taxable Accounts

You've already paid income tax on the money you deposit in taxable accounts, so you only owe taxes on the profits you pocket. But taxable accounts offer some flexibility that tax-advantaged accounts don't. You can offset realized capital gains with realized losses with a strategy called tax-loss harvesting. And inherited assets in a taxable account get a step-up in cost basis to the value on the day of the original owner's death. So when the inevitable happens and you die, says New York City-based certified financial planner Gary Schatsky, "any gains disappear for your heirs."

If you're a buy-and-hold investor, stocks work well in taxable accounts. Any gains on stocks (or other assets in taxable accounts, for that matter) held for more than one year get a preferential tax rate of 0%, 15% or 20%, depending on your taxable income and filing status. Short-term gains – profits on assets you've held for one year or less – are taxed at ordinary-income rates. (That's why active stock traders should consider limiting their taxable activity to tax-sheltered accounts. More on that below.)

The payouts from most dividend stocks, particularly large dividend payers, get taxed at favorable 0%, 15% or 20% rates, too, depending on your income, which makes them sensible holdings, tax-wise, in a taxable account.

Exchange-traded funds, whether they hold bonds or stocks, are also ripe for taxable accounts. Many are index funds, which tend to generate less in capital gains distributions compared with actively managed mutual funds. But even active ETFs tend to be more tax-efficient than mutual funds because of the way ETFs are structured.

Because interest payments from municipal bonds and muni bond funds are often exempt from federal taxes, and in some cases state and local levies, too, park them in taxable accounts.

Finally, foreign stocks, even in a mutual fund or ETF, are best in taxable accounts. Most pay qualified dividends, which get preferential tax treatment, and there’s a credit for foreign taxes paid, says Elizabeth Buffardi, an Oak Brook, Illinois, certified financial planner, "which acts in most cases as a credit against the tax you owe the federal government."

Tax-Free Accounts

Roth IRAs and Roth 401(k)s hold post-tax money, so you don't get a tax break on contributions. But your money accumulates tax-free, and all withdrawals are tax-free, too, as long as you take them after age 59½ and the account has been open for at least five years.

That makes aggressive investors – active traders with big short-term gains, which are taxed as ordinary income – and aggressive investments best for Roth accounts. That includes growth stocks (or funds that invest in them) or stocks in high-volatility asset classes, such as emerging-markets and small-company stocks.

REITs and dividend-paying stocks, are good for Roth accounts, too. Dividend stocks get preferential tax treatment in a taxable account, but in tax-free accounts, "you avoid the tax altogether," says Kevin Cheeks, a San Francisco–based certified financial planner.

If you are furious –or just frustrated –with the inflation readings, the price of fuel and the daily trading drama on Wall Street, remember that we have seen this trouble before, survived and recovered.

Surely you know the proverb that bad news can be good news for financial markets. If the next recession is not yet official, there are signs it is gathering. But some consequences of a standard economic downturn work to the benefit of fixed-income investors and are tolerable for stock and fund holders who diversify and pursue high dividends. There is no cause to freak out.

Let's start with bonds. It is generally too late to sell and quite likely worth selective buying. Since the 10-year Treasury yield topped at 3.48% on June 13, it has dropped to roughly 3%, a bond-price rally that is allaying the year-to-date losses in popular funds.

BNY Mellon Municipal bond Infrastructure Fund (DMB, $13), a closed-end fund and a longtime recommendation of Kiplinger's Investing for Income, bottomed on May 23, down 24% for the year. The fund is now off less than 10% for 2022 as its deep discount to net asset value has reverted to a premium. The 5% yield should be the equivalent of 7% or more if you are in a high tax bracket. The duration is moderate, and most of its bonds are investment grade. (Returns and other data are as of July 8; investments I like are in bold.)

A Fork in the Road for Bond Yields

Remember that everything you see and hear about the Federal Reserve's interest-rate-raising campaign is tethered to short-term rates. The goal is to fight inflation at the cost of an economic slowdown, which means long-term bond yields, including mortgage rates, are intended to level off or fall. Indeed, long Treasury and investment-grade corporate rates could fall harder once the bond world sees a two-month easing of the inflation readings, which would extend this bond rally.

"The antidote to all this pessimism is a change in the inflation outlook," says Ken Leech, chief investment officer for Western Asset Management. Leech loves that gasoline futures are plunging, as are the prices of fertilizer, lumber and more. The Bloomberg Commodity Index is down 15% from early June. That bolsters the dollar, which in turn is disinflationary. The Invesco Dollar-Bullish ETF (UUP, $29) is up 11.5% for 2022.

Turning to stocks, the Dow industrials and the S&P 500 will stay susceptible to news-driven 2% daily swings. But there is a convincing argument for dividend-payers. So far this year, for example, the surprise ace among all blue-chip mutual funds is Federated Hermes Strategic Value Dividend (SVAAX), with a 5% gain. (You can buy the fund with no sales charge at major online brokerage platforms.) Lest you confuse this with an oil fund, its 16.5% energy weighting trails stakes in healthcare and utilities. Returns lag sis-boom-bah bull markets, but the fund is rapidly closing its long-term total-return gap with the struggling Vanguard and Franklin dividend-growth funds. Plus, the Federated fund yields 3.9%.

I know the public is edgy that inflation will stay high. But what seems like bad economic news can be a balm for your portfolio. The rest of 2022 will be better than the first half for many investments, even if recession clouds close in sooner rather than later.

It was a bit late to the party, but Vanguard Global ESG Select Stock (VEIGX) is having a blast so far. The fund launched in 2019—well into the ESG investing trend, which places as much value on environmental, social and corporate governance criteria as on financial measures when selecting stocks. Over the past three years, managers Mark Mandel and Yolanda Courtines, of subadvisory firm Wellington Management, have delivered a 10.1% annualized return. That beat the fund’s bogey, the FTSE All-World index, as well as the typical global large-company stock fund with an ESG focus.

Mandel and Courtines pick profitable, well-run firms around the globe that are leaders in integrating ESG practices into their businesses. They focus on companies that have a market value of more than $20 billion and score well on stewardship, says Mandel. That means the firm’s board members are steering the company toward a future that rewards all stakeholders, including employees, shareholders and the planet.

Take farm equipment giant Deere (DE), one of the fund’s 37 holdings. Its See & Spray technology uses computer vision and machine learning to spray pesticides only on weeds in corn, soybean and cotton fields. This decreases the environmental impact of pesticides and increases a farmer’s crop yield at the same time. The company has a loyal band of employees, too, a vibe Mandel and Courtines picked up on during a recent tour of a Deere plant. And they say new board members with more tech expertise may help push the company forward.

Mandel and Courtines like to get involved with the companies they own shares in, though some are far flung. Half of the fund’s assets are invested in foreign stocks, including Hong Kong–based insurance behemoth AIA Group and Swiss health care company Novartis. Some companies resist engaging with the managers at first but come around eventually. For instance, Colgate-Palmolive (CL) executives, says Courtines, are now open to suggestions about which ESG metrics the firm should focus on. “We set a high bar and give companies the opportunity to be proactive” on setting ESG targets, she says. Otherwise, “we start to look elsewhere.”

Mass shootings in the U.S. have become a quotidian part of American life. Just as the public was struggling to understand the May rampage at a Uvalde, Texas, elementary school that left 19 students and two teachers dead, the carnage of a July Fourth shooting in Highland Park, Illinois, has shocked the country yet again.

If it feels like there are more firearm deaths and injuries in the news, it is because there really are. Add in suicides, accidents and other homicides, and deaths from firearms have more than tripled since 2014. Firearms are now the leading cause of death among U.S. children and teens age 1 to 19, overtaking automobile crashes and cancer.

This naturally has sparked a national conversation about how to solve the problem, with suggested solutions including anything from gun control to better mental-health resources. Some are trying to distance themselves from guns in any way imaginable – even in their own portfolios.

Divesting from firearms would seem easy – just sell any gun stocks you might own. But where things get complicated is when a portfolio is chock full of mutual funds or exchange-traded funds that hold dozens, hundreds or thousands of companies, making it difficult to determine which funds will keep you invested in guns.

Do You Hold Gun Stocks? You Might Be Surprised.

Discovering whether you own a mutual fund or exchange-traded fund (ETF) that invests is gun stocks is probably easier than you think.

The website Gun-Free Funds, for one, allows users to search funds by name, ticker or manager, and it will list all gun-related companies it holds. It also grades funds on an A-to-F scale; the more gun manufacturers or retailers it holds, the worse its grade. For example, Vanguard’s S&P Mid-Cap 400 Index Fund (IVOO) earns a “D” rating for holding stocks including Olin (OLN), which owns the Winchester brand of firearms and ammunition.

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What about readers looking for a fund that is both gun-free and well-positioned for the current market?

In the Kiplinger 25 – our 25 favorite low-fee mutual funds – we recommend several that do not have exposure to gun manufacturing or retailing:

• DF Dent Midcap Growth (DFDMX)
• Parnassus Midcap (PARMX)
• Baron Emerging Markets (BEXFX)
• Brown Capital Management International Small Company (BCSVX)
• Fidelity Select Health Care (FSPHX)
• T. Rowe Price Global Technology (PRGTX)
• A number of bond funds, including Fidelity Intermediate Municipal Income (FLTMX) and TIAA-CREF Core Impact Bond (TSBRX)

Generally speaking, of course, it’s easier to avoid guns if you’re dealing with individual stocks instead of diversified funds. For instance, in the Kip Dividend 15, just one stock – Lockheed Martin (LMT) – is involved in the manufacture of controversial weapons and small arms.

Walmart (WMT) does sell some gun-related merchandise for hunters, but since a mass shooting at a Walmart in El Paso, Texas, in 2019, the company stopped selling handguns, and it hasn’t sold assault rifles since 2015. Also, customers must be 21 to buy a gun at a Walmart store and undergo a background check.

Additional tools exist to help investors parse stocks, ETFs and mutual funds for involvement in the sale or manufacture of guns. In fact, we have cataloged several tools to help investors access environmental, social and governance (ESG) ratings across many issue areas, weapons included.

Recently, direct indexing, a lesser-known investment approach, has started outpacing both ETFs and mutual funds in investor adoption. Direct indexing offers unique benefits that can’t be replicated in a traditional ETF or mutual fund structure, particularly around personalization and tax management.

Given its benefits, direct indexing is expected to continue to outpace ETF and mutual fund growth over the coming years according to a recent Cerulli report. Here’s what you need to know about this growing investment method.

What is direct indexing?

Direct indexing is an investment strategy where an investor holds individual stocks that make up an index in their own account directly, instead of using a mutual fund or ETF to track the underlying index. Similar to an index fund, the goal is to track the performance of a target benchmark index. However, when an investor holds the individual securities directly in their account, it allows for more personalization and the potential for greater tax benefits.

Direct indexing has been the core of many high-net-worth clients’ strategies for decades. It’s no surprise, given its unique benefits, particularly around taxes. Offered mostly through financial advisers, investment minimums for direct indexing are often $250,000 or more. However, no-commission trading and fractional shares have made the strategy more broadly accessible, with minimums at or below $5,000 in some cases.

A lower tax bill

With hundreds of individual stocks held in a direct indexing portfolio, there are extensive opportunities for tax loss harvesting – the practice of selling a security at a loss to offset capital gains. Even in up markets, individual stocks can have bouts of poor performance. Direct indexing portfolios can take full advantage, harvesting losses in underperforming stocks even as the market as a whole is up. This can mean 1% or more in additional after-tax returns, according to recent research from Vanguard.

A separate study looked at historical returns over the last century and found that direct indexing added 1.08% annually in after-tax returns. From 1995 to 2018, the most recent period studied, an investor using a direct indexing strategy to track the S&P 500 would have seen their $100,000 initial investment grow to about $630,000 after accounting for taxes. That’s $101,000 more than they otherwise would have had.

Note: The dark blue line in the graph represents the after-tax value of a portfolio that tracks the S&P 500 using direct indexing and employs a tax loss harvesting strategy. By comparison, the light blue line represents the after-tax value of an ETF that tracks the S&P 500.

Sources: Chaudhuri, Burnham, Lo 2020; author’s calculations.

The flexibility of direct indexing also allows for portfolios to be built around existing holdings. This becomes particularly important when a portfolio has embedded gains in concentrated positions. In such a case, an investor can diversify around existing positions while managing any potential tax impact from liquidating positions.

Pinpoint personalization

By holding securities in their own accounts, investors are free to customize portfolios as they see fit. Such customization is not possible in a fund, as each investor has exposure to the same set underlying securities as every other shareholder.

Direct indexing portfolios can tilt toward ESG factors, or exclude securities that do not align with an investor’s values. Because this can be done at the individual account level, investors don’t need to compromise on their values when building their portfolio. Additionally, holding individual stocks allows shareholders to participate directly in proxy voting, another source of control for investors.

Personalization affords another important benefit: better behavior. It’s often easier to not overreact in a down market and stick to a savings plan when your investments reflect your values.

Too much personalization, however, can cause direct index performance to deviate – positively or negatively – from the target index. Every investor has their own tolerance for risk and performance, and investors should be aware that there is a tradeoff between customization and tracking the benchmark index.

Is direct indexing right for me?

One of the main advantages of direct indexing is that it can generate additional capital losses. Capital losses are most useful when an investor has capital gains to offset from other investments. For investors with little or no outside capital gains, the tax benefits afforded are more limited.

Additionally, direct indexing has more moving parts than a portfolio that uses funds. Holding individual securities and trading them for tax loss harvesting means more transactions to account for at tax time.

For many, direct indexing will be the future of investing

Direct indexing strategies are growing faster than other investment vehicles. And for good reason, the strategy offers benefits that are difficult or impossible to replicate using a fund. Recent innovations, like fractional share trading, have lowered the barrier to entry to direct indexing portfolios.

A once rarified investment strategy is now poised for broader adoption and with it the potential to generate better outcomes for many investors.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

When you buy shares of stock, you become a partner in a business. Perhaps I'm stating the obvious, but I doubt all investors see their purchases that way. Many see stocks as horses to bet on or as scorecards that tell them how their 401(k) is doing. Because stocks represent pieces of companies, the first consideration is whether that company is worthy of your partnership.

As I told readers two years ago, I keep a wish list of about a dozen companies. I want to become a partner, but I am waiting for the market to offer me a better price – an event that may never come. Some of these shares have been on my list for decades, and in my reluctance, I have missed spectacular successes.

Johnson & Johnson (JNJ) is a good example. I have lusted after the stock for 20 years, as it has gone from $54 to $176, with a dividend that has increased from 84 cents to $4.52 a share. If you bought J&J in mid-2002, your original investment would be yielding 8.4% annually in dividends alone. (Stocks I like are in bold. Prices and other data are as of June 3.)

When the market drops sharply, I don't despair. Instead, I pull out my list to see if any of the stocks I like have moved into buying range. In other words, could I become an owner? This is a subjective decision. I'm not looking for a particular price-earnings ratio but a general sense that now is the time to pounce on the value stocks.

Such an occasion presented itself in early 2020, when the market tanked on the realization that the COVID pandemic was serious. In the five-week period ending March 15, the S&P 500 stock index dropped 30%, and I told readers that it was time to "get great companies at a reasonable price."

I cited five stocks whose shares I had picked up after they'd been hammered. All have subsequently risen. Oneok (OKE), an energy pipeline company, was the big winner, going from $27 to $67. Hermès International Société (HESAY), the French luxury-goods retailer, went from $72 to $121, and Bank of America (BAC) from $20 to $36. Salesforce (CRM), the business software firm, and Starbucks (SBUX) notched smaller gains.

All but Oneok have suffered significant declines as the S&P 500 has posted double-digit losses since the end of 2021. Hermès, for instance, peaked in November at $188. I still own Hermès and the others. I am not a market timer. No one can pick the tops and bottoms with anything close to consistency. I can't possibly tell you whether the 2022 market decline will continue or worsen or reverse, and I am severely skeptical of anyone who tries.

More than a decade ago, I asked Mark Hulbert, whose Hulbert Financial Digest tracks the performance of market-timing newsletters, to examine the returns of the 97 newsletters that had been around for at least 10 years. He found that just seven of them had beaten the broad Wilshire 5000 Index over the decade.

As the late John Bogle, founder of Vanguard, put it, "After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don't even know of anybody who knows anybody who has done it successfully and consistently."

By recommending that you keep a wish list and, when the time is ripe, act on it, all I'm saying is that at various points in their history good companies will become irresistibly inexpensive. Sure, they could fall some more, but take the opportunity to become an owner.

Below are five stocks that I’m moving from the wish list to the buy list.

Costco Wholesale (COST) stock dropped from over $600 to $416 in a month and a half this spring. It has bounced back but remains very attractive. Costco sells everything from groceries to garden supplies to tires in its 800 membership warehouses, about three-fourths of them in the U.S. Earnings keep rising impressively, year after year. High interest rates, supply-chain disruptions and the prospect of a recession are certainly concerns, but in the long run, don’t you want to be a partner with the best big-box retailer in the world?

Home Depot (HD), which operates 2,300 home-improvement stores, is a stock I have always wanted to own. Sales and earnings are expected to rise only a few percentage points in 2022 compared with last year, but the comparison is distorted because in 2021 sales exploded 29.9% with the issuance of COVID stimulus checks. Shares are down by one-fourth this year, and the P/E has dropped to just 18. The stock could go lower, but I am not going to pass up the chance to finally become an owner—especially with a dividend yield of 2.5%. (Home Depot is a member of the Kiplinger Dividend 15, the list of Kiplinger’s favorite dividend stocks.)

Illumina (ILMN) is the leader in the field of genomic sequencing, or determining the composition of DNA. For example, Illumina provides the tools to detect mutations in the COVID-19 virus and to determine where cancer has spread in the body and how to treat it. The stock has lost half its value in less than a year. Why? "Biotech investors are hard to impress," said an article in Barron's after sales rose 40% last year. Perhaps, but Illumina is on the cutting edge of health technology.

Netflix (NFLX) is the one that got away. I first bought the stock in 2003, when it was trading at less than $2 a share (adjusted for splits). After the stock quadrupled, I sold it and watched it soar. Disheartened, I never bought it back – even though it has gone through several periods of steep decline followed by strong advances. Netflix shares have dropped from about $700 in November to about $200 today, mainly on worries about competition cutting into subscriptions. What an overreaction! The stock, which carries a P/E of just 18.5 based on analysts' projected earnings for the 12 months ahead, is cheaper today than it was in 2018, even though sales have doubled and net income has quadrupled.

Public Storage (PSA) dominates the self-storage business. With a captive customer base that doesn't want to keep moving stuff around, the company faces little resistance in raising its monthly fees. Rental income at same-store facilities for the most recent quarter rose an incredible 15.7% compared with the same period last year. Public Storage is a real estate investment trust (REIT) that passes its tax liability on to shareholders, so it's best kept in a tax-deferred retirement account. Its most closely watched metric is funds from operations, the rough equivalent of earnings per share. For the three months ending March 31, FFO jumped 24.4% over the same period a year ago. As Public Storage sat on my wish list for three years, the stock doubled, but then this spring it fell more than 100 points in a few weeks.

I have other companies that are still on my wish list. You and I may differ on whether they have declined enough to be worth buying now, but at least keep a close eye on them. I have mentioned J&J already, but others are 3M (MMM), Alphabet (GOOGL), McDonald's (MCD) and Walt Disney (DIS). Better yet, make your own wish list. Carry it around on your mobile phone or on a scrap of paper in your pocket. The time will come to convert some of the names into partners.

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. Of the stocks mentioned here he owns Hermès, Oneok, Starbucks, Bank of America and Salesforce. Reach him at James_Glassman@kiplinger.com.

There have been few places to hide for investors this year. Both stocks and bonds have tumbled – since the start of 2022, the Vanguard Balanced fund, a portfolio of 60% stocks and 40% bonds, has lost 13%. Moreover, interest rates are still rising, inflation is on the march, and the stock market continues to gyrate.

Investors have no control over rising rates or slumping markets, but they can even out the movements in their portfolios and potentially boost returns by investing some of their portfolio in alternative strategies that move out of sync with both stocks and bonds.

We'll introduce three alternative strategies here: long-short funds, market-neutral funds and managed-futures funds. All are capable of generating positive returns during bleak periods for stocks and bonds; so far this year, many have.

Alternative strategies were previously available only to high-net-worth individuals, institutions or financial advisers. Today, a growing number of alternative strategies are available via mutual funds for mom-and-pop investors. Some money managers are making the case for putting 20% or more of your investments in alternative-strategy funds, depending on your age, circumstances and risk tolerance, given today's volatile markets.

All nine of the funds we profile here are run by managers who have solid records and – critically for these types of strategies – strong histories of risk management. The funds are all widely available at most brokerage firms, though some may require a transaction fee. Fund expenses tend to be high due to some unusual operating expenses for the strategies and the high skill level of the managers, many of whom come out of the rarefied hedge fund world. Returns are through May 6.

1. Long-Short Funds

Most investors hold stocks that they believe will rise in value and avoid securities they think will decline in price. But it's possible to profit from both by buying and holding the companies you admire (going long) and by betting that prices of the stocks you dislike will fall (short selling). That's the principle behind long-short investing.

"The ability to take long positions in stocks with superior return characteristics while shorting stocks with a poor outlook provides portfolio managers with more flexibility to utilize all the information they uncover during market research," says Harindra de Silva, a manager at Allspring Global Investors.

These funds typically build their long and short bets with an overall target in mind for net long exposure, or the difference between the fund's long and short positions. A fund that holds 80% of assets in long positions and 20% in short positions has a net long exposure of 60%. Depending on the manager's view of the market, the fund's net long exposure can shift up (a bullish outlook) or down (bearish). The lower the net long exposure of a fund, ostensibly, the less vulnerable it is to stock market swings.

These funds also invest with a target volatility – or beta – in mind. Beta is a measure of the volatility of a stock or portfolio in comparison to the market as a whole, which by definition has a beta of 1.0. A long-short fund manager might target a 0.5 beta as she builds her portfolio, which implies that it's half as volatile as the overall market.

Short selling stocks can dramatically reduce the volatility of a stock fund, which helps to make it a valuable portfolio diversifier, and in the hands of skilled managers it can generate handsome returns over time. For instance, the AB Select US Long/Short Portfolio (ASLAX) returned 8.5% annualized during the past five years. That lagged the return of the S&P 500 Index, but the fund was 44% less volatile than the index during that stretch.

"Investors want to stay invested all the time, but they can't take 50% drawdowns," says Dane Czaplicki, director of research for Long Short Advisors, who suggests that investors move a portion of both fixed income and equity money to a long-short strategy.

The AB Select Long/Short, managed by Kurt Feuerman and Anthony Nappo, is in some ways relatively conservative as far as long-short funds go. The fund can short market indexes and single stocks, and it will build up its cash position as a hedge during volatile periods. The fund's net long exposure has ranged between 30% and 70% historically, and at the end of March 2022 it stood at 49% – down 15 percentage points from the end of 2021. "Our goal is to capture a nice portion of market gains over time and protect capital in difficult times," says Feuerman.

Feuerman is at heart an optimist. "We're believers in the excellence of American business, the upward bias of markets over time and the benefits of compounding," he says. Backed by a team of analysts at AllianceBernstein, the fund has added to energy and financial positions this year because Feuerman reckons that elevated levels of inflation are here to stay.

Boston Partners, a pioneer in long-short mutual funds, manages four portfolios, including the Boston Partners Global Long/Short Fund (BGRSX). The fund selects investments among 10,000 stocks listed around the globe, which are first filtered by a quantitative process that helps to identify statistically cheap stocks with good businesses for the long side of the portfolio and, conversely, low-ranked securities with declining earnings trends for the short side. The fund has gained 9.7% since the start of the year, compared with a 14% decline in its benchmark, the MSCI World index, thanks mostly to successful short positions in stocks including Netflix (NFLX) and Carvana (CVNA).

London-based comanager Josh Jones says today's investing environment is analogous to the early 1970s, when a bull market memorialized by the "Nifty Fifty" growth stocks turned bearish after colliding with accelerating inflation. He says the fund's net long position was recently below 45%, compared with 70% in 2020, and short positions made up more than 50% of assets at last report. "Volatility is great for us because it creates opportunities on the long side when stocks sell off, and positions on the short side work really well," he says.

As with many dyed-in-the-wool value investors, the managers of the LS Opportunity Fund (LSOFX) scrutinize companies' balance sheets and cash-flow statements before glancing at the income statements. It's an important ingredient of risk management.

"We don’t care about the next quarter, and we don't like to lose money – our money," says comanager Kevin O'Brien, who, like his two comanagers, has invested a lot of his own money in the fund. And the approach is particularly useful for analyzing financial businesses such as banks and insurance companies, a sector specialty of LS. Financial stocks make up just over half of the fund's current net long exposure of 60%.

O'Brien thinks we're "in the early innings" of a cycle that favors value-priced shares because of higher interest rates and inflation. Unlike a number of long-short funds that are presently long on value stocks and short on growth shares, LS Opportunity holds value securities on both the long and short sides of its portfolio, which helps to tamp down volatility. The fund consistently maintains 50% to 70% net long exposure over full market cycles.

Harindra de Silva, armed with a doctorate in finance, has authored several seminal academic papers on long-short and quantitative investing. He has put theory into practice as comanager of the 361 Domestic Long/Short Equity Fund (ADMZX) and has earned solid long-term results. Central to his approach is the idea that low-volatility stocks deliver surprisingly high returns. Thus, he invariably buys long low-beta (or low-volatility) stocks and short sells high-beta (high-volatility) stocks, a strategy that should pay off well this year. "High-beta stocks in down markets tend to do really poorly, which gives us this down-market protection," he says.

De Silva's process is highly systematized. He examines 50 factors for each stock, such as quality, valuation and profitability, and then assigns weights for each factor in order to score and rank the securities. He says the fund essentially always holds a 70% net long exposure and sports a beta that's about one-half of the stock market's.

2. Market-Neutral Funds

Market-neutral funds are a long-short strategy with a twist: The funds balance long and short stock exposures in order to achieve a 0% net long exposure to the stock market. The result is a low-volatility portfolio that delivers modest returns. These types of funds generally don't move in sync with stocks or bonds, so they make nice portfolio diversifiers.

Technically, Otter Creek Long/Short Opportunity (OTCRX) is a long-short fund. But Morningstar and other fund analysts place Otter Creek in the market-neutral camp because it shares similar characteristics with funds in that category: a low net long exposure (currently less than 10%), very low volatility and a history of incurring small losses in periods when markets are unfriendly. Comanager Tyler Walling, based in Palm Beach Gardens, Florida, likes to say that you "win by not losing."

Walling's "opportunistic" strategy is quite unusual. He studies the entire capital structure of companies and often chooses to invest in their bonds (including convertibles) rather than in their stocks if he believes the debt offers a better risk-adjusted return.

He short sells stocks he believes will decline, but also frequently expresses a negative view on securities by buying put options (a contract that gives you the right to sell a stock at a set price by a certain date) because he says it is a lower-risk way to profit from declining stock prices. Walling, who has two comanagers, says the fund can be used as an "equity-lite" alternative or to replace a portion of a fixed-income portfolio. Otter Creek returned a very respectable 8.0% annualized over the past three years, with less than half the volatility of the U.S. stock market.

The Vanguard Market Neutral Fund (VMNFX) is on a roll. Over the past 12 months, thanks to targeting a 0% net exposure to the stock market, the fund returned 24%, beating the S&P 500 by 24 percentage points – with less than half the volatility of the benchmark.

Matt Jiannino, Vanguard's head of quantitative equity product management, attributes the outsize gains to nailing some dramatic shifts in the market, such as the flight out of "high-flying growth stocks," he says, which the fund shorted. The fund also invested in stocks selling at reasonable prices with sound fundamentals (which were then "out of fashion," Jiannino says) and consistent earnings growth.

Of course, it's not as easy as it sounds. The fund's computer models crunch the numbers on innumerable company characteristics and issue a report every morning. The fund's long and short portfolios mirror each other, with 250 to 275 stocks on each side. And, unlike its peer funds, Market Neutral balances the short and long exposure for each market sector, too.

Although you shouldn't expect Market Neutral to keep posting huge gains, its low-volatility profile makes it an appealing addition to a portfolio. "The key to investing is staying long term and riding out the ups and downs," says Jiannino.

As with long-short strategies, market-neutral funds come in many shapes and forms. The Victory Market Neutral Income Fund (CBHAX) operates an unusual low-risk, modest-return strategy. It generates most of its return by harvesting dividends from four proprietary indexes of high-yielding stocks around the globe. To offset the long positions, the managers hold short positions in stock futures – contracts that allow the holder to buy or sell an asset at a set price on a future date – on major indexes, such as the S&P 500.

The fund currently yields nearly 3%, and it has returned 3.6% annualized over the past five years, with low volatility that's akin to an index of investment-grade bonds during "normal" times.

Scott Kefer, a comanager, says that a typical investor should consider carving out some of his fixed-income allocation to invest in the strategy because it isn't subject to interest rate risk and doesn’t track movements of either bonds or stocks. "There is always a place in a portfolio for a diversified yield stream," he says.

3. Managed-Futures Funds

Also called systematic trend funds, managed-futures strategies use powerful computer models to profit from market moves, both up and down. The funds invest in futures contracts for a variety of assets, including commodities, fixed income (interest rates and bonds), currencies and stocks. Because the contracts allow holders to bet on prices to rise or fall, managed-futures funds can make money in good and bad markets. But they tend to perform best when investors need them the most – during severe stock market downturns.

Over extended periods, these kinds of funds can generate decent long-term returns, too. The typical systematic trend fund returned 9.3% annualized over the past three years. Add in the lower volatility that's typical of these alternative-strategy funds, and it's clear that managed futures can serve as an excellent diversifier in a multi-asset portfolio.

This year, the AlphaSimplex Managed Futures Strategy Fund (AMFAX) has provided a textbook example of how managed-futures funds perform in rocky markets: It has returned 34.3% amid bearish stock and bond markets so far in 2022 (and 17.4% annualized over the past three years).

Comanager Katy Kaminski says the environment of stress, dislocation and volatility in numerous markets around the globe is close to ideal for the strategy. She is one of several PhD holders involved in managing the fund. Their multiple computer models picked up several clear trends. Lately, the fund has been long on commodities and short on nearly everything else, from two-year Treasuries to stocks to the Japanese yen against the dollar. Given the one-way move (up) of interest rates this year, shorting bonds has been particularly lucrative for the fund.

"Most people are uncomfortable shorting bonds, and most regular investors are long-only in bonds," she says.

Drawing on vast company resources, the PIMCO TRENDS Managed Futures Strategy Fund (PQTAX) invests in 150 different asset classes around the globe. "We want to have as many different things going on in the portfolio as possible for diversification," says comanager Matt Dorsten.

This year, based on strong signals from their models stemming from factors such as high inflation and the war in Ukraine, PQTAX has been long on commodities and short on interest rates and sovereign debt.

"Trend following does well in crisis events because assets become correlated, creating strong, concentrated trends," he says. The models also take advantage of investor behavioral anomalies, such as selling winners too early and, conversely, holding losers too long.

To manage risk, the managers scale positions according to asset volatility. For example, if wheat futures are particularly jumpy, they will hold a relatively small position. Over the past three years, the PIMCO TRENDS Managed Futures Strategy Fund has been half as volatile as the S&P 500, but the fund beat the bogey, with a 14.6% annualized return.

With this year's rough ride, you don't need reminding that stocks are volatile. Their prices bounce up and down, sometimes in extreme ways. The U.S. market as a whole has produced average annual returns of about 10% over the past century, but it doesn't go up 10% every year. In roughly one out of four years, it declines – sometimes a lot.

If stocks returned the same amount every year, then, like bonds, they would yield gains of only a few percentage points. High returns are the reward you get for enduring the fear (often the sheer terror) of watching pieces of your nest egg disappear into thin air.

People like me tell you to hold on. History shows that markets bounce back. But enduring sickening declines isn't easy.

The best way to smooth the ride is through diversification. I'm not talking here about portfolio diversification – the allocation of your assets to stocks, bonds, cash and maybe more. Portfolio diversification is a necessity but a subject for another day. The topic today is diversification in the part of your portfolio that consists of stocks and stock funds.

The value of diversification seems awfully obvious. Morningstar data in June 2021 showed that about 39% of all U.S. stocks had ever suffered three-month losses of 50% or more, but fewer than 1% of diversified stock funds had incurred losses that severe.

Consider the sad tale of Enron, once a high-flying Houston energy company. When it collapsed in 2001, thousands of investors, including Enron employees whose retirement plans were heavily invested in the stock, suffered huge losses. Enron was the seventh-largest company in the Fortune 500, but in 2000 its market capitalization (price times shares outstanding) represented less than 1% of the value of the S&P 500 Index. If you had put $10,000 in an S&P 500 Index fund and all the other stocks maintained their prices, then Enron's trip to zero would have cost you just $100.

Enron's earnings per share had climbed from 9 cents in 1989 to $1.47 in 2000, rising in nearly every year. But the company was cooking its books. "Could the average investor have seen through [Enron's] story and determined that the company was in trouble? Absolutely not," I wrote 20 years ago. The smartest analysts missed it. The only protection was to diversify.

How Much Stock Diversification is Enough?

How much diversification do you need? Certainly, owning an S&P 500 fund such as the Fidelity 500 Index (FXAIX), which holds about 500 different companies and is weighted by market capitalization, will do the trick. Or, for super-diversification, there's the Vanguard Total Stock Market (VTI), an exchange-traded fund that owns 4,119 separate stocks. (Funds and stocks I like are in bold; prices and other data are as of May 6, unless noted otherwise.)

But what if you want to construct your own portfolio of individual stocks? A debate rages among economists over how many securities you need to get the benefits of diversification. More precisely, it's a debate over how much adding extra stocks reduces your overall risk.

In a 1968 journal article, two University of Washington researchers, John Evans and Stephen Archer, said the minimum stock portfolio size should be 10. Another study conducted around the same time showed that standard deviation, a popular measure of volatility, was 49.2% with a portfolio of just one stock and 23.9% with 10. But after that, the study found, risk declines slowly – to 20.2% with a 50-stock portfolio, for example.

In 1987, finance professor Meir Statman disagreed. In a much-cited paper that used a different analytical method, he concluded that investors need "no less than 30 stocks." Another group of economists, led by Harvard's John Campbell, determined that you need 50.

In all these cases, however, the number of stocks is only part of a diversification strategy. You have to diversify by sector, too. If all 30 of your stocks were in energy, for example, your annual average return over the past 10 years would have been a miserable 5.6% (the performance of the S&P Energy Sector index), compared with an annualized 13.9% for the S&P 500 as a whole.

You also need to keep your portfolio as close to equally weighted as you can. You are not diversified if you own 30 stocks, with 29 of them each representing 1% of total assets and one of them representing 71%. The best way to stay balanced is to reallocate your holdings at the end of every year or six months. Sell shares of stocks that have grown sharply in value and use the proceeds to buy more shares of the laggards. Be aware that by selling profitable shares you will incur taxes, so try to use offsetting losses or restrict your reallocating to a tax-deferred account, such as an IRA.

The way I solve the portfolio-size conundrum is to own eight or nine individual stocks as well as diversified funds, such as the SPDR Dow Jones Industrial Average (DIA), an exchange-traded fund nicknamed Diamonds, which holds the 30 stocks in the Dow. The value of the assets in the stock and fund portions of my portfolio are roughly equal. If I owned only the stocks, I wouldn’t get enough diversification protection.

Do you need international stocks or small-company stocks as well as large-caps to get true diversification? I don't think so. Certainly, invest in European mid-cap stocks, for example, if you think such a sector is undervalued, but if the objective is achieving market-level returns (or maybe a tad higher) while suppressing risk, the best strategy is to stick with U.S. large caps.

The Downside of Stock Diversification

But diversification has costs as well. It dilutes strong convictions. Andrew Carnegie, who in his day was the richest man in the world, disdained diversification. He said in 1885, "The concerns which fail are those which have scattered their capital, which means that they have scattered their brains also. 'Don’t put all your eggs in one basket' is all wrong. I tell you, 'Put all your eggs in one basket, and then watch that basket.'"

Warren Buffett, the CEO of the holding company Berkshire Hathaway (BRK.B), agrees. He says that diversification "makes little sense if you know what you're doing." The Berkshire Hathaway equity portfolio at the end of 2021 held 40 listed stocks, but 41% of those assets were in a single stock – Apple (AAPL) – and another 25% were represented by Bank of America (BAC), American Express (AXP) and Chevron (CVX). "I would say for anyone … who really knows the businesses they have gone into, six [stocks] is plenty," Buffett says, adding that "very few people have gotten rich on their seventh-best idea."

Most investors, however, don't have the time or the inclination to "really know" those businesses. Instead, they are saving for a more comfortable life, retirement or security for their children, not to strike it rich. Such investors are happy – or should be happy – with an annual average return of 10%, which will quadruple their investment in about 15 years.

In addition to owning broad index funds, you can get strong diversification through low-cost managed funds. Dodge & Cox Stock (DODGX), for example, has an expense ratio of 0.51% and an annual average return of 14.0% over the past 10 years. DODGX – a member of the Kip 25, our favorite low-fee mutual funds – has a 74-stock portfolio, with the top 10 holdings representing only 32% of total assets, and a good mix by sector. Turnover is only 10% annually. The fund has held some stocks, including Wells Fargo (WFC) and FedEx (FDX), for more than 30 years.

Owning a single fund with a great track record like the Dodge & Cox fund – or Fidelity Contrafund (FCNTX), which has a much larger portfolio but is more top-heavy, or even the Parnassus Core Equity Investor (PRBLX) fund, with only 40 stocks but a broad combination of sectors – is really all you need to achieve solid diversification.

James K. Glassman chairs Glassman Advisory, A public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns SPDR Dow Jones Industrial Avg. ETF.

As Robert Burns wrote in his poem To a Mouse, "The best laid schemes o' Mice an' Men" often go awry.

Last year, we added Vanguard FTSE Europe ETF (VGK) to the Kiplinger ETF 20, our list of the best cheap exchange-traded funds (ETFs) you can buy, because of expectations for an economic recovery.

We were right, for a while. Then Russia invaded Ukraine in February, and that changed everything. European stocks plummeted – in some markets falling to bear-market territory – before recovering some in March.

Vanguard FTSE Europe ETF, which tracks an index of foreign stocks in developed European countries, is down 8.9% so far in 2022, essentially wiping out any upside recorded in prior months. As a result, over the past 12 months the ETF's return is down a bit with a 1.6% loss. But that’s better than the 3.0% average decline in the typical Europe stock fund and the MSCI EAFE, an index of stocks in developed foreign countries. (All returns are through April 8.)

Ireland, Sweden and the Netherlands were a drag, with declines of 13% or more over the past 12 months, while Norway, Denmark and Switzerland stayed above water, with better than 11% returns for the period. The ETF's top countries are the U.K., Switzerland, France and Germany.

Now the outlook for economic prosperity in Europe has dimmed. Higher commodity prices, especially for oil, will hamper European growth, given the region's dependence on Russian energy, says Shaan Raithatha, a U.K.–based economist at Vanguard. The eurozone gets 40% of its natural gas and 25% of its oil from Russia, more than the U.S. and the U.K.

"Persistently higher energy prices affect growth," he says, because consumers are left with less money to spend on other things. “They also weigh on profit margins, leaving businesses less to reinvest." Crude oil prices have climbed more than 30% since the start of 2022.

Raithatha has trimmed his expectations for European economic growth in 2022, albeit by one percentage point, to around 3%. And he expects an average of 8% inflation in 2022 in the developed countries of Europe.

We're watching this fund closely. In its favor, however, is the fund's underlying index, the FTSE Developed Europe All Cap, which includes stocks of all sizes in 16 developed European markets. In short, the ETF offers broad exposure to the region. Another plus: The fund's 0.08% expense ratio is "paper thin," says Morningstar analyst Ryan Jackson.

Warren Buffett dipped into Berkshire Hathaway's (BRK.B, $344.71) massive cash pile for the third time in the past month, initiating a commanding position in HP (HPQ, $34.91).

And while some of the stocks Berkshire has been buying and selling recently might leave folks scratching their heads, this big new bet on a PC and printer maker looks very much like a classic Buffett value play.

Berkshire late Wednesday disclosed a stake of 121 million shares in HP, worth $4.2 billion as of that day's closing price. HPQ stock predictably popped on the news, adding as much as 18% at one point soon after Thursday's opening bell.

Fair enough. There's nothing quite like a major vote of confidence from the world's greatest long-term investor. With 11.4% of HP's shares outstanding, Berkshire Hathaway is now the company's largest stockholder, and by a good margin.

Asset management giant Vanguard, which specializes in passive investment products and therefore must own loads of stocks by default, comes in second with 10.6%, or 111.5 million shares.

Suffice to say Buffett made a statement with this move.

Warren Buffett's Shopping Spree Continues With HP

Berkshire's chairman and CEO has for years bemoaned the fact that rising asset prices have made it tough to find attractive acquisition targets or bargain stocks. The S&P 500 generated a total return of nearly 29% last year, and yet Buffett's holding company was a net seller of equities in all four quarters of 2021.

The result is that Berkshire's cash hoard has nearly doubled over the past five years. The company ended 2021 with $146.7 billion in cash, equivalents and short-term investments. In 2016, that figure stood at $74.9 billion.

But the market's rough start to 2022 has apparently changed Buffett's calculus – and prompted him to go shopping.

In early March, Berkshire disclosed a series of investments in Occidental Petroleum (OXY). BRK.B is now the oil and gas firm's largest shareholder, with 14.6% of OXY's shares outstanding. A couple of weeks later, Berkshire struck a deal to acquire insurer Alleghany (Y) for $11.6 billion.

The HPQ investment isn't in the same league as those other deployments of cash. But it does have the kind of attributes Buffett has exploited for long-term outperformance many times in the past.

Why Buffett Scooped Up HPQ

Buffett's Berkshire Hathaway portfolio comprises scores of stocks, but it's actually a highly concentrated one. Apple (AAPL) alone accounts for 46% of the portfolio's total value. Indeed, the top four holdings – AAPL, Bank of America (BAC), American Express (AXP) and Coca-Cola (KO) – come to 74% of Berkshire's equity holdings.

Then there's HPQ. At just 1.2% of Berkshire's portfolio, the position, while material, isn't going to make too much of an immediate impact.

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Let compounding work its magic, however, and HPQ could be a savvy value play for the long haul.

For one thing, HPQ generates a steady and ample stream of free cash flow (FCF) – the cash left after expenses, capital expenditures and financial commitments have been met – or an average of nearly $4 billion a year over the past five years.

Industry analysts expect that FCF number to increase and – most importantly – to flow into investors' pockets.

"We think HPQ is on pace to generate annual FCF of at least $4.5 billion, with all being returned to shareholders," writes CFRA Research analyst Angelo Zino, who rates shares at Hold.

Free cash flow supports dividends, and it's no secret Buffett adores dividends. HPQ, for its part, has been not only a generous dividend payer, but a dividend grower. The company has increased its payout annually for 13 years. The most recent hike came in November – a 29% increase in the quarterly disbursement to 25 cents per share.

Not Exactly a High Growth Play …

True, the market for PCs and printers is hardly overflowing with growth prospects. But HPQ has a solid track record of slow but steady gains on the top line. Wall Street analysts see this incremental revenue growth continuing for years, all helped by recent strategic acquisitions.

The latest such deal came in March when HP agreed to acquire Poly – which combines the old Plantronics and Polycom – for $3.3 billion. The deal bolsters HPQ's offerings in headsets and cameras, as well as the video conferencing and collaboration software that goes with such gear. It's essentially a bet on permanent changes to work in the post-pandemic era.

"HP and Poly expect to deliver a complete ecosystem of devices, software and digital services to create premium workplace experiences and productivity enhancements in the age of hybrid and work-from-anywhere," writes Argus Research analyst Jim Kelleher (Buy). "In this new normal, HPQ appears well positioned with its strong personal system (PC) and printing franchises."

… But Solid Margins, Cheap Stock

In addition to synergistic acquisitions and slow-but-steady revenue growth, HPQ is reliably profitable. Buffett can pretty much count on the company delivering 20% gross margins and 10% operating margins.

And then there's HPQ's valuation, which Buffett appears to have found irresistible. Before shares jumped on the Berkshire news, HPQ traded at just 8.1 times analysts' 2022 earnings per share (EPS) estimate. That's despite the Street's forecast for average annual EPS growth of 27% over the next three to five years.

Heck, according to data from Refinitiv Stock Reports Plus, HPQ stock was trading at a discount of 16.5% to its own five-year average on an expected earnings basis.

In a word, it was cheap.

Lastly, Buffett famously places a premium on experienced management. CEO Enrique Lores, who has served the company in a myriad of roles for three decades, appears to ably check that box.

The Bottom Line

Buffett snatched up a boring but dependable cash machine at a bargain price.

Retail investors tempted to copy the move might want to wait for a pullback, however. Price is what you pay; value is what you get, as Buffett likes to say. Sure, HPQ could still be a bargain at current levels, but it's sure not the same bargain that Berkshire just caught.

We've constructed three model portfolios using only funds from the Kiplinger 25, a list of our favorite no-load mutual funds. These plans are designed for investors with different goals, time horizons and levels of risk tolerance.

Use the model portfolios below as a starting point for your own portfolio. Tweak where necessary. Beef up your stocks if you want to be more aggressive, or increase the bond portion of your portfolio if you're risk-averse.

Kiplinger 25 model portfolios

1. Aggressive portfolio

Time horizon: 11 years or more

Strategy: Invest 80% of assets in stocks and add a stable, core bond fund for the remaining 20%.

Dodge & Cox Income (DODIX): 20%

Dodge & Cox Stock (DODGX): 20%

Primecap Odyssey Growth (POGRX): 20%

Fidelity International Growth (FIGFX): 10%

Marsico Midcap Growth Focus (MXXIX): 10%

T. Rowe Price Small-Cap Value (PRSVX): 10%

Baron Emerging Markets (BEXFX): 5%

Brown Capital Management International Small Company (BCSVX): 5%

2. Moderate portfolio

Time horizon: Six to 10 years

Strategy: Hold 70% in stocks and 30% in bonds for a more temperate mix.

T. Rowe Price Dividend Growth (PRDGX): 20%

Dodge & Cox Income (DODIX): 15%

Dodge & Cox Stock (DODGX): 15%

Fidelity Strategic Income (FADMX): 15%

Fidelity International Growth (FIGFX): 12.5%

Janus Henderson Global Equity Income (HFQTX): 12.5%

Vanguard Strategic Equity (VSEQX): 5%

T. Rowe Price Small-Cap Value (PRSVX): 5%

3. Conservative portfolio

Time horizon: Five years or less

Strategy: A steadier blend of 70% bonds and 30% stocks geared primarily for income.

Dodge & Cox Income (DODIX): 25%

T. Rowe Price Dividend Growth (PRDGX): 15%

Vanguard Equity Income (VEIPX): 15%

Vanguard Short-Term Investment-Grade (VFSTX): 15%

Fidelity Strategic Income (FADMX): 10%

T. Rowe Price Floating Rate (PRFRX): 5%

Vanguard Emerging Markets Bond (VEMBX): 5%

Vanguard High-Yield Corporate (VWEHX): 5%

Vanguard Wellington (VWELX): 5%

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Interest rates are rising and stock prices are falling, so investors naturally start thinking about bonds. But be careful.

Peter Lynch, the manager of Fidelity Magellan fund during its spectacular run in the 1980s, once said, "Gentlemen who prefer bonds don't know what they are missing."

Generally, I agree. Dow 36,000, the book I coauthored, made the case that, because history shows that stocks and bonds are equally risky over the long term and that stocks return an average of four to five percentage points more a year, the obvious choice is stocks.

But there are reasons to own bonds. First, in the short term, bonds fluctuate much less than stocks, and you may need a reliable investment because you have a large outlay coming up – a college tuition bill or a down payment on a house, for example.

Second, bonds provide ballast for a portfolio. According to research by Russell Investments, since 1997 the correlation between stock and bond returns has been mainly negative. In other words, when one goes up, the other tends to go down, and vice versa. As a result, you get a smoother ride. Finally, bonds supply reliable income – though recently not much.

Over the past decade, bonds have been especially unproductive investments. Since 2012, the annual yield on a Treasury bond that matures in 10 years has averaged just 2% per calendar year and has never exceeded 3%.

The Vanguard Intermediate Bond Index Admiral (VBILX), a popular mutual fund that owns both government and corporate bonds and charges expenses of just 0.07%, has returned an annual average of just 3.1% over the past 10 years, including interest payments and gains and losses from selling assets. (Nonetheless, I'm a fan of this fund for the long term.)

Lately, rates have perked up. Moody's Seasoned Aaa Corporate Bond yield for the safest debt jumped from 2.5% on Dec. 3 to 3.3% on March 3. That's still only about half the average of the past 40 years.

What Are Bonds?

A bond is an IOU, a promise by a business or government to repay an investor for a loan – typically on a specific date (maturity) and at a specific interest rate (coupon, or yield).

Bonds are actively traded, so a 10-year, $10,000 bond issued with a coupon of 3% might trade a few years later at $7,000. Why? First, the borrower might get into financial trouble, and investors doubt they will be repaid. This kind of credit risk applies mainly to corporations or state, local or foreign governments – not, so far, to the U.S. Treasury. Second, interest rates may rise after you buy your bond, so new, similar bonds are issued at higher coupons. Higher rates make your old bond less attractive, so its price on the market falls.

If you hold your bond to maturity, the lower price in the interim won't matter; you'll get the bond's full face value when it comes due. But if you have to sell sooner, you'll take a loss.

Bonds present one other kind of risk: Inflation diminishes the value of the dollar, so that even when you get your $10,000 at maturity, it will have the purchasing power of, say, $6,000. Some decline in value is inevitable, and that expectation is built into the bond's yield, but inflation may be worse than the market anticipates.

Right now, long-term inflation expectations are extremely low, even though the consumer price index (CPI) soared 7.9% in the 12 months that ended Feb. 28. The St. Louis Federal Reserve Bank extrapolates from TIPS, or Treasury inflation-protected securities, that the annual increase in CPI over the next 10 years will be about 2.7%.

My view is that intermediate (five- to 10-year) rates will probably rise another two or three points in the next few years, making bond yields much more attractive.

How Do I Invest in Bonds?

The choices are vast, but, for many investors, buying individual bonds at the riskier end of the debt spectrum – high-yield or junk debt, for example, or bonds issued by shaky governments – is just too adventuresome. Unless you spend a lifetime examining the nuances of particular bond issues, you will probably get better returns at much the same risk with stocks. I am not fond of individual municipal bonds, either. Yes, interest is exempt from federal taxes, but munis, accordingly, have lower yields.

Buying individual government bonds through a broker or directly from the U.S. Treasury is a reasonable option. But owning a bond, or even several, locks you into today’s rates or forces you to take a loss if rates rise.

The best alternative is a mutual fund, whose assets evolve. For instance, if a bond fund has an average maturity of five years, about one-fifth of its holdings will come due in any 12-month period. The fund manager (or the computer algorithm, in the case of index funds) will then decide to buy new bonds with the cash from its maturing bonds, and, if rates are rising, those bonds will have higher yields.

And a fund manager can shift to higher yields by deploying cash from new investors, who tend to flock to bond funds as rates rise. Some of the best funds leaven their safer holdings with riskier debt to boost yields.

When looking at specific funds, decide how much volatility you can tolerate by checking out the duration, a figure expressed in years that indicates the sensitivity of a fund's portfolio to interest rate increases. For example, the Fidelity Long-Term Treasury Bond Index (FNBGX) has a duration of over 18 years, which means if rates rise 1%, the fund's value will fall about 18%. That's risky. (The value, of course, will shoot up if rates fall.)

Although I have been impressed over the years with many active bond fund managers, the expenses they charge can eat up returns when yields are low. For example, one of the largest funds, the Pimco Total Return (PTTAX), which owns a mix of high-quality government and corporate bonds, charges 0.8% and has had an average annual return over the past five years of 3.0%. In the same asset category, I like the Fidelity Investment Grade Bond (FBNDX) better. Expenses are 0.45% for a fund whose average annual return for the past five years is 3.6%.

By contrast, the Vanguard Long-Term Corporate Bond (VCLT), an exchange-traded fund based on an index, has an expense ratio of just 0.04%. It's an excellent fund if you are willing to accept more risk. Holdings are investment grade, but just barely, with 88% of assets rated A or BBB. And the fund has a duration of more than 14, so it's sensitive to rate swings. But more risk, more reward: The fund has returned an annual average of 5.4% over the past five years.

Also recommended is the T. Rowe Price Total Return (PTTFX), which has about one-fourth of its assets rated below investment grade. With an expense ratio of 0.46%, the mutual fund has returned a five-year average of 4.0%. Its bonds mature in an average of eight years, so if rates rise, the portfolio's yield will rise, too.

Another way to protect against rising interest rates is the SPDR Bloomberg Barclays 1-10 Year TIPS (TIPX), an ETF with expenses of 0.15%. TIPS become more valuable as inflation and interest rates increase. Technically, TIPS can have negative yields, as some do now, but the income from the bond gets enhanced when inflation rises by adjustments to the principal.

If rates do rise, returns may soon reach the 5% range for many bond funds. But higher rates, remember, also have the effect of depressing economic growth, which in turn can force borrowers into default. Bond investing is always a matter of balance: long versus short maturities; risky versus safer credits. No more so than now.

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. He owns none of the securities mentioned. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. You can reach him at James_Glassman@kiplinger.com.

If I say "Vanguard" and you think "index funds," you can blame us for your Pavlovian mental response.

We and the rest of the financial media have been lauding the cost-effective goodness of Vanguard's inexpensive index funds since, well, since Vanguard founder John Bogle created them in 1975.

To be fair to Vanguard, its actively managed funds are nothing to sneeze at.

Before the index fund, active management was the way business was done: One or more human managers selected portfolio holdings and determined when to buy and sell.

The index fund altered the model, with a rules-based index calling the shots. Given that managers collect a salary and a computer-stored index doesn't, actively managed funds typically charge higher fees than similar index funds.

Since fees are taken out of a fund's performance, actively managed funds must deliver even better returns to justify their costs.

The good news? Vanguard's roster of about 75 actively managed funds is stacked with solid performers, many of which charge extremely low fees despite having skilled human managers running the show.

Check out five of Vanguard's best actively managed funds to own for the long term.

The products listed here rank among the best Vanguard mutual funds: They cover a variety of basic strategies, and they boast annual fees that are in the bottom 20% of their Morningstar category.

Also, all funds listed here are no-load Investor-class shares, which feature reasonable $3,000 investment minimums.

Data is as of June 25. Yields on equity funds represent the trailing 12-month yield. Yields on bond funds are SEC yields, which reflect the interest earned after deducting fund expenses for the most recent 30-day period.

• Fund category: Large blend
• Assets under management: $92.0 billion
• Yield: 0.7%
• Expense ratio: 0.35%, or $35 annually for every $10,000 invested

We'll start with exposure to large-cap stocks — what you'd typically get by investing in the S&P 500.

The Vanguard PRIMECAP Fund Investor Shares (VPMCX) is helmed by a five-manager team with more than 25 years of experience on average.

Three managers — Theo Kolokotrones, Joel Fried and Alfred Mordecai — have been with Vanguard PRIMECAP since before the turn of the century, while James Marchetti (2005) and M. Mohsin Ansari (2007) joined in the 2000s.

Unlike some funds, in which the managers work together to determine portfolio holdings, each manager here is tasked with leading a sub-portfolio and can choose whatever stocks they want. It's a buy-and-hold strategy, too, with an expected holding period of at least three to five years.

Currently, the team has built a roughly 170-stock portfolio of large caps representing both value and growth strategies.

At the moment, the fund's assets are overwhelmingly used to hold technology names (39%) and health care stocks (21%), with top holdings including the likes of Micron Technology (MU), Alphabet (GOOGL) and Eli Lilly (LLY).

Industrials (13%) and consumer discretionary stocks (11%) also command double-digit weights.

As a result, some sectors are mostly left out — exposure to energy, materials and consumer staples is less than 2% apiece, and exposure to utilities and real estate investment trusts (REITs) is nonexistent.

Large-cap stocks are admittedly one area in which it's difficult to choose active management over indexes — big, blue-chip American stocks are the widest-held and heavily covered on the planet, so there aren't exactly many pricing inefficiencies to exploit.

PRIMECAP's team has done a commendable job, beating Vanguard 500 Index Fund Admiral Shares (VFIAX) by about 30 basis points on average over the trailing 15-year period, though it has come up a percentage point or two short over shorter time periods.

Where VPMCX really seems to excel is during down years. PRIMECAP's team beat out the S&P 500 in 2018 and 2022, for example.

Morningstar gives the fund a Gold Medalist rating based on its forward-looking system to determine a fund's ability to outperform its category index (after fees).

Learn more about VPMCX at the Vanguard provider site.

• Fund category: Small blend
• Assets under management: $2.9 billion
• Yield: 0.9%
• Expense ratio: 0.21%

If you want to be a little more aggressive with your portfolio, you can tap smaller companies. Buying small-cap stocks is a straightforward high-risk/high-return strategy.

Smaller companies tend to be younger and in earlier stages of the growth cycle, meaning they have more runway to expand business lines and geographical markets.

They also tend to be much more agile than their larger peers, and in some cases, boast disruptive technologies that allow them to gobble up market share or, better yet, create whole new markets.

The flip side? They tend to have fewer lines of business, they can have a more difficult time securing debt, and they're typically not as well-capitalized, making them more volatile and susceptible to economic shocks and outside disruption.

Rather than owning individual small caps, some investors try to harness their growth potential while reducing risk through mutual funds such as the Vanguard Strategic Small-Cap Equity Fund Investor Shares (VSTCX).

Portfolio manager Cesar Orosco has worked in investment management since 2004, but he's a relatively new face to VSTCX, taking the helm in 2021. His portfolio is currently made up of about 650 stocks with a median market cap of $3.7 billion.

That holdings set is plenty wide when compared with actively managed large-cap funds, but on the smaller side compared with passive small-cap strategies, which sometimes invest in thousands of stocks.

Current top holdings include the likes of biotech firm Jazz Pharmaceuticals (JAZZ), commercial REIT Brixmor Property Group (BRX) and industrial power services provider EnerSys (ENS).

Unlike with large caps, institutional investors, analysts and the media alike don't pay nearly as much attention to small- and midcap stocks. The result is many more pricing inefficiencies that savvy managers can use to their advantage.

VSTCX management has clearly delivered an advantage to its shareholders — the fund has beaten both its category average and category index over the trailing three-, five-, 10- and 15-year periods.

It also garners a Gold Medalist rating from Morningstar.

Learn more about VSTCX at the Vanguard provider site.

• Fund category: Foreign large blend
• Assets under management: $9.3 billion
• Yield: 1.1%
• Expense ratio: 0.47%

While most American portfolios are going to be full of U.S. stocks, advisers will typically prescribe at least a little geographic diversification.

The Vanguard International Core Stock Fund Investor Shares (VWICX) helps you do so while getting exposure to foreign stocks from both:

• Developed markets: Large, stable economies with transparent, heavily regulated and highly accessible capital markets, albeit with slower rates of growth. Think the U.S., Western Europe, Japan and Australia.
• Emerging markets: Rapidly growing economies with burgeoning middle classes and high rates of industrialization, albeit with less accessible and transparent markets, and often with more risks, such as political instability and currency fluctuations. Think Southeast Asia, South America, Western Europe and Africa.

Managers F. Halsey Morris and Anna Lunden currently own a tight 91 international stocks, with a 75%/25% blend of developed and emerging markets.

Assets are scattered among roughly two-dozen countries; the portfolio is most heavily concentrated in developed markets such as Japan (14.3%) and the U.K. (14.3%), as well as France (7.4%) and Canada (6%), though emerging markets China (8.8%), Taiwan (8.5%) and India (3.8%) command decent chunks of fund assets.

International funds tend to be filled with financial stocks, and that's very much the case with VWICX, which allocates roughly a quarter of assets to the sector.

Tech (16%) and industrial stocks (12%) are the only other two double-digit weights.

International large caps tend to yield more than their American counterparts, and that's reflected in a yield of more than 1% for Vanguard International Core Stock.

This actively managed Vanguard fund came to life in 2019, and it boasts a stellar five-year average annual return of nearly 12%. That's better than the category average, the category index and 94% of its category peers.

It also enjoys a Gold Medalist rating from Morningstar.

Learn more about VWICX at the Vanguard provider site.

• Fund category: High yield bond
• Assets under management: $25.8 billion
• SEC yield: 6.0%
• Expense ratio: 0.22%

Vanguard has its share of actively managed bond funds, too. While we'd typically like to feature a broad core or core-plus fund in a list such as this, most of Vanguard's best-rated actively managed bond funds tend to focus on specific segments of the fixed-income market.

Take, for instance, the Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) – a portfolio of primarily high-yield corporate bonds (aka high-yield bonds, aka junk bonds), but also a handful of Treasuries, bank loans, agency debt, even investment-grade issues "suffering from near-term weakness."

When a major bond rating agency evaluates a bond, it provides a grade that communicates how likely an investor is to receive their full principal and interest payments. Anything above a certain level is considered investment-grade, while anything below that threshold is considered junk.

But even junk exists on a spectrum, and Vanguard High-Yield Corporate aims to invest in junk debt that's of a higher credit quality and lower risk than what's held by comparable high-yield funds.

Right now, the roughly 1,000-bond portfolio has 52% of its holdings in debt rated BB, which is the highest-quality level of junk.

Another 30% is in B-rated bonds. It also has a 12% weight in Treasuries and other investment-grade bonds.

The smallest allocation (4%) is dedicated to bonds rated CCC or lower, or those that are unrated. Yet, despite holding such high-quality bonds, VWEHX still delivers a healthy yield of more than 6% currently.

Vanguard High-Yield Corporate launched in 1978, so it's a very old fund — one that has delivered a 7.8% average annual return since inception.

Its comparables are mixed, though: VWEHX is among the top 25% of its peers by performance over the trailing 15-year period, and in the top third over the past 10, but it's in the bottom half over the trailing three and five years.

Current managers Elizabeth Shortsleeve and Michael Chang have only been with the fund since 2022, but Morningstar Senior Analyst Tom Murphy thinks highly of the fund's prospects.

"As the managers build on their respective track records, the strategy has a good shot of adding to its history of strong risk-adjusted long-term performance, given its low fees and anchor sub-adviser Wellington's proven process," Murphy says about VWEHX, which has earned a Morningstar Silver Medalist rating.

Learn more about VWEHX at the Vanguard provider site.

• Fund category: Moderate allocation
• Assets under management: $124.7 billion
• Yield: 2.0%
• Expense ratio: 0.24%

The Vanguard Wellington Fund Investor Shares (VWELX), which launched in 1929, is both Vanguard's oldest mutual fund and the nation's oldest balanced fund — that is, funds that own both stocks and bonds.

Vanguard Wellington has been managed by Wellington Management Company since its inception.

However, while the fund's current managers, Loren Moran and Daniel Pozen, average more than two decades of investment management experience, they've only been managing VWELX since 2017 and 2019, respectively.

The pair is tasked with investing roughly two-thirds of assets into stocks and the remaining third into bonds.

Currently, the fund's stock sleeve is roughly 80 companies wide with a clear preference for large-cap stocks — the median market cap is more than $430 billion presently.

Management also has an affinity for tech stocks, which account for 32% of assets, led by top holdings Nvidia (NVDA), Alphabet, Microsoft (MSFT) and Apple (AAPL).

The bond sleeve is much wider, at more than 1,500 holdings currently. The entire debt portfolio is investment-grade in quality, with two-thirds of assets in corporate debt, another 25% in Treasuries and the rest split among a few other bond types.

The result is effectively a one-stop shop for an investor's basic needs, should they want to entrust their entire portfolio to a single mutual fund.

At the very least, VWELX has proven a worthy steward. By performance, this Gold Medalist-rated fund is in the top quartile of its category over the trailing one-, three-, five-, 10- and 15-year time frames.

It has topped its category average and index over those time periods, too.

VWELX does have high turnover (how much of the fund's portfolio turns over in a given year), at more than 60% currently.

That makes it less tax-efficient, which is why it and similar funds are best stashed in a 401(k) plan or similar tax-advantaged account.

"The fund continues to stand out under the stewardship of lead managers Daniel Pozen and Loren Moran," Morningstar Analyst Stephen Margaria says.

"Along with its attractive fees, this fund is a strong choice for investors seeking a steady allocation to stocks and bonds," he adds.

Learn more about VWELX at the Vanguard provider site.

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The best Vanguard funds for 2022 won't be a rinse-and-repeat of 2021.

Many of the old standbys from last year focused on ideas and strategies that worked well in a low-interest rate environment – like an overweight exposure to the growthy tech sector. But with the Federal Reserve expected to raise its benchmark interest rate several times this year, strategists predict turbulence for mega-cap tech stocks (and indeed, they've already suffered mightily early on in 2022).

The end of 2021 saw the start of a rotation out of aggressive growth and into value stocks and defensive plays, and that's largely expected to continue as we move deeper into 2022, as long as inflation remains a major theme.

But as 2020 and 2021 reminded us: The economy and Wall Street alike are capable of completely blindsiding us. It could come from wild cards we already know to watch out for, such as another variant of COVID-19 or a Russian invasion of Ukraine, or it could be a new black swan. Either way, it pays to be flexible, and that means having flexible options.

With that in mind, here are the 12 best Vanguard funds for 2022. This list of a dozen funds should help you leverage (or protect against) the major themes of this year: volatility, rising interest rates, inflation and a slow year for mega-cap stocks. But they all have one thing in common: Vanguard's signature low fees.

Data is as of Jan. 31. Fund yields represent the trailing 12-month yield, which is a standard measure for equity funds, unless otherwise noted. Minimum initial investment for all funds listed here is $3,000.

• Category: World stock
• Assets under management: $2.7 billion
• Dividend yield: 1.9%
• Expenses: 0.21%, or or $21 annually for every $10,000 invested

Hands down, the most apropos way to begin our look at 2022's best Vanguard funds is the Vanguard Global Minimum Volatility Fund Investor (VMVFX, $14.28).

A risk-on market has slowly become much more risk-off, potentially leaving some investors wondering what to do with their international exposure. Vanguard Global Minimum Volatility Fund is one solution, either as a long-term core holding or a temporary stabilizer. The fund's manager evaluates all of the stocks in the FTSE Global All Cap Index, and builds a portfolio from components expected to generate lower volatility than their peers. Also, VMVFX tries to further reduce portfolio volatility by heading most currency exposure back to the U.S. dollar.

The Vanguard Global Minimum Volatility Fund is not exactly a household name among Bogleheads. It has only been around since late 2013, which is young for a Vanguard fund, and has built up $2.7 billion in assets since.

While past performance is no guarantee of future results, you can get an idea of how the fund might perform across a volatile 2022 by looking at what it has done over the past few months. Year-to-date, VMVFX is beating 83% of its category peers, and it's even better over the past three months, topping 91% of its peers. However, results aren't as great over the longer term: During the trailing three- and five-year frames, which were primarily bullish for stocks as a whole, VMVFX is near the bottom of the category.

That's a frequent trade-off with minimum- and low-volatility funds: Superior results during the less-frequent occasions where the market struggles, but suboptimal performance over long, predominantly bull periods.

As for what's under the hood of VMVFX? Remember, it's a "global" fund, which means it's international but includes the U.S. Currently, the portfolio is roughly 60% U.S. and other North American stocks, while the remainder is spread across multiple regions, including the Pacific (18%), Europe (12%) and various emerging markets (8%).

Top holdings include enterprise software name Tyler Technologies (TYL), blue-chip pharmaceutical firm Johnson & Johnson (JNJ) and freight operator C.H. Robinson Worldwide (CHRW), each of which carry a weight of less than 2%.

Note: VMVFX also trades as Admiral class shares (VMNVX).

Learn more about VMVFX at the Vanguard provider site.

• Category: Foreign large value
• Assets under management: $15.2 billion
• Dividend yield: 1.4%
• Expenses: 0.35%

The Vanguard International Value Fund (VTRIX, $41.61) earns a spot among the best Vanguard funds to buy in 2022 for a reason that can be boiled down to one word: valuation.

In an environment where mounting uncertainties over inflation, rising interest rates and high-priced U.S. stocks are causing volatility, many investors are increasingly becoming more risk-averse, instead seeking out higher quality and more reasonable valuations. That includes in international stocks.

Foreign stocks, especially developed markets, tend to be cheaper than their U.S. counterparts, and you see that play out in VTRIX. The weighted average price-to-earnings (P/E) ratio for Vanguard International Value Fund's 206-stock portfolio was around 15 in late January. That's far less than the 25 P/E for the S&P 500, and less than the roughly 16 P/E for the U.S.-centric Vanguard Value ETF (VTV).

VTRIX's heaviest weight belongs to European stocks, which account for a little more than half of assets. The Pacific and emerging markets account for another 20% each, and most of the remainder is invested in North America. Top 10 holdings include familiar names such as South Korean electronics maker Samsung Electronics, Chinese e-commerce giant Alibaba Group (BABA) and Swiss drug manufacturer Novartis (NVS).

Learn more about VTRIX at the Vanguard provider site.

• Category: Large blend
• Assets under management: $51.6 billion
• Dividend yield: 0.9%
• Expenses: 0.32%

The Vanguard Health Care Fund Investor (VGHCX, $210.54) takes a broad approach to healthcare stocks, investing in various sectors both in the U.S. and abroad. This provides investors with the sector's typical defensive attributes.

Pharmaceutical stocks make up the biggest chunk of the portfolio at about 40% of assets, but VGHCX investors are also exposed to biotech (19%), health insurance (14%), healthcare equipment (13%) and several other industries. There's also geographic diversification, as a good third of the Vanguard Health Care Fund portfolio is invested in international stocks.

This blend is well-evidenced in its top 10 holdings, which include the likes of America's UnitedHealth Group (UNH), Pfizer (PFE) and Eli Lilly (LLY), the U.K.'s AstraZeneca (AZN) and Switzerland's Novartis (NVS).

One caveat is that the buy-and-hold approach from Wellington Management, Vanguard Health Care's fund advisor, tends to produce average returns compared to its peers. However, it also tends to produce a below-average risk profile, which is why we like VGHCX as one of the best Vanguard funds for 2022.

Note: VGHCX also trades as Admiral Class shares (VGHCX).

Learn more about VGHCX at the Vanguard provider site.

• Category: Real estate
• Assets under management: $91.5 billion
• Dividend yield: 3.2%
• Expenses: 0.12%

The Vanguard Real Estate Index Fund Admiral (VGSLX, $150.85) could easily follow up a strong 2021 with a healthy 2022. Real estate tends to perform well in high-inflation environments, and other macroeconomic trends supportive of real estate and real estate investment trusts (REITs) remain in place.

In general, tenants should have an easier time paying rents in 2022. But certain industries – such as senior housing, gaming, storage units and lodging REITs – could enjoy a particularly brisk recovery.

Also attractive even amid a rising-rate environment are REIT yields, which typically sit around 3% to 4% – far more income than most investment-grade debt at current levels, and enough to still look good even if interest rates head higher several times this year.

The VGSLX portfolio is a basket of REITs that invest in various types of real estate, from office buildings to hotels to self-storage units – and a lot more in between. Top holdings include telecommunication infrastructure REITs American Tower (AMT) and Crown Castle International (CCI), logistics specialist Prologis (PLD), self-storage facility operator Public Storage (PSA) and retail REIT Simon Property Group (SPG).

Note: VGSLX also trades as an ETF, the Vanguard Real Estate ETF (VNQ).

Learn more about VGSLX at the Vanguard provider site.

• Category: Equity energy
• Assets under management: $4.9 billion
• Dividend yield: 3.9%
• Expenses: 0.37%

The Vanguard Energy Fund Investor (VGENX, $41.64) is off to a hot start already this year, and it could be one of 2022's best Vanguard funds if energy maintains its path.

It's certainly expected to, given accelerating demand, constrained supply and geopolitical issues popping up right and left.

Demand for crude oil in 2021 recovered faster than expected from peak-pandemic levels as economies rebounded from the COVID-19 slowdown. Robust economic growth and continued recovery in air transportation in 2022 could drive global oil demand above even pre-pandemic levels.

The Organization of the Petroleum Exporting Countries (OPEC) appears to remain vigilant in keeping a tight grip on output to prop up pricing. Should that persist, and combine with increasing air travell, trucking and consumer demand, we could see even higher oil prices across 2022.

Thus, funds heavy in oil and energy stocks – such as VGENX – are expected to do well in the year ahead. Vanguard Energy specifically is heavy in utilities and the integrated and upstream oil & gas industries. Top holdings in its 42-stock portfolio include big energy names such as ConocoPhillips (COP), U.K.-Dutch firm Royal Dutch Shell (RDS.A), and France's TotalEnergies (TTE).

If you want to stick with the best Vanguard funds to ride the energy wave in 2022, then VGENX is a simple way to do so.

Note: VGENX also trades as Admiral Class shares (VGELX).

Learn more about VGENX at the Vanguard provider site.

• Category: Large blend
• Assets under management: $83.4 billion
• Dividend yield: 1.6%
• Expenses: 0.08%

The Vanguard Dividend Appreciation Index Fund Admiral (VDADX, $44.15) is a passively managed portfolio that focuses on large-cap U.S. companies with the potential to grow their dividends over time. This means shareholders get a heavy dose of high-quality value stocks, which are broadly expected to outperform growth in at least the first half of 2022 if not longer.

What makes VDADX one of the best Vanguard funds for 2022 is a combination of extremely low expenses and attractive risk-adjusted returns.

Vanguard Dividend Appreciation Index Fund, which charges a mere 8 basis points annually (a basis point is one one-hundredth of a percentage point), tracks the S&P U.S. Dividend Growers Index, "which consists of common stocks of companies that have a record of increasing dividends over time," according to VDADX's prospectus.

That results in a portfolio heavy in value stocks (though it does also include high-quality growth stocks) that grow their payouts over time, and typically don't stretch financially to do so. Mega-caps such as Microsoft (MSFT), Home Depot (HD) and JPMorgan Chase (JPM) are among top-10 holdings.

Note: VDADX also trades as an ETF, the Vanguard Dividend Appreciation ETF (VIG).

Learn more about VDADX at the Vanguard provider site.

• Category: Large blend
• Assets under management: $56.4 billion
• Dividend yield: 1.5%
• Expenses: 0.26%

The Vanguard Dividend Growth Fund Investor (VDIGX, $37.86) can be an attractive value play in 2022. This is particularly true for investors looking for an actively managed mutual fund that offers exposure to a diverse mix of dividend-focused companies.

You won't find many high-quality, actively managed mutual funds on the market with expenses below 0.30%. Couple the low fees with a portfolio of value stocks and you get a recipe for a solid choice for the equity portion of a portfolio built for 2022.

The VDIGX portfolio consists of 42 large-cap stocks with the highest allocation weights given to industrials (20%), healthcare (20%) and consumer staples (17%). As such, shareholders get quality holdings like discount retailer TJX Companies (TJX), blue-chip insurer UnitedHealth Group (UNH) and consumer products giant Colgate-Palmolive (CL).

With this fund's dividend focus, you're not going to see many growth stocks, which means you won't see as much short-term volatility, either. But fund manager Wellington Management still pulls off solid returns in the long run, which makes VDIGX one of the best Vanguard funds to own in 2022 and beyond.

Learn more about VDIGX at the Vanguard provider site.

• Category: Mid-cap blend
• Assets under management: $108.7 billion
• Dividend yield: 1.2%
• Expenses: 0.06%

The Vanguard Extended Market Index Fund Admiral (VEXAX, $124.70) invests mostly in mid-cap stocks, as well as some small caps. This makes it a fine holding for investors seeking a core holding that isn't stuffed full of high-priced, large-cap tech stocks at risk for significant declines in 2022.

The stocks that did the best since the onset of the COVID-induced market malaise in March 2020 will likely perform the worst as the Fed raises rates in 2022. And VEXAX is one of the best Vanguard funds to steer clear of the downside potential of the S&P 500 while still remaining fully exposed to equities.

VEXAX tracks the S&P Completion Index, which consists of about 3,000 U.S. mid- and small-cap stocks. The fund is considered to be a complement to the Vanguard 500 Index Fund (VFINX) because it covers stocks with smaller capitalizations than those in the S&P 500 Index. And together, they offer investors exposure to the entire U.S. stock market. That's how you get the "Completion" moniker.

But in 2022, VEXAX can be used as an alternative, rather than a complement.

The Vanguard Extended Market Index is primarily growth-focused, with a quarter of assets allocated to technology stocks, and another 12% in consumer discretionary. But you also get a healthy dose of healthcare (13%), industrials (14%) and financials (14%). Top holdings include the likes of asset management firm Blackstone (BX), fintech Block (SQ) – formerly known as Square – and cloud-based data platform Snowflake (SNOW).

Note: VEXAX also trades as an ETF, the Vanguard Extended Market ETF (VXF).

Learn more about VEXAX at the Vanguard provider site.

• Category: Small blend
• Assets under management: $140.6 billion
• Dividend yield: 1.1%
• Expenses: 0.05%

The Vanguard Small-Cap Index Fund Admiral (VSMAX, $99.80) could be one of 2022's best Vanguard funds for investors who are OK with taking on a little more risk but want limited exposure to high-priced, large-cap stocks.

Generally speaking, small-cap stocks are a high-risk, high-reward investment. When the economy and/or broader stock market tanks, hunger for risk often tapers off, leading investors to jump into larger, safer companies and bail from smaller, riskier equities.

Conversely, if bullish sentiment returns, small caps are often one of the quickest areas of the market to recover.

VSMAX is a collection of more than 1,500 small-cap stocks diversified across both value and growth styles. That makes it a solid core fund for investors who want long-term small-cap exposure.

Vanguard Small-Cap Index Fund invests in all 11 market sectors, though some more than others. Industrials (19%), consumer discretionary (15%), financials (15%) and technology (13%) enjoy sizable weightings, while telecommunications (2%) and consumer staples (3%) play more minor roles.

Top holdings currently include biotechnology firm Bio-Techne (TECH), oil and gas company Diamondback Energy (FANG) and casino REIT VICI Properties (VICI).

Note: VSMAX also trades as an ETF, the Vanguard Small-Cap ETF (VB).

Learn more about VSMAX at the Vanguard provider site.

• Category: Inflation-protected bond
• Assets under management: $41.8 billion
• SEC yield: -1.6%*
• Expenses: 0.20%

While strategists largely see inflation moderating at some point in 2022, Vanguard Inflation-Protected Securities Fund Investor (VIPSX, $14.22) could still end up as one of the best Vanguard funds for 2022 if consumer prices continue to rise faster, and for longer, than expected.

VIPSX holds Treasury Inflation-Protected Securities (TIPS), which are bonds that are indexed to inflation; the principal value of these bonds adjusts for movements in inflation. In other words, when consumer prices rise, TIPS do too; but if inflation levels off or we even see deflation, TIPS will generally struggle.

While TIPS' primary feature is this inflation indexing, they also carry interest-rate risk. Thus, if and when the Fed decides to start raising its benchmark rate, that could bring down the value of VIPSX's holdings.

Still, Vanguard Inflation-Protected Securities Fund and its portfolio of nearly 50, high-credit-quality TIPS should be effective in hedging aggressive inflation. It can be used solely for portfolio diversification purposes, or it can be used to complement a core bond holding that's not expected to perform well in inflationary environments.

* SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.

Note: VIPSX also trades as Admiral Class shares (VAIPX).

Learn more about VIPSX at the Vanguard provider site.

• Category: Muni national long
• Assets under management: $19.2 billion
• SEC yield: 1.7%
• Expenses: 0.17%

The Vanguard High-Yield Tax-Exempt Fund Investor (VWAHX, $11.65) seeks high current income that is exempt from federal income tax. That makes it ideal for investors looking for tax-free income from bonds held in a taxable brokerage account.

The 1.7% SEC yield might seem on the low side, but remember: that yield is tax-exempt. A traditional, taxable bond fund would need to yield 2.7% to deliver as much take-home income as VWAHX.

What makes Vanguard High-Yield Tax-Exempt a potential winner for 2022 is that it invests up to 80% of its assets in investment-grade municipal bonds. These can achieve higher yields and potentially greater returns in a rising-rate environment, compared to higher-quality corporate bonds and Treasuries, which are found in typical aggregate bond index funds.

Although investment-grade municipal bonds might generally have lower credit ratings, and thus higher default risk, compared to a mix of corporates and U.S. Treasuries, the greater risk for fixed income in 2022 will likely be interest-rate risk, not default risk. That said, VWAHX and its longer-maturity portfolio will hardly be immune from turbulence if rates rise considerably in 2022.

Still, Vanguard High-Yield Tax-Exempt Fund and its high-quality portfolio of muni bonds could be among 2022's best Vanguard funds. It's certainly useful if you don't want to share your income with the tax man.

Note: VWAHX also trades as Admiral Class shares (VWALX).

Learn more about VWAHX at the Vanguard provider site.

• Category: Ultrashort bond
• Assets under management: $20.4 billion
• SEC yield: 0.6%
• Expenses: 0.20%

If you're playing it safe, the Vanguard Ultra-Short-Term Bond Fund Admiral (VUBFX, $9.99) is one of the best Vanguard funds you can buy in 2022 ... even if you don't hold it throughout the entire year. In short, this fund is meant to mitigate interest-rate risk while delivering more yield than a typical money market account.

To get an idea of what's in the Vanguard Ultra-Short-Term Bond Fund fund, the portfolio provides exposure to money market instruments and short-term high-quality bonds, as well as asset-backed, government and investment-grade corporate securities. The fund typically maintains a dollar-weighted average maturity of zero to two years.

That results in a pretty low 0.6% current yield for VUBFX. But consider that average money market rates were sitting around 0.07% in December 2021.

We should note that even an ultra-short-term bond fund carries more interest-rate risk than a money market fund. But consider that the 12-month return on the Vanguard Ultra-Short-Term Bond Fund, through Dec. 31, 2021, was 0.13%, which is more than double the average bank savings account rate of 0.06%.

Past performance is no guarantee of future results, but VUBFX is built to minimize volatility while providing a modest sum of income. And if bond markets are particularly challenging in 2022, it should easily beat riskier intermediate- and long-term bond funds.

Note: VUBFX also trades as Admiral Class shares (VUSFX).

Learn more about VUBFX at the Vanguard provider site.

Some fund manager changes concern us less than others. When two longtime managers of Vanguard Equity-Income (VEIPX), a member of the Kiplinger 25, the list of our favorite no-load mutual funds, retired last year, we weren't bothered.

The departing managers were part of Vanguard's quantitative equity group, which uses a computer algorithm to choose stocks. Plus, the quant group runs just one-third of the fund's assets.

But recently, Vanguard announced that Michael Reckmeyer, the Wellington Management portfolio manager who has run two-thirds of the fund's assets since 2007, would retire at the end of June. And that has us on guard.

Reckmeyer is a masterful dividend-stock investor. Since he stepped in as a portfolio manager at Equity-Income in 2007, the fund's 9.2% annualized return has beaten the 8.8% average annual gain in its benchmark, the FTSE High Dividend Yield index. He favors high-quality firms that pay increasingly higher dividends over time. The fund currently yields 2.28%.

In October, Vanguard named Matthew Hand a co-portfolio manager of the fund. He will take over as sole manager when Reckmeyer retires.

The Leadership Shift was Given a Long Runway

This transition has been in motion for years, says Reckmeyer. Back in 2018, Hand, then a 14-year veteran member of Equity-Income's analyst team, shed some of his analytical duties so he could work more closely with Reckmeyer and learn the art of portfolio building and risk management.

Hand says he expects that much will stay the same at Equity-Income. "Mike and I both grew up at Wellington. We are extraordinarily aligned and share the same investment philosophy," he says.

Both say the fund's investing process evolves over time. When Reckmeyer became manager in 2007, for instance, he initiated a regular stress test to ensure each stock's dividend was sustainable even in a recession. Hand says he has been folding in more environmental, social and governance factors to identify any hidden risks as well as opportunities for the portfolio.

We'll be watching the fund closely this year, especially in the coming months as we reassess our entire roster of Kiplinger 25 funds for May. Stay tuned.

Despite a bumpy ride, many bitcoin investors are sitting on big gains, with the cryptocurrency reaching new highs in 2021. One way to avoid the tax bite that comes with selling appreciated crypto is to direct it to charity instead, and investors are taking notice. In 2021 through September, donors contributed $158 million in crypto to Fidelity Charitable donor-advised funds, a 464% increase from the same period in 2020.

With a donor-advised fund, you can contribute assets at any time and decide later what charities to support with grants from the fund. Contributions are eligible for an immediate charitable tax deduction for those who itemize and grow tax-free in an investment account. And when you donate appreciated assets (such as stocks or crypto) that you’ve held for more than a year, you avoid long-term capital gains tax of up to 20% (see Your Guide to Giving). If you want to contribute to a charity that doesn’t accept crypto, funneling your donation through a donor-advised fund that takes crypto can bypass that obstacle.

The largest donor-advised funds accept donations of cryptocurrency, and others are expected to follow suit as the investment’s popularity grows. Fidelity Charitable has no minimum asset contribution for its donor-advised funds, to which donors can add crypto at any time. Schwab Charitable (no minimum for a self-managed account; $250,000 minimum for an account managed by an investment adviser) takes crypto contributions on a case-by-case basis. Vanguard Charitable ($25,000 minimum to open an account) accepts bitcoin from existing donors on a case-by-case basis.

Donations of appreciated crypto investments that you’ve held for more than a year, which qualify for a tax deduction of their fair market value, make the most financial sense. If you’ve held an appreciated crypto­currency as an investment for a year or less, your tax deduction is limited to the cost basis—essentially, the original amount you paid. “It would be the same net effect, tax-wise, as selling it yourself and donating the proceeds,” says Tony Oommen, of Fidelity Charitable. And because cryptocurrency is considered property, donations of more than $5,000 in value require a qualified appraisal—which may run a few hundred dollars—to claim the tax deduction, says Oommen. Ask your tax adviser to recommend an appraiser, or use a service such as Charitable Solutions.

We don't write about American Funds much on Kiplinger.com or in the pages of Kiplinger Personal Finance magazine. That's because these funds, which are managed by parent company Capital Group, are primarily sold through advisers.

For years, the funds charged a front-end load (to compensate those advisers), which made it ineligible for recommendation in our book – literally. Now, however, at some brokerage firms, you can buy a no-load share class for no transaction fee.

But American Funds is a powerhouse in the 401(k) world, where investors of all sorts can access them. Six of its funds appear among the 100 most widely held funds in employer-sponsored retirement savings plans; another seven of its target-date funds, American Funds Target Date Retirement series, also rank among the top 100. In this, our annual review of the biggest 401(k) funds in America – a list that comes courtesy of financial data firm BrightScope – we take a closer look at the most popular funds from Capital Group.

First, some explanation of how the Capital Group operates is necessary because it's unique. Using a process the company calls the Capital System, each fund is run by multiple managers, from as few as two to more than a dozen. Every manager runs a percentage of the fund's assets independently, within the broader guidelines of the fund's objectives. They're encouraged to invest alongside shareholders, too, and many managers have six figures or more of their own money invested in the funds they manage.

The company says its aim is to create a diversified portfolio that can produce good results with less volatility. It also means that even as assets grow in any given fund, the firm isn't forced to close it to new investors – Capital Group simply adds more managers. As a result, several American Funds portfolios are among the biggest funds in the country by assets.

As always, this story is meant to help retirement savers make good choices among the funds that are available in their 401(k) plan. And it is written with that perspective in mind. Look for our review of funds from other big firms in the 401(k) world: Fidelity, T. Rowe Price and Vanguard.

Now, let's explore some of the best American Funds products for your 401(k) plan … and some of the laggards, too.

Returns and data are as of Nov. 11. In each review, we refer to the symbol, returns and expense ratio of the share class that is available to most investors. The reason for this is that the share classes of specific funds offered in 401(k) plans can vary, depending in part on the size of the plan.

• Symbol: ABALX
• Expense ratio: 0.58%
• 1-year return: 18.2%
• 3-year annualized return: 12.9%
• 5-year annualized return: 11.5%
• 10-year annualized return: 10.9%
• Rank among the top 401(k) funds: #31
• Best for: Investors who want an all-in-one fund that holds stocks and bonds

Like other balanced funds, American Funds American Balanced holds stocks and bonds. It is designed, say the managers in a recent report, "to serve as the complete portfolio of a prudent investor."

In other words: Buy shares in this fund, and you're done.

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ABALX fine-tunes its blend of stocks and bonds to achieve three goals: conserve capital, provide current income and offer long-term growth. Keeping volatility at bay and delivering steady returns is also a priority. At last report, the fund held 65% of its assets in stocks, 32% in bonds and 3% in cash and other securities. The fund has a current SEC yield of 1.23%.

On the stock side, the fund typically tilts toward blue-chip companies, such as Berkshire Hathaway (BRK.B) and Royal Dutch Shell (RDS.A), that pay high dividends. But these value-oriented types of stocks have been a drag on the fund's performance as growthier stocks have been more in demand for the greater part of a decade. Still, the fund holds some shares in fast-growing companies, too, including Activision Blizzard (ATVI) and ASML Holding (ASML).

The bond side holds mostly investment-grade bonds (debt rated triple-A to triple-B). U.S. Treasuries comprise 10% of the fund's assets and act as the backbone of this side of the portfolio, which also includes corporate bonds, asset-backed and mortgage-backed securities, municipal bonds and foreign debt.

The portfolio's risk-aware positioning helped in early 2020, when both stocks and bonds plummeted in value during the pandemic's early days. American Balanced sank 22% between February and March 2020, while its typical peer – funds that allocate 50% to 70% in stocks – lost 24%. Indeed, the fund is a peer-beater. Over the past 10 years, American Balanced outpaced 85% of its peers with a 10.9% annualized return.

Critics might point out that the fund lags the return of its composite index – comprised of 60% of the S&P 500 index and 40% of the Bloomberg U.S. Aggregate Bond index – over the past 10 years. But that's understandable. The S&P 500 is top-heavy in growth companies such as Apple (AAPL), Amazon.com (AMZN), Google parent Alphabet (GOOGL) and Facebook parent Meta Platforms (FB). American Balanced owns shares in some of those companies, but nothing close to the hefty stakes these stocks take up in the S&P 500 index.

ABALX is among the best American Funds you can stash in your portfolio. As balanced funds go, it's a standout option.

Learn more about ABALX at the Capital Group provider site.

• Symbol: AEPGX
• Expense ratio: 0.82%
• 1-year return: 17.0%
• 3-year annualized return: 17.0%
• 5-year annualized return: 13.4%
• 10-year annualized return: 9.5%
• Rank among the top 401(k) funds: #3
• Best for: International stock exposure

American Funds EuroPacific Growth is the biggest actively managed foreign stock fund in the country. But the Capital System of dividing a fund's assets among multiple managers has helped the fund stay competitive. Over the past five and 10 years, for instance, the fund has largely kept pace with its typical peer: funds that invest in large, foreign companies. And it beats the MSCI EAFE index of stocks in foreign developed countries.

Morningstar recently downgraded its rating on EuroPacific Growth, to Silver from Gold, because the category has become "increasingly competitive," says Tom Nations, an associate director of research.

Certainly, there are zippier foreign-stock funds available out there. But in a 401(k) plan, the investment choices, especially with foreign-stock funds, are typically limited to an actively managed fund and an index fund. So, the question for 401(k) investors is whether an investment in AEGPX is better or worse than an investment in an international-stock index fund.

On that, the verdict is clear: EuroPacific Growth beats Vanguard Total International Stock Index (VGTSX) over the past two, three, five and 10 years. What's more, during the recent bear market in early 2020, EuroPacific Growth fund held up better, with a 31.4% loss, compared with a 33.3% loss in Vanguard Total International Stock index fund.

AEPGX is among the best American Funds you can find in a 401(k) plan, and we don't expect that to change even though a longtime manager is stepping down at the end of 2021. Even after his departure, AEPGX will still have 10 managers.

Those managers each look for high-quality companies with good long-term growth prospects in Europe and the Pacific Basin. The fund holds mostly large companies – a byproduct of the fund's hefty assets, which were $189 billion at last report. ASML Holding, Taiwan Semiconductor (TSM) and AIA Group (AAGIY) are top holdings.

Learn more about AEPGX at the Capital Group provider site.

• Symbol: ANCFX
• Expense ratio: 0.61%
• 1-year return: 29.0%
• 3-year annualized return: 17.7%
• 5-year annualized return: 16.2%
• 10-year annualized return: 14.8%
• Rank among the top 401(k) funds: #90
• Best for: Diversified equity exposure, but an S&P 500 index fund would have offered more reward for the risk over the past decade

American Funds Fundamental Investors emphasizes growth and income by investing in undervalued companies. Specifically, it favors firms that make in-demand, high-quality products, and boast good prospects for growth in sales or earnings that are underappreciated by the market.

U.S. stocks make up most of the portfolio. But the fund has the leeway to look overseas, which is why 19% of the fund's assets are invested in international companies in Europe, Canada, and Japan as well as emerging countries including Taiwan, India and Korea.

ANCFX has seven managers, but a "bevy" of recent manager changes – including three new portfolio managers named in 2020 – has resulted in a drop in rating from Morningstar analyst Alec Lucas, to Silver from Gold. Even so, Lucas still finds "this fund's flexible profile still makes it an attractive option."

We disagree. The fund has a value tilt, and value-oriented stocks have been a drag in recent years, relative to growth-oriented shares. It goes some way to explain why Fundamental Investors now lags the S&P 500 based on annualized returns over the past three, five and 10 years. But over that time, Fundamental Investors has been roughly as volatile as the index, too.

And on the income front, Fundamental Investors is only on par, offering the same 1.3% as a popular S&P 500 index fund.

Learn more about ANCFX at the Capital Group provider site.

• Symbol: AGTHX
• Expense ratio: 0.61%
• 1-year return: TK%
• 3-year annualized return: TK%
• 5-year annualized return: TK%
• 10-year annualized return: TK%
• Rank among the top 401(k) funds: #17
• Best for: Aggressive investors willing to take on extra risk for higher returns

Growth stocks have driven broad market returns for the greater part of the past decade. That should bode well for American Funds The Growth Fund of America, which invests in large, growing companies. And indeed, over the past three, five and 10 years, Growth Fund of America has outpaced the S&P 500 index.

But performance has been lumpy, and that has us betwixt and between on Growth Fund of America, which is why we rate AGTHX a Hold.

The 400-stock portfolio – Microsoft (MSFT), Tesla (TSLA) and Facebook parent Meta are top holdings – has lagged the S&P 500 in five of the past 11 full calendar years (between 2020 and 2010). That said, its good years have more than made up for the bad, and over the past decade on an annualized return basis, the fund beats the S&P 500. A $10,000 investment in the fund 10 years ago would be worth nearly $51,000 today; a similar investment in Vanguard 500 Index fund would be worth just under $46,000.

And beating the index is precisely why investors choose to invest in actively managed funds.

If we were looking at potential funds for the Kiplinger 25, the list of our favorite actively managed funds, Growth Fund of America wouldn't get very far because it lags its peers. But assessing a fund's value in a 401(k) plan is a little different. We must compare it with the alternatives that you might have available to you in the plan. And typically, the choice is between an active fund, such as Growth Fund of America, and an index fund.

Our advice: Tilt toward Growth Fund of America, but be prepared to sit tight in the lean years, when this fund lags a comparable S&P 500 index fund. Otherwise, go for the index fund.

Learn more about AGTHX at the Capital Group provider site.

• Symbol: ANWPX
• Expense ratio: 0.76%
• 1-year return: 30.9%
• 3-year annualized return: 24.4%
• 5-year annualized return: 20.0%
• 10-year annualized return: 15.1%
• Rank among the top 401(k) funds: #56
• Best for: Global stock exposure

American Funds New Perspective fund splits its portfolio between U.S. and foreign stocks. It's a solid option for investors looking to beef up their foreign stock exposure, but who don't want to go all-in on a foreign-stock fund.

Seven managers divide the portfolio's $140 billion in assets and invest their own sleeve as they see fit. But they all must invest in companies that receive a meaningful share of sales and operations outside of their home base. Together they have constructed a roughly 300-stock portfolio of mostly large companies with above-average earnings growth. Tesla, Microsoft and Facebook are the fund's top holdings.

Next to its peers – funds that invest in foreign and U.S. large companies – New Perspective has stayed above average for the majority of each of the past 11 calendar years, making it one of the best American Funds for 401(k) investors. On an average-annual return basis, ANWPX's 15.1% 10-year return outpaces the typical world large-stock fund, which gained 13.6% annualized, as well as the MSCI ACWI index, which climbed 11.6% on average per year.

Learn more about ANWPX at the Capital Group provider site.

• Symbol: AWSHX
• Expense ratio: 0.58%
• 1-year return: 29.7%
• 3-year annualized return: 15.8%
• 5-year annualized return: 15.3%
• 10-year annualized return: 14.0%
• Rank among the top 401(k) funds: #54
• Best for: Older investors who want a low-volatility stock fund

There was a time when investors relished the safe, strict parameters that American Funds Washington Mutual follows for stock-picking. Though the fund launched in 1952, the rules it follows defining eligible prospective stocks stems from a Washington, D.C., court case following the Great Depression that established a list of high-quality stocks appropriate for investors. Though some of the rules have been relaxed over the years, the eligibility criteria are supposed to steer managers toward high-quality companies with solid balance sheets and that pay consistent, growing dividends.

In practice, the criteria result in a portfolio that's low on risk. But in recent years, when many of the market's high-flying stocks didn't pay dividends, AWSHX's guidelines have crimped overall returns.

Investors, particularly those who are young and still have decades to go before retirement are giving up too much in returns for a small relative improvement on risk. A broad U.S. stock-index fund would be a better option.

Over the past 10 years, for instance, Washington Mutual investors have experienced 10% less volatility. But in return, they have lagged a S&P 500 index fund by an average of 2.2 percentage points per year. In other words, a $10,000 investment 10 years ago in Washington Mutual would be worth almost $10,000 less than an investment in an S&P 500 index fund.

That said, older investors nearing retirement or already retired, who want to keep a toehold in the stock market, might find this American Funds product's strict approach to stock-picking appealing because it results in less volatility. That's why we have a Hold rating on AWSHX.

Learn more about AWSHX at the Capital Group provider site.

• Rank among the top 401(k) funds: #39 (AAETX, 2030); #51 (AADTX, 2025); #55 (AAFTX, 2035); #58 (AAGTX, 2040); #70 (AACTX, 2020); #75 (AAHTX, 2045); #83 (AALTX, 2050)
• Best for: Best for savers who want to put their investments on autopilot

We've long been fans of the American Funds Target Date Retirement series. They're a solid choice for investors who want an expert to handle their retirement investments from start to finish – and well into retirement, too.

You pick the target-date fund with the year that's closest to when you plan to retire, then sit back and let experts take care of the rest. The managers of the target-date series will shift the blend of stock and bond funds over time to a more appropriate allocation as you get closer to retirement.

What sets American Funds' target-date series apart from others is its glide path – the prescribed shift in stocks and bonds over time in any given target-date series. Throughout the series, the firm's target-date funds hold considerably more in cash than their typical peer, but each of the portfolios also have a slightly more aggressive stock position.

For instance, the American Funds 2040 Target Date Retirement fund holds just under 6% of its assets in cash and 84% in stocks and 10% in bonds. The typical 2040 target-date fund, by contrast, holds 2% of its assets in cash, 75% in stocks, 13% in bonds and 10% in other diversified assets.

Interestingly, the series gets relatively more aggressive in its retirement years. The 2010 American Funds target-date fund, for instance, currently holds 9% in cash, but has a 40% stake in stocks, 50% in bonds and 1% in other assets. Compare that with the typical 2010 target date fund, which has the same cash allocation, 9%, but just 35% in stock, 53% in bonds and 3% in other assets.

What matters too, of course, is the outcome. And on that front, these funds deliver, returning above-average returns with below-average risk.

This target-date series is among the best American Funds has to offer, and is a solid choice for retirement savers who want a pro to do the work for them.

Learn more about American Funds Target Date Retirement at the Capital Group provider site.

I host various seminars for retirees. At every seminar, one retiree always raises his or her hand and tells me they recently loaded up on dividend-paying mutual funds and preferred stocks. I shake my head and wish them luck.

I understand the logic but disagree. The last few years bear this out. Since 2016, the Vanguard High Dividend Yield ETF (VYM) – which owns high-dividend-paying stocks – has severely underperformed the broad market as measured by the Vanguard S&P 500 Index fund (VFIAX) (see Figure 1). Dividend investors in VYM gave up a tremendous amount in overall performance and diversification.

For this reason, I tell investors who are in retirement not to take an income-only approach. Instead, consider a core-and-satellite investment strategy like the one I outline below, or tune into our complimentary retirement planning webinar on Nov. 16 to learn more (register here).

Dividend investing versus the broad market

It’s all about balance. If we go all in on dividend-paying stocks and mutual funds, our dividend income may increase, but at the expense of overall portfolio appreciation and diversification. Figure 1 bears this out. Many technology stocks are not high-dividend-paying stocks and are not in the Vanguard High Dividend Yield ETF. In other words, investors in the high-dividend fund missed the tech run. The S&P 500 index fund grew 70% more versus the high-dividend ETF over the past five years.

Dividend mutual funds lack diversification

Many dividend-focused mutual funds and ETFs own a greater proportion of bank, energy and utility companies than the index. The Vanguard High Dividend Yield ETF (VYM), as of Sept. 30, 2021, had about 1.5 times more in in financial service companies and roughly three times as much in energy and utility companies as the Vanguard S&P 500 Index (see Figure 2). The high dividend ETF also owns significantly less in tech: 9.67% versus 24.65%.

This is no surprise since banks, utility and energy stocks usually have higher dividends than tech stocks. However, since 2016 those bank and energy stocks did not perform as well as tech stocks. This year is a little different as energy stocks have soared.

The key is to be aware that owning dividend-paying mutual funds can lead to a portfolio that tilts heavily to three sectors of the economy. As a result, the performance can vary significantly from the broad benchmark and rely heavily on the health of banks, energy and utility companies. Granted, the S&P 500 Index owns a significant amount of tech right now. That too is a concern and something investors need to be aware of.

Therefore, I advocate for a more balanced core portfolio, adding income satellites for retirees where it makes sense. Here’s how that works:

Create a good core

Instead of a focusing on income-only investments, retirees should hold the bulk of their nest egg in a core portfolio of low-cost broadly diversified index funds. For my core, I use large cap indexes, small cap indexes, international and emerging market indexes. I also use equal-weighted indexes. Equal weighting is a simple idea: We buy the same dollar value in each stock, representing an equal part of the value of the portfolio. Equal weighting reduces the glaring overexposures to tech, banks and energy stocks I mentioned earlier. I may also build my own index, which gives me more control of the sector allocations.

I also add in various active and passive fixed income managers, as well as active equity managers where it makes sense, like in ESG, or a specialty strategy, such as hedging or merger arbitrage. I then adjust the allocations as time goes on depending on performance and perceived opportunities. This is my core portfolio. A good core should keep pace with the broad market, but with less risk than the broad market.

Create income satellites

If you have a strong core, you can round out your portfolio using satellites. A satellite is a tilt or a slight overweight in the portfolio. For my retired clients, I may recommend a high-dividend-paying individual stock manager or ETF as a satellite. I like individual stocks and ETFs for their tax efficiency. An individual stock manager can use tax-loss harvesting to minimize taxes. ETFs are typically more tax friendly than mutual funds. There are also passive dividend index mutual funds that can work.

Preferred stocks are a satellite. Preferred stock is a separate class of stock that companies issue. Preferred stock has higher yields than regular common stock, usually around 3%-5%. There are different risks with preferred stocks, such as interest rate risk, so be sure to do your homework.

Real estate investment trusts (REITs) are a good income satellite for retirees, too. REITs have high yields, usually 4%-5%. I typically recommend retirees have 2%-5% of their overall portfolio in REITs. That’s enough of a tilt to boost the income and diversification, but not enough to wreak havoc on the overall portfolio if the sector performs badly. There are several types of REITs, such as multi-family housing, warehousing and data centers, active and passive mutual funds, and ETFs. I usually mix in all the above.

Focus on total return, not income

Instead of focusing on income, I tell my clients to focus on total return. In a good year for the stock market, such as 2019, 2020 and so far 2021, I take the profits or gains from the portfolio and my clients use them for spending. In a bad year, we may take less from the portfolio or use our bonds and cash, so our stocks have time to recover.

I prefer the total return approach because dividend and interest income are usually not enough to cover clients’ lifestyle expenses. Taking profits is also like rebalancing. It reduces our risk. For the past five years taking profits from growth stocks has reduced our exposure to IT and software companies. This approach didn’t help the portfolio grow, but it did reduce our risk of being overexposed to tech – risk of loss is something I find retirees usually care more about than performance.

Conclusion

Unless you have a strong conviction about financial, energy and utility companies, I would steer away from high-dividend-yielding funds and ETFs for the bulk of your money. Instead, try a core-and-satellite approach. A good core is well-balanced and well-diversified across industries, large and small companies, and domestic and foreign stocks. Consider adding income satellites like high-dividend stocks, preferred stocks and REITs in small amounts. Satellites can increase the portfolio income without changing the risk too much. It’s all about balance.

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Taxes are a drag. A drag on your investment return, that is. Dividends are taxable, interest income is taxable and capital gains are taxable. Your after-tax investment return – what you keep, not make, on your investment portfolio – could be lower than you think. And with tax rates probably trending higher, now is the time to get planning. After all, portfolio income when added to your other income can push you into a higher tax bracket, trigger an additional investment income tax, or cause Social Security benefits to be taxed.

Here to help are 10 fixes to help increase your after-tax investment return:

1. Use low-turnover mutual funds

Mutual funds report a “turnover ratio.” This is the rate at which a fund manager buys and sells stocks or turnovers a portfolio. The higher the turnover, the greater the likelihood for taxable capital gains distributions at the end of the calendar year.

Consider using low turnover funds – lower than 30% – in taxable accounts. High-turnover funds belong in IRAs and 401(k)s where there are no taxes on capital gains.

2. Use index funds in taxable accounts

Index funds, such as the Vanguard Index Funds, have low turnover. There is very little buying and selling, and typically lower capital gains distributions in index funds than active funds. For that reason, index funds are good investments for taxable accounts like a brokerage account.

3. Active indexing helps even more

Active indexing is owning each individual stock in a stock index instead of buying the index mutual fund. It’s like buying all the stocks in the S&P 500 index. You do this to increase the opportunity to harvest losses in the portfolio.

In 2020 the S&P 500 Index finished positive for the year, yet there were 196 stocks in the index that had a loss (See Figure 1). In that year, any one of the 196 stocks could have been sold at a loss to offset a gain elsewhere in the portfolio. You can’t do that if you own an index mutual fund, such as the Vanguard S&P 500 Index.

When you invest in an index mutual fund, you lose the opportunity to harvest losses from the underlying stocks. In that strategy, losses are used to reduce your gains. The less you pay in taxable gains the more money you keep invested. Excess losses are carried forward indefinitely on your federal tax return. This is extremely important for those who may have to sell an asset in the future to provide income. Your future self will thank you for banking those losses.

Managing 500 stocks is a lot for an individual investor. I use two or three institutional money managers for my clients, or you can consider building your own index fund.

Figure 1: Owning individual issues of stock create more opportunities for tax-loss harvesting than owning a single index mutual fund.

4. Look to tax-managed mutual funds for help

Tax-managed mutual funds are mutual funds available to retail investors. The difference between a tax-managed and regular mutual fund is a tax-managed fund actively employs various tax saving strategies. The manager may have a low-turnover strategy to reduce capital gains. He or she may also use tax-loss harvesting – offsetting gains with losses. Tax-managed funds are best held in taxable accounts and can help lower the taxes on your portfolio income.

5. Max out tax-friendly accounts

If you have a high-deductible plan through work, a health-savings account (HSA) is a tax-friendly place to save. The same for cash value life insurance. If you can contribute the max to your 401(k) or IRA, but still are looking for additional tax-deferral, consider making after-tax contributions if your plan allows. Some 401(k)s can take additional after-tax 401(k) contributions – beyond the regular and Roth. There is no deduction upfront, but the earnings are not taxed.

The nice thing too is you may be able to convert your after-tax contributions to a Roth 401(k). You will have to check with your 401(k) administrator. Qualified distributions from a Roth 401(k) are tax-free. The earnings are taxable upon conversion. My recent blog post explains this strategy in greater detail: The “Mega-backdoor Roth.”

6. Consider a no-load variable annuity as an option

All variable annuities allow for tax deferral. The capital gains and interest income are reinvested in the annuity. I prefer a no-load variable annuity, which can have lower costs than a traditional variable annuity. Be aware, upon withdrawal from any annuity, the gains are taxed as ordinary income. That is a trade-off you’ll have to balance – swapping capital gains today if you invested in a brokerage account vs. tax-deferral and ordinary income tax in the future.

You will have to defer long enough with a no-load annuity to make the compounding work you. For my clients, I routinely shop around for a no-load variable annuity that offers the best mix of mutual funds and lowest fees.

7. Be smart about where you hold high-yield bonds

The next three tips involve “asset-location” or holding the right investment in the right account. Kiplinger’s Nellie Huang had a good article about this in June, citing “not all bonds should be held in taxable accounts.” I cringe when I see an investor own a high-yield savings bond in a taxable account. All that high yield is eaten up by ordinary income tax rates. High-yield fixed income belongs in an IRA, 401(k) or no-load variable annuity.

8. Take a look at REITs

REITs (real estate investment trusts) are great for income, some paying a 4%-6% yield. That yield may or may not be taxable. Some private REITs pay back their yield as a return of capital and have other expenses, such as depreciation, which they pass onto investors, reducing the tax liability. Whereas with publicly traded REITs, like the Vanguard Real Estate Index Fund, the yield is ordinary income.

If the REIT you own pays all ordinary income, it is best to own it in a retirement account to avoid the ordinary income tax.

9. Find the best spot for your dividend-paying investments

When it comes to stocks, bonds and mutual funds, the qualified dividends they generate are taxable, but at preferential rates. (See Figure 2.) Ideally, you want to own dividend-paying stocks in retirement accounts or in a no-load variable annuity to avoid the tax.

Figure 2: Tax rates on Qualified Dividends are different than ordinary income tax rates

Sometimes it comes down to asset location. If a client has stocks and bonds, I may recommend owning all the dividend-paying stocks in a taxable brokerage account, given the preferential tax treatment. We could then allocate all our fixed income to retirement accounts, so the yield is not taxed.

10. Consider owning ETFs instead of mutual funds

ETFs (exchange-traded mutual funds) have the upper hand versus traditional mutual funds when it comes to taxes. It has to do with the way ETFs redeem, or sell, their shares. If you own an ETF and go to sell, another individual investor buys your shares. If you sell a mutual fund, the manager redeems stock to pay you for your shares. This can cause a capital gain distribution, which is taxable.

Granted, this is less the case with an index mutual fund, but from a tax perspective, ETFs generally are more tax efficient. There is much more to know about ETFs, please consult a qualified professional or use the Kiplinger ETF tool, The Kiplinger ETF 20.

As with many things in life, you can only control what you can control. You can’t control whether tax rates rise, but you can control how and where you own certain investments. Remember:

• High-yield, high-income, high-turnover mutual funds are better off in non-taxable accounts, such as IRAs, 401(k)s, and no-load variable annuities.
• Try to max out your 401(k) or IRA contributions.
• Consider making after-tax contributions to your 401(k) if the plan allows.
• Have an active tax-loss harvesting strategy, like using an active index to build up losses to offset against future gains.
• Use ETFs in taxable accounts to cut down on capital gains distributions.
• Review your asset allocation, and consider owning all your dividend-paying stocks in taxable accounts and fixed income in retirement accounts.

But before you make any wholesale changes to your investment approach, you should consult with a qualified professional, or email me to discuss your options. You may be able to control a lot more than you think!

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

T. Rowe Price's corporate symbol is the bighorn sheep: a sure-footed and agile climber, even in the roughest terrain. It was chosen to reflect investors' ability to rely on the firm's investment expertise to navigate all types of markets.

As far as the best T. Rowe Price funds are concerned, it's an accurate representation.

In this, part of our annual review of popular workplace retirement funds, we put T. Rowe Price's most widely held 401(k) funds to the test. We analyze five of Price's funds, plus the target-date series T. Rowe Price Retirement, and rate them Buy, Sell or Hold. (Seven Retirement target-date funds appear among the most widely held 401(k) funds in the country – with target years between 2020 and 2050 – but we appraise the series as a whole.)

This story is meant to help savers make good choices among the funds available in their 401(k) plan. It is written with that perspective in mind. Look for our reviews of other big fund firms in the 401(k) world, which currently include Vanguard and Fidelity, and will soon include American Funds as well as Buy-rated funds among all the top 401(k) options.

Read on as we look at some of the best T. Rowe Price funds for your 401(k) plan (and weed out some of the provider's lesser options).

Returns and data are as of Nov. 2. In each review, we refer to the symbol, returns and expense ratio of the share class that is available to most investors. The reason for this is that the share classes of specific funds offered in 401(k) plans can vary, depending in part on the size of the plan.

• Symbol: TRBCX
• Expense ratio: 0.68%
• 1-year return: 31.4%
• 3-year annualized return: 25.4%
• 5-year annualized return: 24.8%
• 10-year annualized return: 19.3%
• Rank among the top 401(k) funds: #20
• Best for: Long-term growth, but a new manager has us pushing the pause button

T. Rowe Price Blue Chip Growth has long been one of the best T. Rowe Price funds widely available in 401(k) plans, but a recent change gives us at least momentary pause.

Larry Puglia retired in October as longtime manager of this blockbuster fund after nearly 30 years. Since he launched TRBCX in June 1993 (with Thomas Broadus, who stepped down in 1997), it has delivered a 12.4% annualized return, which handily beats the S&P 500 return of 10.6% over the same period.

Puglia's departure is the main reason we have a Hold on the fund.

New manager Paul Greene started at T. Rowe Price as an analyst in 2006 and was a manager of T. Rowe Price Communications & Technology (PRMTX) from May 2013 to April 2020. During that time, the fund returned 13.8% annualized, beating the typical communications fund as well as the average tech fund and the S&P 500.

That's some evidence that Greene has the chops to run Blue Chip Growth. But the transition between managers can be tricky. Even though Greene will manage to TRBCX's objective – to invest in stocks of large, established companies with above-average growth potential – his buying and selling decisions will vary from Puglia's, for better or for worse. He might want to shift the portfolio he inherited a bit, too.

Also, this is his first stint as sole manager of a diversified U.S. stock fund – one with a whopping $101 billion in assets.

On top of that, Price recently filed to have TRBCX reclassified as non-diversified, from diversified, with the Securities & Exchange Commission. That allows Greene to invest a greater portion of the fund's assets in fewer issuers, and it could kick up the fund's volatility a bit. So, while we're cautiously optimistic that Greene will do well as the new manager at Blue Chip Growth, we have a Hold on the fund for now as we wait and see what he does and how it affects the fund's performance.

Learn more about TRBCX at the T. Rowe Price provider site.

• Symbol: PRGFX
• Expense ratio: 0.64%
• 1-year return: 36.8%
• 3-year annualized return: 26.5%
• 5-year annualized return: 24.4%
• 10-year annualized return: 18.9%
• Rank among the top 401(k) funds: #48
• Best for: Investors looking for extra exposure to large, fast-growing companies

T. Rowe Price Growth Stock is one of three large-company growth funds from T. Rowe Price – along with Blue Chip Growth and Large-Cap Growth I (TRLGX) – that rank among the most widely held 401(k) funds. That's hardly surprising given the firm's rich record with growth investing. Chances are your 401(k) plan only offers one of them, so you won't have to choose between them.

PRGFX is a decent choice for investors looking for a good growth fund. Manager Joe Fath likes to invest in companies that feature one or more of the following characteristics: industry leadership in a lucrative part of the economy, superior growth in earnings and cash flow, an ability to sustain or expand earnings momentum even during tough economic times. The traits typically lead Fath to concentrate on four sectors: information technology, consumer discretionary, communications services and healthcare.

"These segments," he says, which currently make up more than 90% of the fund's assets, "are areas where we can find innovative companies that offer above-average growth prospects."

Since Fath took over in January 2014, T. Rowe Price Growth Stock has returned 17.3% annualized, better than the 14.7% average gain in the S&P 500 over the same period.

In mid-2021, PRGFX shareholders agreed to reclassify the fund as non-diversified, instead of diversified, meaning the fund can invest a greater portion of its assets in fewer issuers. This could lead to more volatility, but the firm has said publicly that it believes reclassification won't "substantially affect the way a fund is currently managed."

Fath hasn't made significant changes to the portfolio, yet. In late 2020, the fund's biggest 10 holdings in the fund represented 45.9% of the fund's assets. At the end of September 2021 – three months after Growth Stock was reclassified – the top 10 holdings represented 46.9% of the fund's assets.

He currently holds stock in 117 companies. Some are familiar, including, Amazon.com (AMZN), Microsoft (MSFT) and Alphabet (GOOGL). Others – such as electric vehicle maker Rivian, one of the fund's best performers in the first half of 2021 – are investments in private companies that have yet to go public. (Note: Rivian is expected to go public in November under the ticker "RIVN.")

"Our access and ability to invest in private placements will continue to help the fund stand out from its industry peers," says Fath.

PRGFX is one of the best T. Rowe Price funds available in 401(k) plans, and a solid growth stock fund for investors looking to spice up their core portfolio.

Learn more about PRGFX at the T. Rowe Price provider site.

• Symbol: TRLGX
• Expense ratio: 0.56%
• 1-year return: 38.1%
• 3-year annualized return: 27.2%
• 5-year annualized return: 27.1%
• 10-year annualized return: 20.3%
• Rank among the top 401(k) funds: #46
• Best for: Aggressive investors looking for above-average returns

Regular mom-and-pop investors can't invest in T. Rowe Price Large-Cap Growth I, which has a $1 million minimum and is designed for institutional clients, such as a 401(k) plan. But it's one of T. Rowe Price's best funds. And it sports a well-below-average 0.56% expense ratio, the lowest of all the T. Rowe Price actively managed U.S. stock funds highlighted in this story.

Manager Taymour Tamaddon took over in early 2017, so we limit our scrutiny to the length of his tenure. But Tamaddon delivers, with a 26.6% annualized return since he stepped in as manager. That beats the average 22.7% annualized return of his peers – funds that invest in large, growing companies – as well as the 18.3% average annual gain in the S&P 500 index.

Tamaddon, like almost every other U.S. growth stock fund manager, holds the usual suspects at the top of his portfolio. but he takes sizeable bets. Alphabet, Microsoft and Amazon.com, at last report, were the top three holdings and represented nearly 27% of the fund's assets. Those three stocks have been big contributors to TRLGX's recent performance. Over the past 12 months, the fund has gained 38.1%.

Along with Blue Chip Growth and Growth Stock, Large-Cap Growth was also reclassified in mid-2021 as a non-diversified fund with the SEC, which allows it to concentrate in a certain sector, industry or geographic area. Tamaddon already takes big stakes in specific stocks. But further concentration might add to the fund's volatility.

Even so, as long as you can stomach the bumps along the way, T. Rowe Price Large-Cap Growth is a solid choice for investors looking to tap into fast-growing U.S. companies.

Learn more about TRLGX at the T. Rowe Price provider site.

• Symbol: RPMGX
• Expense ratio: 0.73%
• 1-year return: 31.5%
• 3-year annualized return: 20.6%
• 5-year annualized return: 19.6%
• 10-year annualized return: 16.2%
• Rank among the top 401(k) funds: #50
• Best for: Investors looking for long-term growth

For close to three decades, manager Brian Berghuis has run T. Rowe Price Mid-Cap Growth (it will be 30 years in June 2022), delivering a 14.3% annualized return over the period. No other diversified U.S. stock fund manager in the country has done better – for as long. Although three other diversified U.S. stock funds sport slightly higher annualized returns over that period, none were earned by the same manager over the entire period.

RPMGX has been closed to new investors since 2010. But if Mid-Cap Growth is offered in your 401(k), that doesn't matter. Participants in a retirement-savings plan that includes Mid-Cap Growth as an investment option can invest at any time.

Now the only question is how much longer Berghuis, who just entered his 60s, will stick around. He has not announced any plans to retire. That's good news. But Mid-Cap Growth has taken on associate managers, which at T. Rowe Price is sometimes a signal (albeit a distant one) that a manager transition is in the works. The firm prefers to make changes slowly, and adding associate managers to a fund a year in advance of a manager change is not uncommon.

Berghuis still is lead portfolio manager and is ultimately responsible for portfolio decisions, but Donald Easley and Ashley Woodruff were recently named associate managers on the fund; John Wakeman has been an associate portfolio manager since 1992.

We're envious of those 401(k) plan participants who can invest in RPMGX. It's all-around one of the best T. Rowe Price funds on offer.

Learn more about RPMGX at the T. Rowe Price provider site.

• Symbol: PRNHX
• Expense ratio: 0.75%
• 1-year return: 38.7%
• 3-year annualized return: 33.0%
• 5-year annualized return: 31.0%
• 10-year annualized return: 22.1%
• Rank among the top 401(k) funds: #66
• Best for: Aggressive minded investors with a long-term view looking for exposure to small and midsize companies

T. Rowe Price New Horizons has entered a new chapter with manager Joshua Spencer, who stepped in after superstar Henry Ellenbogen abruptly left T. Rowe Price in April 2019. So far, it's been thrilling. Since Spencer took over, he's pounded the competition with a 35.2% annualized return, beating 94% of its peers, funds that invest in midsize, growing companies, and far and away ahead of the 20.4% annualized gain in the Russell Midcap Index.

PRNHX is closed to new investors, but if it's offered in your employer-sponsored retirement savings plan, you're free to buy shares as a first-time investor in the fund.

Ellenbogen was a tough act to follow. During his nine-year tenure as manager of New Horizons, the fund posted an 18.7% annualized return, beating every diversified stock index imaginable, and all but one U.S. diversified stock fund: a small-company fund called Virtus KAR Small-Cap Growth (PXSGX).

But Spencer has made his mark on PRNHX. Like Ellenbogen, he looks for small, undiscovered emerging companies that offer the potential for accelerated earnings growth because of new products, a revitalized management team, or a structural shift in the economy. Investments in private companies – including shoemaker Allbirds (BIRD), which only very recently went public; apparel company Rent the Runway; and Tempus Labs, a biotech firm – represent 5% of the fund's assets and offer the promise of enhanced returns.

Although Spencer focuses on companies with $7 billion or less in market value at the time of purchase, like his predecessor, he'll hang on as long as the company is growing. It's one reason New Horizons, which started under Ellenbogen as a small-company growth fund, is now classified a mid-cap growth fund. Most of the fund's top 10 holdings predate Spencer as manager. Veeva Systems (VEEV), a cloud-computing company, for instance, has been in the fund since 2017 and boasts a market value of $45 billion.

This is a solid option for investors who want to invest early in companies with solid growth prospects.

Learn more about PRNHX at the T. Rowe Price provider site.

• Rank among the top 401(k) funds: #27 (TRRCX, 2030); #41 (TRRDX, 2040); #45 (TRRHX, 2025); #49 (TR, 2020); #53 (TRRJX, 2035); #69 (TRRKX, 2045); #72 (TRRMX, 2050)
• Best for: Investors who want a managed, diversified approach to their retirement savings

Target-date funds take the worry out of investing your retirement savings because experts handle everything for you. They decide how much of your assets should hold stocks or bonds and when your portfolio needs rebalancing. They even work to make your money last throughout your retirement.

The key to a top-notch target-date fund is the asset-allocation plan behind it. And for the past decade, T. Rowe Price has had a winning one. The proof is in the long-term performance record of the funds in this target-date series, which is the third biggest in the country after Vanguard and Fidelity. Over the past three, five and 10 years, T. Rowe Price Retirement target-date funds have posted returns that rank among the top decile of their respective peer group.

The "Retirement" series is Price's flagship target-date product. The firm has since launched other target-date products. One, called "Target," is slightly more conservative than its older sibling Retirement. While Retirement holds 55% of its assets in stock at retirement, Target holds 42.5%. And earlier this year, Price introduced the "Retirement Blend" series, which relies on a mix of active and passive funds.

But the firm's Retirement target-date funds dominate the 401(k) world. The funds hold 24 to 26 mostly actively managed mutual funds, depending on the target year. The most popular one, T. Rowe Price Retirement 2030, holds 26 funds, including some of the stellar portfolios we highlighted here, such as New Horizons and Mid-Cap Growth, as well as one index fund, T. Rowe Price Equity Index 500 (PREIX).

The Retirement target-date series are highly diversified and includes exposure to a wide variety of assets, including long-term Treasuries, foreign stocks and bonds, emerging-markets stocks and bonds, floating-rate loans and real assets, such as natural resources, real estate and commodities.

The asset allocation team, headed by Wyatt Lee, frequently makes adjustments to the target-series glidepath or to the fund lineup. In the first half of 2020, for instance, the team initiated a glide path tweak that raised the overall stock allocation and lowered the bond allocation at certain points along the glide path. Like all changes at Price, the shifts will be made slowly and won't be completed until mid-2022. Ultimately, the stock allocation at the beginning of the glide path – with 40 years before retirement – will increase to 98% from 90%. And at the glide path's end – 30 years after retirement – the stock holdings will sit at 30%, up from 20%.

This target-date series includes some of the best T. Rowe Price funds you could want to shepherd your retirement. They're a fine choice for retirement savers who want professional investment management for their 401(k) money.

Learn more about T. Rowe Price Retirement funds at the T. Rowe Price provider site.

Fidelity celebrates good stock picking. The firm holds a contest every year for its portfolio managers: They get 60 seconds to pitch one idea, and the best pitch wins a dinner for four. The best performer after 12 months also wins dinner.

Maybe that's why many of the best Fidelity funds stand up so well in our annual review of the most widely held 401(k) funds.

Here, we zero in on Fidelity products that rank among the 100 most popular funds held in 401(k) plans, and rate the actively managed funds Buy, Hold or Sell. A total of 22 Fidelity funds made the list, but seven are index funds, which we don't examine closely because the decision to buy shares in one generally hinges on whether you seek exposure to a certain part of the market.

Actively managed funds are different, however. That's why we look at the seven actively managed Fidelity funds in the top-100 401(k) list. We also review seven Fidelity Freedom target-date funds as a group as they all rank among the most popular 401(k) funds. And we took a look at Fidelity Freedom Index 2030 – it has landed on the top-100 roster for the first time, and while it's index-based, active decisions are made on asset allocation.

This story is meant to help savers make good choices among the funds available in their 401(k) plan. It is written with that perspective in mind. Look for our reviews of other big fund firms in the 401(k) world, which currently include Vanguard, T. Rowe Price and American Funds, and will soon include Buy-rated actively managed funds across all issuers.

Let's look at some of the best Fidelity funds for your 401(k) plan. We'll determine which ones stand up to scrutiny, and which ones, if any, you should avoid.

Returns and data are as of Oct. 24. In each review, we refer to the symbol, returns and expense ratio of the share class that is available to most investors. The reason for this is that the share classes of specific funds offered in 401(k) plans can vary, depending in part on the size of the plan.

• Symbol: FBALX
• Expense ratio: 0.52%
• 1-year return: 25.7%
• 3-year annualized return: 18.1%
• 5-year annualized return: 14.8%
• 10-year annualized return: 12.3%
• Rank among the top 401(k) funds: #59
• Best for: Investors who want an all-in-one, stock-and-bond portfolio

Funds that hold stocks and bonds, otherwise known as balanced funds, are typically considered moderate all-in-one funds. But Fidelity Balanced is a little turbocharged. It typically holds an above-average stake in stocks compared with the peer group, funds that allocate 50% to 70% of assets to stocks.

At last report, FBALX held 72% of its assets in stocks – nearly 10 percentage points more than the typical balanced fund. On the bond side, the fund is a bit more staid than others, generally speaking. Investment-grade securities, rated between triple-A and triple-B, fill most of the bond portfolio – more than the typical balanced fund holds in high-grade bonds – and represent 23% of the entire portfolio. Junk-rated or below bonds make up just 1% of the fund's assets.

This Fidelity fund has a unique setup. Über-manager Robert Stansky makes the big-picture decisions of how much of the portfolio should own in stocks and in bonds. Eight stock pickers and four bond pickers, who specialize in specific sectors, do the specific security selection. U.S. government bonds dominate the bond portfolio. The usual suspects – including Microsoft (MSFT), Apple (AAPL), Amazon.com (AMZN) and Alphabet (GOOGL) – top the stock side.

Balanced funds are good choices for investors who want a no-fuss, all-in-one fund. But this one is more aggressive than others. That means more volatility in down markets. In the 2007-09 bear market, for instance, Fidelity Balanced sank a cumulative 43.5%, which was more than the typical 40.8% drop in the typical balanced fund. (For context, the S&P 500 lost a cumulative 55.3%.) And in the pandemic bear market in early 2020, Fidelity Balanced lost 26.7%, exceeding the 24.2% loss in the typical balanced fund (the S&P 500 lost 33.8%). Bear that in mind when you invest.

But overall, FBALX remains among the best Fidelity funds. The portfolio positioning has helped Fidelity Balanced deliver a 10-year annualized return that beats 98% of its peers. It also results in a yield of about 0.9% at present.

Learn more about FBALX at the Fidelity provider site.

• Symbol: FBGRX
• Expense ratio: 0.79%
• 1-year return: 36.8%
• 3-year annualized return: 33.6%
• 5-year annualized return: 28.8%
• 10-year annualized return: 21.8%
• Rank among the top 401(k) funds: #63
• Best for: Aggressive investors who want to invest in fast-growing, innovative companies

Fidelity Blue Chip Growth is a member of the Kiplinger 25, the list of our favorite actively managed no-load funds, and is among the best-performing Fidelity funds you can find. Manager Sonu Kalra has run FBGRX for more than a decade, earning a 21.8% annualized 10-year return that outpaces 96% of all large-company growth funds and the S&P 500.

"What we're trying to do with this fund is identify companies where the market is mispricing not just the absolute rate of growth but the durability of that growth," he says. "We do that by trying to identify companies that are participating in large underpenetrated markets."

Kalra divides the portfolio into three buckets:

Secular growers, he says, are businesses that are benefiting from growing trends such as e-commerce, cloud technology, electric vehicles.

Cyclical growers include companies that are in the sweet spot of the business cycle – home builders, for instance, benefiting from the move out of the city during COVID 19, or energy companies on the rebound after the pandemic shut-down.

Kalra calls the last bucket "opportunistic growers." It includes companies that have a catalyst to drive growth going forward – a new manager or a new product. American Eagle Outfitters (AEO), for instance, is a retailer with a brand of intimate wear that's growing rapidly and an online business that's thriving.

FBGRX holds stocks in more than 500 companies, at last count. But the portfolio is top-loaded. For instance, the largest 10 holdings make up nearly half of the fund's assets. Companies below the 20th biggest holding represent stakes of less than 1% each of the fund's assets.

Kalra, who credits a team of 100-odd analysts with helping him to do his job (they're his "eyes, ears and feet on the street"), has positioned Fidelity Blue Chip Growth for an economic rebound, with a tilt toward cyclical stocks. In mid-2021, he added to stakes in Airbnb (ABNB) after shares pulled back and in Tesla (TSLA), which he says will see an increase in demand for its vehicles once the supply-demand dynamic improves across the auto industry.

Investors looking for an actively managed fund that can beat the S&P 500 haven't been disappointed in the 12 years that Kalra has been running the fund. We don't expect that to change.

Learn more about FBGRX at the Fidelity provider site.

• Symbol: FCNTX
• Expense ratio: 0.86%
• 1-year return: 28.4%
• 3-year annualized return: 23.5%
• 5-year annualized return: 21.9%
• 10-year annualized return: 17.6%
• Rank among the top 401(k) funds: #6
• Best for: Moderate investors looking for a tamer growth fund

Will Danoff has presided over Fidelity Contrafund since September 1990. Since then, Contrafund has returned 14.2%, well ahead of the 11.2% annualized return in the S&P 500. A $10,000 investment on the day Danoff took over would be worth more than $620,000 today. A comparable investment in a low-cost S&P 500 index fund would be worth $262,253, nearly 60% less.

In other words, Contrafund is a proven standout.

Danoff prefers to buy beaten-down or overlooked best-in-class companies with superior earnings growth, proven management teams and sustainable competitive advantages. These days, he's bullish on tech – well, he has been for years, but he is particularly keen on the space now as digital transformation stories continue apace. More than 30% of the fund is invested in technology, at last report, which is a touch above the 28% weighting in the S&P 500 stock index. He has owned Amazon.com, a top holding, since 2007, and Apple, another top fund holding, since 2003.

Watchers of Fidelity funds consider Contrafund a conservative choice for growth. There's some merit to that. Over the past five years, for instance, the fund's 21.7% annualized return ranks in the 50th percentile of its peer group: funds that invest in growing, large companies. But FCNTX has been less volatile over that period than the typical large-company growth fund, too.

This is one of the best Fidelity funds for investors who want growth but not all the volatility that comes with a more aggressive fund.

Learn more about FCNTX at the Fidelity provider site.

• Symbol: FDIVX
• Expense ratio: 1.05%
• 1-year return: 23.9%
• 3-year annualized return: 17.4%
• 5-year annualized return: 12.6%
• 10-year annualized return: 10.0%
• Rank among the top 401(k) funds: #74
• Best for: Foreign stock exposure

It's hard to muster up excitement about investing overseas, because U.S. stocks have done so much better than foreign shares.

As foreign-stock funds go, Fidelity Diversified International, which invests mostly in large companies with durable or improving growth prospects, is a solid choice. In fact, this Fidelity fund has beaten the index – the MSCI EAFE, which tracks foreign stocks in developed countries – over eight of the past 11 full calendar years.

William Bower has run FDIVX for more than 20 years. He favors high-quality businesses with competitive advantages and consistent profitability. The fund's top country exposures include Japan, France and the U.K. But its investments aren't limited to developed countries. In fact, 10% of the fund is invested in emerging markets, mostly in Asia. Its top holdings are ASML Holding (ASML), a maker of photolithography systems used to make semiconductor chips, pharmaceutical firm Roche Holding and luxury goods maker LVMH Moet Hennessy Louis Vuitton (LVMUY).

In years past, we have rated Fidelity Diversified International a Hold because next to its peers – funds that invest in large, growing foreign stocks – it's decidedly mediocre. Fidelity Diversified International has lagged the typical foreign large growth fund in five of the past 10 years.

There are certainly better actively managed funds out there, but those funds might not be available to you in our plan. In this review, we have to consider that this might be the only active foreign fund available in the plan.

In that context, this foreign-stock fund is a fine choice. Over time, FDIVX has beaten the MSCI EAFE index, and it has been less volatile, too.

Learn more about FDIVX at the Fidelity provider site.

• Symbol: FDGRX
• Expense ratio: 0.83%
• 1-year return: 35.7%
• 3-year annualized return: 35.2%
• 5-year annualized return: 30.6%
• 10-year annualized return: 22.7%
• Rank among the top 401(k) funds: #26
• Best for: Aggressive investors looking for to generate wealth

Fidelity Growth Company is Fidelity's best large-company growth fund. Over the past decade, manager Steven Wymer has delivered a 22.7% annualized total return to shareholders, which trounces the 16.2% gain in the S&P 500. Only a dozen or so funds have done better than that over the past 10 years.

Many investors are shut out to Fidelity Growth Company now because it's closed to new investors. But if your 401(k) plan includes FDGRX as an investment option, you can still invest in it, even if you're new to the fund.

Wymer holds close to 500 stocks in the fund, with a heavy tilt toward information technology companies, such as Nvidia (NVDA), Salesforce.com (CRM) and Shopify (SHOP), as well as communications services firms, such as Google parent Alphabet, social media firm Facebook, and Roku (ROKU), the streaming-device company.

Economically sensitive stocks have recently given back some of their leadership to secular growth stocks, Wymer says in a recent report. "The outperformance of a stock or sector in the months ahead will be driven more by individual fundamentals than macro factors or trends," he says. That's why he's focused on companies with a strong outlook based on fundamentals.

FDGRX is one of the best Fidelity funds on offer, generating significant wealth in the past over time. If you're lucky enough to have access to it in your 401(k) plan, buy shares.

Learn more about FDGRX at the Fidelity provider site.

• Symbol: FLPSX
• Expense ratio: 0.78%
• 1-year return: 38.5%
• 3-year annualized return: 15.3%
• 5-year annualized return: 13.6%
• 10-year annualized return: 12.9%
• Rank among the top 401(k) funds: #77
• Best for: Investors looking for a solid value-oriented fund

Joel Tillinghast was a Fidelity analyst covering tobacco and personal-care-product firms when he came up with a concept for a new fund more than 30 years ago. The idea was to find good values in high-quality small companies and out-of-favor larger firms.

Fidelity higher-ups loved it. So in late 1989, Fidelity Low-Priced Stock launched.

FLPSX has been an unequivocal success since then, with Tillinghast at the helm, returning 13.6% annualized since inception – well ahead of the average annual gain in the S&P 500, the Russell 2000 small-company index, the Russell mid-cap benchmark and nearly all small- or midsize-company stock funds. Morningstar recently named Tillinghast its outstanding portfolio manager of 2021.

Some things have changed over the years. Tillinghast now has five comanagers, though he still runs about 95% of fund's assets. In the fund's early days, stocks had to be $15 or less at the time of purchase. A few years ago, the threshold jumped to $35, or the stock has to boast an earnings yield that falls at or above the median for the small-company Russell 2000 index, which is still the fund's benchmark. Low-Priced Stock also owns more foreign stocks than it did in its earliest days. At last report, 35% of assets were invested in international shares, mostly in Europe and Japan.

Finally, FLPSX was always focused on companies of all sizes, but early on, it tilted heavily toward small firms. Now, the fund is evenly split among large-, midsize- and small-company stocks.

But Tillinghast and his comanagers still look for companies with sturdy profits, little debt and a sustainable competitive edge over peers. He's not "stingy," says Morningstar analyst Robby Greengold, and he doesn't "chase fads." Among the fund's top holdings are UnitedHealth Group (UNH), British clothing footwear and home products retailer Next, and Metro, a Canadian grocery store chain.

FLPSX is one of the best Fidelity funds if you're looking for a great core holding – it's well diversified among sectors and globally. And it boasts low volatility relative to most stock funds. The only concern is that Tillinghast, who is 63 years old, plans to retire from investing at the end of 2023.

Learn more about FLPSX at the Fidelity provider site.

• Symbol: FPURX
• Expense ratio: 0.52%
• 1-year return: 22.4%
• 3-year annualized return: 16.4%
• 5-year annualized return: 14.1%
• 10-year annualized return: 8.9%
• Rank among the top 401(k) funds: #84
• Best for: Moderate investors who want an all-in-one stock-and-bond fund

Manager Daniel Kelley took over Fidelity Puritan in mid-2018, but he appears to be finding his way. That's why we're upgrading this fund from Hold to Buy. Since he assumed his position, the fund has returned 14.5% annualized, which outpaces the fund's benchmark, a 60/40 blend of the S&P 500 index and Bloomberg U.S. Aggregate Bond index. That beats the 10.0% annualized return in the typical balanced fund, too.

On the stock side, Kelley relies on fundamental and quantitative analysis to build the portfolio. He favors companies that offer earnings and revenue growth at a reasonable price. FPURX currently has a high stake at 70% of assets. On the bond side, which includes a roughly 5% stake in high-yield bonds, the goal is to find attractively priced bonds with a disciplined eye on risk management.

Lately, Kelley has loaded up on retail stocks that might benefit from pent-up demand from consumers as well as financials, which stand to gain from improved loan demand as the economy reopens. A rise in interest rates, if it happens, would be a bonus for banks, too. Bank of America (BAC) and Wells Fargo (WFC) were top bank holdings at last report.

On the bond side, rising inflation and interest rates are a concern. (Bond prices and interest rates move in opposite directions.) So Puritan is currently tilting toward investment-grade corporate bonds, especially those issued by financials, given the banks' strong balance sheets and attractive valuations.

Fidelity Puritan is best for moderate investors who want an all-in-one portfolio solution for stocks and bonds. Under Kelley, who has run the fund for just over three years, Puritan has turned in above-average returns with below-average volatility.

Learn more about FPURX at the Fidelity provider site.

• Symbol: FXIFX
• Expense ratio: 0.12%
• 1-year return: 18.8%
• 3-year annualized return: 13.4%
• 5-year annualized return: 11.8%
• 10-year annualized return: 9.7%
• Rank among the top 401(k) funds: #100
• Best for: Investors who want a low-cost blend of stocks and bonds

This is the first time a Fidelity Freedom Index target-date fund has ranked among the 100 most widely held 401(k) funds.

This particular fund is designed for investors who plan to retire around the year 2030; that puts them in their mid-50s today. It holds 64% of its assets in stocks (39% in U.S. stocks and 25% in foreign shares), 35% in bonds and 1% in cash. As its name implies, it is comprised entirely of index funds (six, to be exact). Along with a total market U.S. stock fund and a total global (ex-US) stock fund, the 2030 fund also holds a bond fund that mirrors the Bloomberg U.S. Aggregate bond index, a long-term Treasury fund and an inflation-protected bond index fund.

It gets the job done, as index funds go. Over the past 10 years, the fund's annualized return, 9.7%, outpaces the typical 2030 target-date fund, which posted a 9.6% annualized return.

Because index funds make up its innards, much of Freedom Index 2030's success will hinge on how assets are allocated. Many experts believe that regardless of the strategy, asset allocation – the practice of apportioning a certain slice of a portfolio to different assets to balance risk and reward – is more important to investing successfully than security selection.

To that end, Fidelity announced in July 2021 that it would be tweaking the allocation of the Freedom Index funds, all of it to increase diversification benefits on the bond side. It's adding a slice of foreign government debt, beefing up the allocation to Treasury Inflation-Protected Securities (short-term and long-term) as well as long-term Treasuries. To make room for these changes, the series will reduce assets in investment-grade bonds and short-term debt.

"These updates seek to improve portfolio resilience in distinct market environments that may emerge, especially for investors nearing or in retirement," says a company spokesperson.

The transition will be made slowly and isn't expected to be complete until early fall 2022.

Learn more about FXIFX at the Fidelity provider site.

• Rank among the top 401(k) funds: #24 (FFFEX, 2030); #28 (FFTWX, 2025); #32 (FFFFX, 2040); #33 (FFTHX, 2035); #37 (FFFDX, 2020); #57 (FFFGX, 2045); #61 (FFFHX, 2050)
• Best for: Investors who want an expert to handle their retirement savings

Seven Fidelity Freedom Funds that sport the target years 2020 to 2050 rank among the most widely held 401(k) funds. While not splashy, the Freedom series nonetheless deserve a spot among Fidelity's best funds. These funds perform well, ranking in the top quartile of their respective peer groups in most calendar years.

Fidelity Freedom 2030 is the biggest in 401(k) plans. Geared toward retirement savers with just under a decade to go before they quit working, the fund currently holds 62% of its assets in stocks (30% is in U.S. stocks; 32%, in foreign shares); and 31% is in bonds, most of which is U.S. debt. The rest sits primarily in cash.

FFFEX sports a finely tuned allocation. The portfolio holds 11 U.S. stock funds – mostly actively managed, including Fidelity Series Small Cap Opportunities (FSOPX) and Fidelity Series Opportunistic Insights (FVWSX) – and seven foreign stock funds, including an international small-company fund, a Canada fund, and two emerging-markets stock funds. All of the holdings are "Series" branded funds, which were created exclusively for the Freedom target-date funds and are not otherwise available to retail investors.

The bond portion of Freedom target-date funds are similarly finely calibrated, and includes exposure to floating-rate loans, real estate debt, foreign bonds and high-yield IOUs.

Fidelity's tweaks to its target-date fund allocation change – mentioned in our review of the Freedom Index 2030 fund – apply to all of the firm's target-date products. So the firm's actively managed Freedom Target series will also get a slice of foreign government debt, and a beefing-up of allocation to Treasury Inflation Protected Securities (short-term and long-term) and long-term Treasuries, too.

The changes will be gradual, but we're watching the series closely just in case.

Learn more about Fidelity Freedom Funds at the Fidelity provider site.

The term “custom made” has long been associated with the finest products. But custom-made products aren’t limited to cars, clothes and furniture. In fact, 7% of 401(k) plan participants on Vanguard’s platform have their 401(k) asset allocation customized to their individual requirements using an advice tool commonly known as a managed account (MA).

Under a managed account program, a plan sponsor selects a third-party adviser to provide independent investment advice to participants. Some plans offer a choice of providers, but many only make one product available.

Participants who enroll in the service are asked to provide the adviser with additional information, such as their risk tolerance, assets outside their 401(k) plan, and expected retirement date. Using this information, the provider will develop the participant’s overall asset allocation, choose investments and monitor and rebalance the accounts, all on a continuing basis. In effect, participants turn over discretion in the management of their entire defined contribution plan account to a third-party professional.

In addition to asset management, many providers support additional guidance on savings levels, when to start taking Social Security payments, and designing a sustainable decumulation strategy for retirement. But delegating the asset allocation and fund elections of a participant’s balance is at the heart of the service.

Fees vary widely but are commonly assessed as a percentage of assets and can range from 20 to 75 basis points. And while this may not seem substantial, it can be a considerable sum over an extended period. For example, if you put $10,000 per year in a 401(k) plan over the course of a 30-year career at a 6% return, an additional 30 basis point fee — on top of the investment expense of the underlying plan funds — will cost approximately $50,000 over the period.

Issues to consider before going with a managed account

Most of the literature on this topic available from your plan highlights the various benefits of using a managed account … with typically less focus on its limitations, other than the standard disclosure that all investing involves risk.

So, for participants who want assistance with asset allocation, how do you determine whether the additional cost of a managed account is worth it, particularly as compared to target date funds (TDFs)? Target date funds are prepackaged, age-appropriate investment strategies intended to provide post-employment income while reducing risk near retirement. Put another way, which solution (net of expenses) will produce the best outcome?

Like every investment decision, there are many factors to weigh, but here are some considerations that don’t typically appear in the marketing materials:

Accurate performance benchmarking is impossible

One of the inherent limits with managed accounts is that there is no widely accepted way to gauge your investment performance. Most investment funds are compared to a benchmark, an index of unmanaged securities against which fund performance can be measured. Since every asset allocation for managed account users is customized to the individual, there is no agreed upon way to measure performance versus if you had invested in a target date fund.

The Investment funds available for your MA portfolio are limited

In constructing a customized investment portfolio, managed accounts are limited to use only the investment funds available in the plan. There are small plans where an adviser can pick funds to use specifically as part of an advice product, but this option generally isn’t available for anyone working for midsize or larger employers. This may make it more difficult for managed accounts to achieve similar performance to target date funds that don’t have this limitation. (To be fair, managed account providers do review fund lineups and, if there are additional asset classes needed, will ask the plan sponsor and/or its consultant to consider fund additions.)

Your portfolio could end up looking like a typical target date fund anyway

Providers often stress they are creating a unique portfolio for you based on your individual situation. As cited in a report by the Government Accountability Office (GAO), creating a unique portfolio relies on both customization and personalization. Customization involves allocating a participant’s account based solely on age or other factors that can be easily obtained from the plan’s record keeper, such as gender, income, current account balance and current savings rate. These can be obtained without participant engagement.

Many providers also personalize asset allocations based on factors such as outside outsets, including other retirement plan balances, risk tolerance, expected retirement age and spousal assets. But unfortunately, the track record of participants who use this service is decidedly mixed on entering and maintaining their personalized info.

Even though many providers issue, at a minimum, quarterly reminders in addition to other outreach initiatives, the GAO reported that generally fewer than one-third, and sometimes fewer than 15%, of participants furnish this personalized information. If this is surprising, think about your personal finances and consider whether you have paid a recurring charge (for example, a service contract or streaming service) for a product long after you last used it.

So, what happens if you don’t personalize? In those cases, the providers must make assumptions based on your age and the customized data they obtain from your record keeper. And these assumptions may not significantly vary from those made by your plan’s target date manager for participants in your age cohort.

Put simply, you may be paying for a custom-made product but end up getting the equivalent of a target date fund but at higher cost.

Actions to take before investing

What actions can you take to address the issues above? Here are some ideas:

Do a self-assessment

As highlighted above, managed accounts are far less valuable if you don’t provide and maintain your personalized financial information. So, before anything else, you should you do an honest self-assessment of your long-term willingness to spend the time necessary to maintain the information needed. For instance, if you are the type of person who ignores benefit elections and doesn’t even bother to glance at plan materials, you may not be well-suited for this type of service.

Ask the provider

Reach out to the managed account provider before investing and ask questions about how to benchmark performance and the degree of customization you can expect based on your personal financial situation. Challenge them to prove why their option is superior to your plan’s target date fund.

Use the product for a limited period

Managed account services can be terminated at will. So, one approach might be to sign up for the service, look at the asset allocation, and see how it differs from the age-appropriate target date fund. Then, you can get a better idea of the degree of customization provided and terminate the service if you don’t think it’s valuable. Many providers will offer 60- to 90-day windows when you can take advantage of the service at no cost. Just make sure that you “watch the clock” and don’t let it auto-renew (like those streaming service subscriptions).

Older participants can evaluate alternatives outside the plan

One of the inherent limitations of managed accounts offered through a qualified plan is that you typically have a choice of only one or two providers as record keepers want to limit the expense of building the interfaces required. But participants age 59.5 and older typically have the right to roll over their entire vested account balance to a rollover IRA without limitation. So rather than limiting yourself to the plan’s providers, particularly if you are unable to address the concerns raised above, participants can look at the cost and features of services available through an IRA rollover from other providers.

The bottom line

It’s understandable that many participants may not want to do the research required to weigh using a target date fund or managed account. One study found the average person will spend more time each year planning their vacation than their 401(k) investment options. And since the cost of a managed account is not an out-of-pocket expense but deducted from investment returns, it may seem less impactful. But this is similar to buying a custom-made suit and being unwilling to sit with a tailor to take measurements. You will likely get something very close to an off-the-shelf alternative but at a higher cost.

Many bespoke products require a certain time investment to really reap the benefits. The points above should provide a road map for anyone interested or currently participating in a managed account service to start that process.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

So many investment choices, so many potential portfolio decisions. The inventory of stocks, bonds, funds and other financial assets for sale is big enough to fill a big-box store. But there’s a downside to shopping at financial supermarkets: It injects complexity into the investing process.

That can lead to portfolio miscues, such as chasing highfliers that have already run up in price, investing in assets you don’t understand or buying a bunch of funds that own many of the same stocks (which means you’re less diversified than you think). “The more complex your portfolio is, the easier it is to get out over your skis,” says Matt Fleming, a wealth adviser at Vanguard Personal Advisor Services.

The good news? You can play it simple and build a portfolio using just one to three funds. If you choose correctly, you’ll get a low-cost, diversified mix of stocks and bonds that’s easier to track and manage. Here are three ways to build a slimmed-down, simple portfolio. (Returns and other data are as of September 10.)

One-stop shopping. If stock picking or fund selection isn’t your strong suit, consider a target-date fund, a single-fund portfolio that holds stocks, bonds and sometimes cash in various combinations. The beauty of these savings vehicles, found in most 401(k) plans, is that the fund (which typically holds other funds) makes the investment decisions for you, including periodic rebalancing to make sure your mix of holdings doesn’t get out of line with your risk tolerance.

The fund managers determine how aggressive or conservative the fund’s asset mix should be based on how many years you are away from retirement (or another savings goal serving as your “target”). All you have to do is fund the account. “It puts your portfolio on autopilot, but pros are in the cockpit,” says Jeffrey Wood, an investment adviser at Lift Financial.

The closer you get to your golden years, the less risky your target-date portfolio becomes. The fund dials back more-volatile stock holdings and boosts the weighting in tamer bonds as your hair turns gray. If you’re 40 and want to retire at 65, you might consider a fund with a target date of 2045. T. Rowe Price Retirement 2045, for example, held roughly 90% in stocks and 10% in fixed-income investments at the end of the second quarter, according to fund tracker Morningstar. In contrast, retirees who own T. Rowe Price Retirement 2020 have just 51% in stocks and 49% in bonds.

A fund’s “glide path” (or how its portfolio transitions from aggressive to conservative over time) varies by fund firm. Over the long haul, a target-date series that has a larger stock allocation will likely post bigger returns but carry more risk.

A top target-date fund series to consider is T. Rowe Price Retirement, with expense ratios ranging from 0.53% to 0.64%. The series includes portfolios with holdings among more than two dozen other T. Rowe funds, including Small Cap Value, a member of the Kiplinger 25, the list of our favorite no-load funds. We also like Fidelity Freedom (0.59% to 0.75%). The series gives you access to top managers, such as Joel Tillinghast, of Fidelity Low-Priced Stock, and Steven Wymer, of Fidelity Growth. The Vanguard Target Retirement (0.13% to 0.15%) series of funds provides sweeping exposure to stocks and bonds in the U.S. and overseas by filling portfolios with a handful of lower-cost total-market index funds, such as Vanguard Total Stock Market Index, which owns virtually every publicly traded U.S. stock.

A balanced approach. The old-school balanced port­folio of 60% stocks, 40% bonds is another option to consider, as the bond portion provides diversification, income and a smoother ride with fewer wild price swings. Today, balanced fund managers have some leeway to tilt their portfolio weightings beyond the traditional 60-40 split depending on their market outlook; many balanced funds now have equity weightings of 70% or more. If stocks wobble, bonds will provide ballast. Balanced funds invest in growth-oriented and dividend-paying large-company stocks, as well as bonds ranging from U.S. Treasuries to investment-grade corporates.

“Going with a balanced approach is always a good idea,” says Josh Simpson, investment adviser at Lake Advisory Group. “Steady growth should always be the goal. People get in trouble when they try to hit home runs.” One downside, however, is that even with wiggle room to tweak their allocations somewhat, these funds may hold too few stocks, and as a result be too conservative for young investors with a very long investment time horizon.

Still, a good option to consider is Fidelity Balanced (symbol FBALX, 0.52%), which in the past year returned 27.6%, topping 88% of its category peers. According to the most recent report, the fund held 72% of its portfolio in stocks and 28% in fixed income; top holdings included Microsoft and Apple. Another solid choice is Dodge & Cox Balanced (DODBX, 0.53%), which delivered a 32.3% one-year return, topping 93% of peers, and had 68% in stocks and 32% in bonds at last report. The fund’s largest stock sector weighting was financials, which made up 24% of the portfolio and included top holdings such as Wells Fargo and Charles Schwab.

The whole market in three funds. This strategy, popularized by “Bogleheads” (investors who embrace the low-cost, index-fund approach espoused by the founder of Vanguard, the late John Bogle), includes investments in three asset classes: U.S. stocks, inter­national stocks and U.S. bonds. The portfolio consists of index funds or exchange-traded funds that charge rock-bottom fees and invest in baskets of securities that cover an entire investment universe.

A popular approach is to buy one fund that invests in the total U.S. stock market, one that tracks the total international stock market and one that covers the total U.S. bond market. “It gives you exposure to everything,” says Simpson. Using Vanguard Total Stock Market Index (VTSMX, 0.14%), Vanguard Total International Stock Index (VGTSX, 0.17%) and Vanguard Total Bond Market Index (VBMFX, 0.15%), you’ll gain exposure to the equivalent of some 3,900 U.S. stocks, 7,500 foreign stocks and 18,000 U.S. bonds. (ETF versions of the funds are also available.) Building a similar portfolio using total market funds offered by providers such as Fidelity and iShares is just as easy.

To make this strategy work, make sure your target weightings of U.S. stocks, foreign stocks and bonds remain in line with your risk tolerance. And it’s on you to rebalance the port­folio periodically. Also, remember that the best you can do with index funds is match the gains of the index, minus any expenses. You won’t beat the market. But that’s okay. “Being average is fine, because so many people’s returns are below average,” Wood says.

One last piece of advice: For a simple portfolio to succeed, you must stick to the plan. “Even simple solutions fail if you bail at the wrong time,” says Vanguard’s Fleming.

Related content

• How to Find the Best Mutual Funds for Beginners
• Investing Mistakes Beginners Make and How To Avoid Them
• Should You Use a 25x4 Portfolio Allocation?

Most retirement savers are determined to keep their investments simple. They stash most of their savings in low-cost index funds or in target-date funds, which are portfolios of diversified funds that become more conservative as you approach retirement. This strategy has served savers well in recent years: The S&P 500 index was up 36% for the past year and 18% annualized for the past five years (through September 10).

But if you’ve been following the news, you may be wondering if that’s all there is. Bitcoin has generated enormous returns for people who invested in the cryptocurrency years ago (or even months ago). The white-hot housing market has priced out many home buyers, leading to increased demand for rental properties. Some investors have profited by buying and selling so-called meme stocks, such as GameStop and AMC. And there’s always the temptation to make a long-term bet on an obscure company that could turn out to be the next Amazon.

If you own a traditional or Roth IRA, you can invest in just about anything, with the exception of life insurance and collectibles, such as antiques. Employer-provided 401(k) and other retirement plans are more restrictive, but some allow you to trade individual stocks and specialty funds (see More Choices in Your 401(k)).

For nontraditional investments, you’ll need to open a self-directed IRA, a type of account specifically designed to invest in alternative investments, such as cryptocurrencies, real estate and precious metals. (Major IRA providers, such as Fidelity, Vanguard and Schwab, place restrictions on their customers’ investments.) Fees may be higher than you’d pay for a traditional IRA, and self-directed IRAs have occasionally been hijacked by financial outlaws to steer investors into fraudulent investments. Before investing in a self-directed IRA, check with your state securities regulator and the Securities and Exchange Commission to see whether the provider or custodian has been the subject of any enforcement actions. Avoid unsolicited offers to invest in a self-directed IRA, particularly if the promoter urges you to transfer money from a traditional IRA or 401(k) plan.

Although you can make a lot of money investing in alternative investments, you could lose it, too, jeopardizing your retirement security. And if you run afoul of IRS rules regarding transactions in IRAs and other tax-advantaged accounts—which is particularly easy to do if you invest in rental properties—you could find yourself with an unwelcome tax bill that could decimate your savings.

The Apple of your IRA?

Earlier this year, ProPublica, an investigative news organization, revealed that Peter Thiel’s $2,000 investment in a Roth IRA in 1999 is now worth more than $5 billion. As PayPal’s cofounder, Thiel was able to buy 1.7 million shares of the company for a tenth of a penny per share three years before PayPal went public. Because the money is in a Roth, his profits will never be taxed. (However, unless he decamps to New Zealand and gives up his American citizenship, his billions will still be subject to federal estate taxes when he dies.) The story triggered an uproar, with some lawmakers questioning whether tax rules should be changed to prevent wealthy people from using a Roth as a tax shelter. But Thiel’s tax-free windfall was entirely legal, says Ed Slott, founder of IRAhelp.com.

Unless you’re on the verge of founding the next PayPal, you’re unlikely to replicate Thiel’s success. But there’s nothing to stop you from using money in your traditional or Roth IRA to bet on a company you’re convinced will be the next Apple or Amazon.

Some major IRA providers restrict investments in over-the-counter stocks (also known as penny stocks), which are companies that don’t meet the requirements to be listed on a major stock exchange. To invest in these stocks, along with shares of privately held companies, you may need to open a self-directed IRA.

But most major IRA providers will allow you to invest in any publicly traded company that’s listed on the Nasdaq or New York Stock Exchange, which means you don’t need to set up a Robinhood account to dabble in the next GameStop. And if you’re determined to try your hand at buying and selling individual stocks, doing it in an IRA offers some significant tax advantages. You don’t have to report your gains and losses to the IRS every year, as you do with a taxable account.

With a traditional IRA, taxes on dividends (if there are any) and gains are deferred until you withdraw your money. You’ll pay taxes on withdrawals at ordinary income tax rates, which currently range from 10% to 37%. That’s higher than current long-term capital gains rates, which range from 0% to 20%, depending on your income. However, because you’re not taxed until you take money out of your IRA, you have more control over taxes, Slott says. You could, for example, take withdrawals in a year when your income is low to minimize your tax bill (with the caveat that you’re required to take required minimum distributions once you turn 72).

With a Roth, you’ll never pay taxes on your gains, as long as you’re 59½ or older and have had the account for at least five years when you take the money out. Losses are another story. If you make a bad bet in a taxable account and decide to bail on a stock, you can deduct losses against your taxable gains; if your losses exceed that amount, you can deduct $3,000 against ordinary income. But if you lose money in a traditional or Roth IRA, “the government is not going to share your pain,” Slott says.

That wasn’t always the case. Prior to 2018, some losses in a Roth IRA were deductible if, after closing all of your Roth accounts, the amount remaining was less than the amount you contributed, plus anything you converted. (Deductible losses in traditional IRAs were limited to nondeductible contributions.) Even then, such a loss was treated as a miscellaneous deduction, which meant that you could only deduct it, along with other miscellaneous deductions, to the extent it exceeded 2% of your adjusted gross income. But the Tax Cuts and Jobs Act, which took effect in 2018, eliminated miscellaneous deductions.

For that reason—along with the fact that this is your retirement savings—you should exercise care when investing IRA money in individual stocks. Neal Nolan, a certified financial planner in Asheville, N.C., tells clients who are interested in stock picking to limit their investments to money they can afford to lose. “You should never lose sight of the big-picture, long-term approach,” he says. “It’s like a form of gambling—when done in moderation, it’s probably okay.”

A roof over your retirement savings

Housing inventory is expected to remain tight for the foreseeable future, which means demand for rental properties will continue to rise. But buying a house requires you to invest a lot more money than you may have in your taxable accounts.

Companies such as Entrust and Equity Trust offer self-directed IRAs for investors who want to use money in their IRAs to purchase rental property. But to preserve your account’s tax-advantaged status, you must follow a complex set of rules that reduce your flexibility—and possibly your profits, too.

To start with, any funds used to maintain the property and cover other costs, such as property taxes and insurance, must come out of your IRA. If you hire someone to repair the roof, for example, you must pay that individual with money from your IRA, not other sources. Sweat equity is also prohibited—even if you’re capable of painting the house, the IRS requires you to pay a third party to do it. In addition, you can’t take any of the tax breaks typically available to property owners, such as write-offs for depre­ciation, property taxes and other expenses.

If you’re retired and own rental property in a traditional IRA, you’ll encounter major hassles when the time comes to take required minimum distributions. Once you turn 72, you must take annual withdrawals from all of your tax-deferred accounts, based on the year-end balance of your IRAs. To determine the year-end value of a piece of real estate, you must obtain an appraisal, which can cost thousands of dollars, says Greg Giardino, a CFP in Hawthorne, N.J. (This doesn’t apply if your property is in a Roth IRA because you don’t have to take RMDs from a Roth.)

Finally, IRS rules against self-dealing limit how you can use your rental property. You can’t live in it, and your family members can’t live there, either. If you buy a rental property with an IRA and let your sister live there, for example, the IRS could disqualify the entire transaction, which means the IRA would be treated as if you withdrew all of the money. You would owe income taxes on the entire amount, plus a 10% early-withdrawal penalty if you’re younger than 59½, says Slott, of IRAhelp.com.

There are other ways to add real estate to your retirement portfolio that won’t jeopardize its tax-advantaged status. One option is a real estate investment trust. REITs own offices, malls, warehouses, hotels and other properties. REITs that invest in apartment buildings are well positioned to profit from the tight housing market. Nuveen Short-Term REIT ETF (symbol NURE), for example, invests about 50% of its assets in apartment leases. Its shares were up almost 36% for the year to date (through September 10).

REITs are required to return at least 90% of taxable income to shareholders, so dividends are typically generous. Because dividends are taxed as ordinary income, IRAs provide a tax-efficient way to harvest these dividends. In a traditional IRA, taxes on the dividends will be deferred until you take withdrawals, and if your REITs are in a Roth, dividends—along with all other earnings—are tax-free.

A little bit of bitcoin?

Bitcoin has been around for 11 years, and the cryptocurrency is rapidly going mainstream, attracting interest from both Wall Street institutions and Main Street investors. Bitcoin gets its name from the technology behind it. Every transaction is encrypted by computer code, known as blockchain technology, which eliminates the need for a middleman or a central bank. Only 21 million tokens will ever be made, and nearly 19 million are already in circulation, so fewer than 3 million are left to be created. That aspect of the digital currency appeals to investors who want a hedge against inflation, says Chris Kline, COO and co-founder of Bitcoin IRA, which allows investors to invest in bitcoin and other cryptocurrencies in traditional and Roth IRAs.

Although bitcoin has been popular with young investors (see Should You Invest in Crypto?), there’s plenty of interest among older investors, too, Kline says. Many of Bitcoin IRA’s customers are in their forties and fifties and are looking for ways to diversify their retirement portfolios, he says.

As is the case with any investment, past performance is no guarantee of future returns—and that’s particularly true for bitcoin. “When one looks at the value of bitcoin, you have to wonder if you’re a little late to the party,” says Nolan, the Asheville, N.C., CFP. Advocates for bitcoin counter that it still accounts for a sliver of the global investing market and has plenty of room to grow. Because of its extreme volatility, though, it probably shouldn’t account for more than 1% to 3% of your retirement savings.

A little over a year ago, I said that small-company stocks offered good value – they weren't dead, as many believed.

Sure enough, they woke with a start. In less than six months – from Sept. 24, 2020, to March 15, 2021 – the small-capitalization S&P 600 Index rose an incredible 69%, more than triple the gain of the large-cap S&P 500.

Afterward, however, small caps reverted to the pattern that has prevailed since 2014. Their prices plateaued over the next six months, while large-company shares kept up a briskly consistent ascension. It's not that small caps have done poorly over the past decade. Their returns are well into the double digits and are higher than historical averages. The problem is that in this bull market the little companies have trailed the big ones so badly that it makes you wonder whether the gap is permanent.

Consider the Russell 2000, a popular small-cap index. Over the past five years, the large-cap Russell 1000 has beaten the Russell 2000 by an annual average of four percentage points and over the past 10 years by 2.6 points. These are serious differences – especially because, historically, small caps have solidly outperformed large caps.

To compensate for their greater risk, small caps have historically scored higher returns. Except that lately – despite that amazing six-month spurt – they haven't. Since 2014, Vanguard Russell 1000 (VONE), an exchange-traded fund linked to the large-cap index, has beaten the Vanguard Russell 2000 (VTWO), an ETF that tracks its small-cap analog index, in seven of eight calendar years, including so far in 2021. (Stocks and funds I like are in bold.)

Has something profound and lasting happened to small caps, or is this period an anomaly that might be in the process of reverting to the mean?

The case for large caps begins with investors' enormous enthusiasm for both S&P 500 Index funds and the stocks with trillion-dollar market values that dominate those funds. Another change that favors large caps is that as technology allows business to become more global, giant companies have a huge advantage, both in efficient supply chains and in marketing brands known throughout the world. Also, in this low-interest-rate environment, large firms can gain easier access to cheap money, so they can grow even larger.

This case makes sense, but I view investments through a dif­ferent prism. In markets, investors shun groups of stocks until those shares become irresistible. Then they jump in, and prices rise. That was the phenomenon that powered small caps from September 2020 through March 2021, which proved that these stocks can still attract investors.

Big Bargains

Small caps are offering undeniable value. According to Morningstar, the average price-earnings ratio for the Russell 2000 stocks that make up Vanguard's ETF is just 16, compared with 22 for the stocks in the Vanguard Russell 1000 ETF. The average price-to-book value for the small-cap ETF is 2.2, compared with 4.0 for the large-cap fund. The Russell 2000 ETF (IWM) has lower valuations despite having higher long-term earnings growth.

Small caps have other attractions, too. The S&P 500 has become almost an internet specialty fund, with the information technology and communication services sectors together accounting for 39% of the total index. Those high-tech sectors amount to only 16% of the small-cap S&P 600. The small-cap indexes have the long-term advantage of being broadly diversified.

Tech stocks, furthermore, are not the only ones that are soaring.

Take Crocs (CROX), a Colorado-based maker of clunky though trendy slip-on clogs. Recently, under imaginative management, the company has grown impressively, its shoes becoming especially popular with teenagers. When COVID hit, investors feared the worst, and the stock lost half of its value. But since March 2020, the share price has risen by a factor of nine. (Take that, Apple!) Despite its spectacular rise, Crocs still carries a reasonable P/E of 20, based on the consensus of analysts' estimates of earnings for the year ahead.

Crocs has increased in value so much that, at nearly $9 billion, its capitalization no longer qualifies as small. The generally accepted limit for a small-cap stock is $2 billion, but that's an old number and probably too low; I would update it to about $4 billion.

Under the Radar

Because they are followed by fewer financial analysts, small-cap stocks can escape notice and become underpriced. That may be the case with Calavo Growers (CVGW), a marketer and distributer of avocados. Calavo's stock, which is covered by only five analysts and has a market cap of about $700 million, is down by more than half from its 2018 high and carries a dividend yield of 3.0%, considerably more than a 10-year Treasury bond.

With a fleet of 247 aircraft, Bristow Group (VTOL) serves offshore energy companies and provides search and rescue work around the world. Although shares have doubled since the summer of 2020 as oil prices have risen, the stock, with a market cap of $966 million, trades far below its record high.

Some of the best small-cap funds are closed to new investors. Access is limited to my 2020 pick, Wasatch Ultra Growth, which has returned 43% in the past 12 months. You can still purchase shares directly from the fund company, though, or crib from its list of holdings, including Vintage Wine Estates (VWE), a Sonoma-based owner of more than 30 upscale wine brands. The stock went public in April 2020 and is tracked by just five analysts.

Many small-cap funds are mid-cap funds in disguise. The average holding of Artisan Small-Cap, for example, has a market cap of $7 billion. That compares with $2.3 billion for SPDR Port­folio S&P 600 Small Cap (SPSM), and $1.8 billion for another ETF I like, WisdomTree U.S. SmallCap Dividend (DES). One of Artisan's holdings is Ingersoll Rand (IR), with a market cap of $22 billion. C'mon. Although there's a place for large- and mid-cap stocks in any portfolio, right now, small is beautiful.

Some good, true small-cap managed funds are open to all. An investment of $10,000 in Buffalo Small Cap (BUFSX) 10 years ago would be worth roughly $49,000 today. Its number-one asset is Everi Holdings (EVRI), a gaming technology company with a P/E of 21. AB Small Cap Growth (QUASX), founded in 1969, has notched an annualized return of 27% over the past five years. (You can purchase the fund with no sales charge at some brokers.) Holdings include John Bean Technologies (JBT), which makes food-processing equipment, and Trupanion (TRUP), which provides medical insurance for pets.

Few investing joys beat buying shares of a small company and eventually seeing them soar. It’s not just the money but the thrill of discovering stocks, in this mega-cap era, that most folks find just too small to notice.

Junk bonds sure aren't being treated like junk this year.

High-yield mutual funds have become a popular draw for portfolios in 2021. Todd Rosenbluth, Head of ETF & Mutual Fund Research at independent research firm CFRA, says high-yield bonds gathered nearly twice as much new money during the first half of 2021 as in all of 2020.

"Investors were more comfortable taking on credit risk as the U.S. economy recovered," Rosenbluth says.

Just like you and I, corporations are measured on their ability to repay their debts. Companies with ratings that fall below what's considered investment-grade are typically referred to as high yield, or junk. And when the economy gets dicey, investors often pull away from junk bonds because of the higher risk these companies might default on the debt. Indeed, this dynamic played out during the worst of the pandemic.

Conversely, any traction in the fight against COVID (like the recent FDA approval of the Pfizer-BioNTech vaccine) is likely to improve the chances of that debt getting repaid, which is a clear boon for high-yield bonds. At the same time, the Federal Reserve has continued to signal that it plans on leaving its benchmark rate near zero for at least the next year or so. That's keeping a lid on the yield of better-rated bonds, making high-yield mutual funds holding junk debt look all that much more attractive.

We aren't out of the woods yet, however, and there's plenty of economic risk still floating around. Thus, investors interested in junk debt might want to consider actively managed products. Bond indexes are often constructed using the amount of debt issued to determine their weightings (similar to how stock indexes often weight holdings by stocks' market value). But that can backfire when it comes to riskier segments of the market, such as junk bonds.

Here, then, are five high-yield mutual funds with a human touch. Each of these actively managed funds boasts considerably higher yields than what you can get out of investment-grade corporate bonds. All of these picks are also "no-load" products, meaning there are no upfront sales fees – just the annual expenses that funds typically charge.

Data is as of Aug. 26. SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.

• Assets under management: $29.9 billion
• SEC yield: 2.9%
• Expenses: 0.23%, or $23 annually for every $10,000 invested
• Initial minimum investment: $3,000

Investors looking for a bellwether high-yield bond fund can start with the Vanguard High-Yield Corporate Fund Investor Shares (VWEHX, $6.00), a Kip 25 selection.

This nearly $30 billion behemoth has delivered strong returns throughout more than four decades of existence, and it continues to be one of the cheapest actively managed high-yield mutual funds you can buy.

The secret to the fund's 6.0% annual return over the past decade comes down to manager selection.

Like many of the best Vanguard mutual funds, the firm has outsourced VWEHX's decision-making to Wellington Management. Wellington's Michael Hong, who has spent 13 years running the fund, fine-tunes the holdings with a focus on credit-risk management. Currently, 56% of the portfolio is in BB-rated bonds, which are considered the top tier of the junk market. This helps mitigate volatility and default risk.

VWEHX's average duration is a modest 3.7 years, which implies that the fund would decline 3.7% for every 1-percentage-point increase in interest rates. The fund currently yields a little less than 3%.

Learn more about VWEHX at the Vanguard provider site.

• Assets under management: $19.5 billion
• SEC yield: 3.2%
• Expenses: 0.73%
• Initial minimum investment: $250

For investors looking for a little more "oomph" from their high-yield bond allocation, the American Funds High Income Trust F-1 (AHTFX, $10.50) could be a top bet.

Just note that the "oomph" comes from a difference in credit quality.

High Income Trust's focus is on current high income and the potential for capital appreciation. That dual mandate has its team of managers looking at different set of bonds than the previously mentioned Vanguard High-Yield Corporate. Top-tier junk bonds tend to be limited in their ability to provide capital appreciation—not so for lower-graded bonds.

"American Funds High Income Trust has more CCC-and-below-rated bonds than popular ETFs, but CFRA finds the fund as having high reward potential," says Rosenbluth, whose firm gives the fund its top five-star rating.

This leads to a plumper yield than other high-yield mutual funds, but also a potentially bumpier ride depending on economic conditions. But the clearer the economic reopening looks, the more of an edge AHTFX's difference in credit quality might provide.

From an interest-rate-risk standpoint, AHTFX is similar to VWEHX, sporting an average duration of 3.5 years.

Note: Investors can buy the American Funds' no-load F1-share class through a handful of online brokers, including Fidelity and Schwab. (In your 401(k) plan, you don't pay a sales charge to buy shares in any American Funds portfolio.)

Learn more about AHTFX at the American Funds provider site.

• Assets under management: $120.7 million
• SEC yield: 3.2%
• Expenses: 0.90%
• Initial minimum investment: $0

The United States might be the biggest game in town, but it's not the only one. International assets can help you diversify your risk and potentially produce a smoother long-term ride.

Buying international stocks is a fairly easy process; plenty of foreign multinationals trade on U.S. exchanges and receive ample media and analyst coverage. Bonds are another story. Researching and buying U.S. corporate debt is difficult enough – trying to do so with an international tilt adds yet another layer of complexity.

That's why most investors are better off tapping high-yield mutual funds as a one-stop shop for international bond exposure.

The Fidelity Global High-Income Fund (FGHNX, $9.84) offers both domestic and foreign junk bonds in one package, with a roughly 60/40 U.S.-international split.

Managers Harley Lank, Timothy Gill, and Terrence Pang each take an active role in the various regional sleeves of the portfolio. The trio apply both a top-down approach, making allocation decisions based on macroeconomic factors, as well as a bottom-up approach to individual security selection.

Currently, 45% of the assets in this Fidelity mutual fund are invested in bonds rated BB or better, with another 38% in B-rated bonds. That's what management seems to think will perform in current market conditions; but a 53% turnover ratio signals that the managers are willing to shift their views if and when conditions change.

Learn more about FGHNX at the Fidelity provider site.

• Assets under management: $5.7 billion
• SEC yield: 1.3%
• Expenses: 0.62%
• Initial minimum investment: $2,500

The problem with most bonds is that their interest is taxed at ordinary income rates, which could be as high as 36% for some individuals. This makes most high-yield mutual funds particularly unsuitable for taxable accounts; it's best to stick them in your 401(k) or IRA.

But that doesn't mean you can't store junk bonds in your taxable account – if you focus on a specific kind of junk.

Municipal bonds are issued by states, cities and local governments to pay for their daily expenses or pay for special projects. The benefit? Their income is typically exempt from federal tax, and in many cases, state taxes as well.

Just like with regular bonds, however, all munis aren't created equal. Credit worthiness varies from state to state and town to town, which means you can indeed find junk municipal debt. It's here that investors can get more income.

One way to play the junkier side of municipal bonds is the T. Rowe Price Tax-Free High Yield Fund (PRFHX, $12.76).

Manager James M. Murphy, who has managed the fund since 2001, straddles the line between junk and investment-grade munis. Roughly 55% of portfolio is in BB-rated debt or below (or not rated). Another 30% is in BBB-rated junk, and another 13% is in A-rated debt.

Like the previously mentioned Vanguard High-Yield Corporate Fund, PRFHX produces a smoother and less volatile ride, while still providing a high total return. The high-yield bond fund has beaten both the Bloomberg 65% High Grade/35% High Yield Index and the Morningstar category average over the trailing 10 and 15 years; it also has beaten the Lipper High Yield Municipal Debt Funds Average over the last decade.

By the way, that 1.3% SEC yield isn't as low as it seems. On a "tax-equivalent" basis (what a taxable bond would have to offer in yield to deliver the same amount of yield as a tax-free muni bond), PRFHX actually yields about 2.2%, and potentially a little more depending on what state you reside in.

Learn more about PRFHX at the T. Rowe Price provider site.

• Assets under management: $1.2 billion
• SEC yield: 3.7%
• Expenses: 0.87%
• Initial minimum investment: $2,500

One way that active management can significantly outperform indexes is by taking a high-conviction approach to constructing their portfolios, holding fewer positions at greater concentrations than the indexes.

So in other words, high-yield mutual funds can excel by putting their money behind their best ideas.

Janus applies this approach to numerous products, including Janus Henderson High-Yield Fund Class T (JAHYX, $8.63). The fund owns 253 different high-yield issues. That might seem like a lot, but consider that the fund's benchmark – the Bloomberg U.S. Corporate High Yield Bond Index – has closer to 2,200 holdings.

In addition to credit analysis, Janus also applies sector fundamental analysis to discover potential outperformers.

The proof is in the pudding. JAHYX has outperformed its benchmark since its inception near the end of 1995, returning roughly 7.3% annually over that time.

"Janus Henderson High Yield Fund is an example of moderately priced, actively managed five-star fund," Rosenbluth says about the institutional N-class shares, which charge 0.62% but have a $1 million minimum investment. The T-class shares discussed here charge more, at 0.87%, but require a mere $2,500 minimum buy-in.

Learn more about JAHYX at the Janus Henderson provider site.

Small-company stocks typically lead the market coming out of a recession. This time was no different. The rally has flatlined since spring, however, and as the returns of the Kiplinger 25's small-cap stock funds show, not all pockets of the small-company world fared well.

Value-priced stocks were the biggest winners. American Century Small Cap Value (ASVIX) gained 71% over the past 12 months, ahead of the 47% return in the Russell 2000 small-company index. Now swollen with nearly $6 billion in assets, the fund is closing to new investors. Existing shareholders should stay put. But we will find a replacement for it in the Kip 25 next month.

Low-quality small stocks did better than their high-quality counterparts. That kept a lid on gains in our other two small-cap funds, because both favor good businesses. Over the past 12 months, T. Rowe Price Small-Cap Value (PRSVX) gained 49%; T. Rowe Price QM US Small-Cap Growth Equity (PRDSX) rose 30%.

T. Rowe Price Small-Cap Value manager Dave Wagner likes a bargain, but he'll pay up for high-quality companies. That gives the portfolio both value and growth traits. Last year, Wagner dialed up the focus on value, scooping up beaten-down economically sensitive stocks amid the COVID sell-off, including energy and bank shares. Those investments surged "quickly and in a big way" last fall, says Wagner, helping the fund's one-year return.

T. Rowe Price QM US Small-Cap Growth Equity manager Sudhir Nanda uses computer models to find reasonably priced growing companies with steady earnings and revenues. That posed a headwind in last year’s market. "Everything that we like has done poorly, and everything that we don’t like has done well," says Nanda.

It's typical for both funds to lag in big up markets. But over the long haul, both funds have delivered solid returns that beat their respective benchmarks. Looking ahead, says Wagner, small-cap stocks are "decently valued, and the outlook is largely good."

In other news: Vanguard Wellington is officially open to all investors. Up to now, new investors had to buy shares directly from Vanguard.

Index funds, which are designed to mimic the ups and downs of a specific index, from the S&P 500 Index to the Barclays Capital California Municipal Bond Index, have become a runaway success. Index investing was introduced to the public with mutual funds in the 1970s. The strategy got a big boost in the 1990s with the rise of exchange-traded funds (ETFs), which can be bought and sold like shares of stock.

It wasn't until the turn of the millennium, however, that index funds really caught on. Between 2010 and 2020, they grew from 19% of the total fund market to 40%, and two years ago, the total assets invested in U.S. stock index funds surpassed the assets of funds actively managed by human beings. The 13 largest stock funds all track indexes.

No wonder: Compared with managed funds, index funds offer better average returns, in large part because their expenses are lower. According to fund-tracker Morningstar, the 10-year return of Vanguard S&P 500 (VOO), an ETF linked to the most popular benchmark and carrying an expense ratio of just 0.03%, exceeded the return of 87% of its 809 peers in the large-cap blend category. The index has beaten a majority of those peers in every single one of the past 10 calendar years.

Also, because only a few of their constituent stocks change each year (the annual turnover rate for the Vanguard fund is just 4%), index funds incur minimal capital gains tax liabilities. (Returns and other data are as of Aug. 6; index funds I recommend are in bold.)

Specialized index funds – ETFs such as the iShares MSCI Brazil (EWZ) or the TIAA-CREF Small-Cap Blend Index (TRHBX) – are straightforward. They let you own a country, region, investing style or industry without having to choose individual stocks or bonds. But what if you want to own the market as a whole, or a big chunk of it? The choices can be overwhelming – and not necessarily what they seem.

Begin with the S&P 500, consisting of roughly the 500 largest U.S. companies by market capitalization (number of shares outstanding times price). Like most indexes, the S&P 500 is weighted by capitalization: The bigger the market cap a company has, the more its influence on the performance of the index. Apple (AAPL), for instance, has about 60 times the impact of General Mills (GIS).

Any cap-weighted index fund is a heavy bet on larger companies. Lately, that bet has become extremely heavy because a few stocks have become gigantic. In 2011, for example, the total market cap of the 10 biggest S&P 500 stocks was $2.4 trillion. Currently, it’s $13.7 trillion. Apple itself has a cap as large today as all 10 of the largest S&P stocks combined a decade ago.

Or consider simply the five trillionaire stocks I highlighted recently. All by themselves, Alphabet (GOOGL), Amazon.com (AMZN), Apple, Facebook (FB) and Microsoft (MSFT) represent 22% of the value of the S&P 500. In recent years, those stocks have been on a tear, and the index has benefited.

Targeted Bet

You may think you are getting broad diversification by buying an S&P 500 Index fund, but you are actually making a substantial wager on a handful of stocks in the same sector. As of July 31, infor­mation technology, Apple's category, and communications services, the sector of Facebook and Alphabet, Google's parent, represent a whopping 39% of the S&P 500. By contrast, energy represents just 2.6%.

Most of the other popular broad indexes are similarly top-heavy and focused on technology. Consider the MSCI U.S. Broad Market Index and other gauges that measure all, or nearly all, of the approximately 4,000 stocks listed on U.S. exchanges.

The five trillionaire stocks represent about 18% of the asset value of Vanguard Total Stock Market (VTI), the most popular of the ETFs based on such indexes; that's only a few percentage points less than the trillionaires' weight in the S&P 500. The iShares Russell 1000 (IWB) is an ETF whose portfolio is based on an index of the 1,000 largest stocks. It has about 20% of its assets in the trillionaires; 36% in tech and communications.

I still like the trillionaires, and I like technology, but I have decided no longer to deceive myself by thinking that most index funds tracking the S&P 500 are the best way to own the U.S. market.

Most advisers – me included – urge a balanced approach. For example, I have a personal program of putting the same amount of money every month into each of the dozen or so diversified stocks I own. Then, I rebalance at the end of each year by buying and selling so that each stock is valued roughly the same. Such a strategy makes sense for investing in the broad market as well, but most of the popular index funds don't provide it.

Also, although technology is hot now, sector weightings shift back and forth over time. Don't you want your portfolio tilted toward sectors and stocks that are out of favor?

Between 2014 and 2020, technology ranked in the top four of 11 sectors in all but one year, and it ranked number one in three years. By contrast, energy has ranked last in five of the past seven years, and consumer staples stocks such as Procter & Gamble (PG) have finished in the bottom half of the sector rankings for five years in a row. When you buy the S&P 500, you get a lot of tech but little energy and consumer staples – which is the opposite of what bargain-hunting investors want.

The Equal-Weight Solution

There are, however, ways to avoid loading up on a few stocks, or any one sector.

One is the S&P 500 Equal Weight Index. Each stock represents roughly 0.2% of total assets (there are actually 505 stocks in the S&P 500 Index), with rebalancing at the end of each quarter. As a result, every time the index is rebalanced, the trillionaires account for about 1% of assets; technology and communi­cations, 20%. Over the past 10 years, the S&P 500 has beaten its equally weighted cousin by about one percentage point, annualized, but that's hardly unexpected in a great decade for big growth stocks.

Invesco S&P 500 Equal Weight (RSP), an ETF with an expense ratio of 0.2%, offers an easy way to buy the index. Be warned that its turnover, at 24%, is much higher than a standard broad market index fund's turnover, so it's best to own it in a tax-deferred account such as an IRA.

A second index alternative is my old favorite, the Dow Jones Industrial Average, composed of just 30 large-cap stocks. The Dow is price weighted. In other words, the higher the price of a share of a stock, the more the company's influence on the value of the index.

As weird as price weighting sounds, it enhances the diversification of the portfolio because stocks whose price runs up quickly tend to split, and new companies take their place leading the index. (Many large tech companies, especially, rarely split their shares. But as a result, the Dow won't let them in.)

You can buy the Dow through the SPDR Dow Jones Industrial Average ETF (DIA), nicknamed Diamonds, with an expense ratio of 0.16%. The fund's 10-year annual average return is nearly two points below the S&P 500's, but that’s not bad considering that tech and communications represent just 22% of the portfolio.

I'm not telling you to avoid conventional broad-market funds. Notice that I am still recommending them. I'm just saying there are other ways to get better diversification and come close to really owning the U.S. stock market.

Similar to nutrition advice to "eat the rainbow," investors would do well to "invest around the world." And one way to do so is to find the best international ETFs (exchange-traded funds).

International exposure is a key element in creating a diversified portfolio to avoid home country bias, where you become overexposed to stocks domiciled in your home country. If you only invest domestically and your country experiences a recession, your entire portfolio could tank. 

"It is imperative to have some international exposure in your investment portfolio as domestic markets and international markets are not always correlated when it comes to performance," says Ronnie Thompson, investment advisor representative and owner of True North Advisors. When your home country is in recession, other nations may be thriving and thus could balance out your portfolio.

One of the best ways to get international exposure is through an international ETF. These funds hold many different international stocks, allowing you to diversify even further within your global exposure. This also reduces the risk of putting all of your international eggs in a single foreign country's basket.

International ETFs can also be purchased on the U.S. stock exchange so you don't have to navigate foreign stock markets to access them.

But choosing the right international investments and appropriate degree of international exposure isn't always easy. You first need to understand why you're seeking exposure overseas, then know what to look for in the best international ETFs.

The importance of international exposure

In addition to helping diversify your portfolio, the best international ETFs can enable you to access better growth or value opportunities than those offered domestically.

"For example, emerging markets can give access to certain countries that are experiencing potentially greater growth than we have historically seen in mature economies, such as here in the United States," says Chris Huemmer, senior client portfolio manager at Northern Trust FlexShares. "Companies in these growth economies can potentially take advantage of better demographics, cheaper labor and access to natural resources to grow businesses both at home and abroad."

International equities are also often more attractively valued than those in the U.S. Valuations on international stocks have historically been lower than U.S. stocks, says Brian Kraus, senior vice president of Systematic ETFs at Hartford Funds. This gap is even larger now as the U.S. markets recovered faster than other markets, creating compelling opportunities for savvy investors.

"International stocks are also generally more cyclical and historically perform better in value cycles versus growth cycles, as they have about twice as much cyclical sector exposure as the S&P 500," Kraus says. "Current market dynamics are shifting in favor of value and if this continues to hold firm, we believe this may be beneficial to international stocks and funds."

How much international exposure to have 

Before you can choose the best international ETFs, you need to know how much of your portfolio to allocate to foreign investments. 

Unfortunately, there's no perfect mix of domestic to international stocks because the right amount will depend on your investment objective. However, Thompson says a decent rule of thumb for a traditional portfolio is to hold 60% domestic and 40% international. This "creates a good diversification, but also allows you to remain concentrated in U.S. based markets which, long-term, have always been strong," he says.

This also reflects the fact that international stocks make up around 40% of the global market capitalization across all stock markets.

"Often investors will mirror this percentage as a starting point with 40% of their overall equity allocation being earmarked for international stocks, and then adjusting that percentage up or down based on risk tolerances, investment preferences, time horizon or a myriad of other factors," Huemmer says.

How to find the best international ETFs

There are several best practices to keep in mind when choosing the best international ETFs. The most important characteristics to pay attention to in any foreign fund are its:

• Country exposure: "Each index provider may define the countries in their universe differently, which can lead to very different weightings on both a country and sector level," Huemmer says. "For example, the term 'world' may mean a different set of countries for each index provider," and some developed market indices exclude Canada from their universe.
• Expense ratio: International equity ETF expense ratios were on average 0.1% higher than U.S. equity ETFs in 2022, but you should still aim to keep expenses low.
• Tracking error: Many international ETFs track a benchmark index and the tracking error will measure how closely the fund adheres to its benchmark's performance.

While keeping investment costs low is important, Kraus cautions against blindly looking for opportunities in the cheapest parts of international markets.

"This simplistic approach toward lower portfolio valuations can result in exposure to companies with poorer profitability and elevated volatility," he says. Instead, look for "valuable opportunities within international markets, without sacrificing quality and consistency."

The best international ETFs

Before perusing the following list of some of the best ETFs with an international flavor, remember that what's "best" for one investor may not be best for another. Choose international ETFs as you would domestic ETFs: by finding the fund whose strategy will help you reach your own investment goals.

That said, here are three of the best international ETFs to consider adding to your portfolio:

• Countries included in portfolio: 42
• Expense ratio: 0.07%

With nearly 8,000 stocks in its portfolio, the Vanguard Total International Stock ETF (VXUS) is a great way to get broad international exposure from a single fund. Among those 8,000 stocks are companies from 42 separate countries, the largest of which is Japan at 16% of the portfolio, followed by the U.K. at 10% and dwindling down to 0.1% exposure to Hungary.

VXUS tracks the FTSE Global All Cap ex US Index, which represents companies of all sizes in developed and emerging markets excluding the U.S. The fund has closely tracked its benchmark since inception, returning 3.86% compared to 3.89% for the benchmark.

Learn more about VXUS at the Vanguard provider site.

• Countries included in portfolio: 10
• Expense ratio: 0.39%

The Fidelity International Value Factor ETF (FIVA) is another diversified international ETF that spans Europe, Asia and North America by tracking the Fidelity International Value Factor Index. FIVA covers 10 different countries with 123 stocks.

More than half of the portfolio is in Europe, with the U.K. and Germany accounting for most of the holdings there. However, Japan represents the largest country exposure overall at more than 23% of the portfolio. Canada, meanwhile, makes up the North American exposure, at 10% of the portfolio.

Learn more about FIVA at the Fidelity provider site.

• Countries included in portfolio: 12
• Expense ratio: 0.40%

Emerging markets investments can be volatile, but FlexShares aims to dampen this by focusing on the financial health of the companies it holds within the FlexShares Emerging Markets Quality Low Volatility ETF (QLVE). The result of these efforts are seen in a standard deviation, which measures how volatile an investment is, of 12.04 versus nearly 18 for the Morningstar Diversified Emerging Markets category. This makes it a lower risk option than many other emerging markets funds.

The fund's roughly 200 holdings cover a dozen countries from China, which accounts for more than one-fifth of the portfolio, all the way down to Peru, which makes up only 0.02% of the portfolio. As an added bonus, the international ETF pays a yield of more than 2%.

Learn more about QLVE at the FlexShares provider site.

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The universe of exchange-traded funds (ETFs) includes more than 15,000 products worldwide, ranging from sophisticated and tactical funds to rather vanilla index funds tied to tried-and-true benchmarks. Among the latter, few are more popular than S&P 500 ETFs.

The S&P 500 Index is one of the stock market's most widely followed benchmarks, because it's comprehensive, diversified and fairly easy to understand. It tracks the shares of 500 large, predominantly U.S-domiciled companies that trade on the major American exchanges. That's it.

While purchasing all 503 stocks that make up the index will give the average retail investor exposure to the broad market, buying an S&P 500 ETF requires much less capital.

Even Berkshire Hathaway (BRK.B) Chairman Warren Buffett believes most investors should just buy and hold an S&P 500 fund. Buffett bought two such funds for the Berkshire Hathaway portfolio in 2019, and he reiterated his position at Berkshire's annual shareholder meeting in 2021: "I recommend the S&P 500 index fund and have for a long, long time."

When a world-class stock picker tells even well-heeled investors in his own company to stop picking stocks and simply buy and hold the S&P 500, small investors should take notice and follow this advice.

If you're interested in doing just that, here are seven S&P 500 ETFs to consider.

While some of the funds on this list provide direct exposure to one of the market's major indexes, others offer interesting twists for more active tactical investors and even traders.

Data is as of May 7. Dividend yields represent the trailing 12-month yield, a standard measure for equity funds.

• Assets under management: $753.9 billion
• Expenses: 0.095%, or $9.50 annually on every $10,000 invested
• Dividend yield: 1.1%

The SPDR S&P 500 ETF Trust (SPY) is the first U.S.-listed ETF, launched at the beginning of 1993. SPY has approximately $754 billion in assets under management (AUM) and has long been one of the most liquid and popular vehicles to play the U.S. stock market.

Although it's still popular, it's certainly not the lowest-cost ETF tracking the S&P 500, with a gross expense ratio of 0.095%. That's three times as much as some of the S&P 500 ETFs on this list.

Why do some investors choose to pay more? For starters, 0.095% adds up to a mere $9.50 a year on every $10,000 invested, so that's not exactly breaking the bank.

SPY also continues to be the go-to vehicle for large institutional traders seeking to put on big positions. In such circles, the liquidity risk that comes with trading a product that doesn't have as much volume is a much bigger concern than a small difference in annual fees.

If you're not a Wall Street titan, you have different priorities. In other words, SPY might not be the perfect solution for buy-and-hold investors.

Learn more about SPY at the State Street Investment Management provider site.

• Assets under management: $817.0 billion
• Expenses: 0.03%
• Dividend yield: 1.2%

Under the auspices of the iShares family of funds run by asset-management giant BlackRock (BLK), the iShares Core S&P 500 ETF (IVV) launched in 2000.

Like SPY, it's large and liquid, with $817 billion in assets under management, and is one of the top ETFs of any flavor. IVV also boasts a bargain-basement 0.03% expense ratio, making it one of Kiplinger's favorite cheap ETFs.

On a total return basis (price plus dividends), IVV is up 260.4% since the March 23, 2020, COVID-19 lows and has generated an 32.9% total return in the past 12 months.

By comparison, the tighter 30-stock portfolio of the Dow Jones Industrial Average has produced a 202.1% return since the 2020 bottom and is up 24.3% in the past year.

Learn more about IVV at the iShares provider site.

• Assets under management: $88.0 billion
• Expenses: 0.20%
• Dividend yield: 1.5%

While a relatively simple and effective index of domestic stocks, the S&P 500 is not without its drawbacks. Perhaps the most obvious is that it's weighted by market cap, meaning the biggest stocks make up the biggest share of the index. About 40% of the S&P 500's weight is concentrated in its top 10 holdings.

Since those holdings are predominantly large U.S. tech stocks, you won't be surprised to find that the sector is over-represented: S&P 500 ETFs such as SPY allocate more than 36% of its assets to tech stocks.

Financials (11.7%), communication services stocks (11.0%) and consumer discretionary stocks (10.0%) are also well represented. On the other hand, utility stocks, real estate and materials combined make up about 6%.

Many investors might already have a significant stake in technology companies, either through owning individual stocks or other tech-heavy funds. Similarly, some investors might want more exposure to defensive sectors such as consumer staples stocks.

Whatever your needs, if the S&P 500's lopsided constitution isn't for you, consider the Invesco S&P 500 Equal Weight ETF (RSP) as an alternative.

RSP equally weights every stock in the S&P 500, then rebalances every quarter to ensure a fairly equal distribution of weight across all 500 companies it holds. That means at the start of any given quarter, $4.2 trillion Apple (AAPL) would have the same impact on the fund as $6.2 billion flooring company Mohawk Industries (MHK), which would round out the bottom of traditional S&P 500 ETFs.

This doesn't mean you'll get a perfect sector balance, however. While each stock is equally weighted, the S&P 500 holds different numbers of stocks from different sectors.

At the moment, tech is the largest sector allocation of RSP at 16.2% of assets, followed by industrials at 15.6%. Meanwhile, the smallest weightings go to energy stocks (4.6%) and communication services (3.8%).

The Invesco S&P 500 Equal Weight ETF is well established at $88 billion in assets, and the RSP has held its own against the broad market in recent years, up 215.6% on a total-return basis since the March 2020 bottom.

Note that, at 0.20% in annual expenses, it's pricier than the plain-vanilla S&P 500 ETFs.

Learn more about RSP at the Invesco provider site.

• Assets under management: $141.2 billion
• Expenses: 0.02%
• Dividend yield: 1.1%

In 2019, State Street Investment Management recognized the difference between institutional traders and smaller "retail" investors. While also acknowledging some investors' preference for SPY's lower-cost competitors, State Street decided to offer a look-alike S&P 500 fund and converted an existing large-cap ETF into the SPDR Portfolio S&P 500 ETF (SPYM).

The big difference — aside from the fact that assets under management total $140 billion — is that the fee is much less than SPY's at 0.02% annually, or a measly $2 per year on every $10,000 invested.

The holdings are exactly the same and in exactly the same proportion: 503 holdings representing 500 of the largest U.S.-listed companies, which collectively represent about 80% of domestic market capitalization.

Leading positions are the same, too, which at the moment include Nvidia (NVDA, 8.0% of assets), Apple (AAPL, 6.7%) and Microsoft (MSFT, 4.9%).

The modest savings in fees might add up over years or decades if you plan to hold this S&P 500 ETF for the very long term. That could make SPYM more attractive to traditional investors than its larger sister fund.

Learn more about SPYM at the State Street Investment Management provider site.

• Assets under management: $961.6 million
• Expenses: 0.89%
• Dividend yield: 4.3%

Among the more interesting ways to play the popular stock index is to bet on a decline through a short fund.

The ProShares Short S&P500 (SH) seeks to deliver the opposite return (minus fees) of the S&P 500 Index. In other words, if the S&P 500 declines 1% in a day, SH should gain 1% and vice versa.

The stock market trends higher over the long term. Even amid an uncertain outlook for the global economy, U.S. equities have rebounded after approaching correction territory amid the start of war in the Middle East between the U.S., Israel and Iran.

A bearish bet such as ProShares' ETF seems to make little sense. The losses you'd incur during a positive run for the S&P 500 would be compounded by SH's significant costs of 0.89% annually. Who in the world would buy this inverse ETF?

Speculators betting against a short-term decline might. Consider that, from February 27 through March 30, SH surged nearly 9%, while SPY fell by almost 8%.

It's also important to note that SH has big purposes for institutional or sophisticated traders looking to hedge against declines. For these investors, this short S&P 500 ETF is more of an insurance policy than a profit vehicle.

These factors might not make ProShares Short S&P500 right for everyone. Most buy-and-hold investors are better off leaving inverse funds alone. But SH remains an important tool to tactical investors and traders and boasts nearly $1 billion in AUM as a result.

Learn more about SH at the ProShares provider site.

• Assets under management: $817.5 billion
• Expenses: 0.03%
• Dividend yield: 1.2%

We're returning our focus to "vanilla" S&P 500 ETFs with the Vanguard S&P 500 ETF (VOO). With $818 billion in assets under management, it's not only the biggest S&P 500 ETF, it's the biggest exchange-traded fund period.

And if you roll in the look-alike Vanguard mutual fund, you get closer to $1.4 trillion in AUM in this specific S&P 500 strategy. The exchange-traded VOO is relatively young, launching in 2010 in what seems like a very late entrance onto the ETF scene.

However, many investors know Vanguard and its iconic founder Jack Bogle as pioneers of passive investment strategies that use fixed indexes to power their funds. That's exactly the strategy VOO uses, and it builds on that tradition.

As is its fashion, Vanguard looks to pass on the savings from this simple investment strategy via a low-cost structure for investors. VOO also provides a dirt-cheap 0.03% expense ratio. Vanguard account holders don't have to look outside the family to gain easy, inexpensive access to this major market index.

Learn more about VOO at the Vanguard provider site.

• Assets under management: $6.4 billion
• Expenses: 0.84%*
• Dividend yield: 1.1%

ETFs and other exchange-traded products (ETPs) are wildly popular among smaller investors, in part because they provide easy access to investments that used to be too complex or costly.

However, the universe of ETPs out there operates under the same principles as anything on Wall Street. Two of those ideas are particularly important to call out before we discuss our next S&P 500 ETF:

• You shouldn't chase the crowd and should only invest based on your personal means and goals.
• You should never invest in any product unless you fully understand what you're getting into.

Disclaimers out of the way, let's talk about the Direxion Daily S&P 500 Bull 3x Shares ETF (SPXL). As the "3x" in the name indicates, this is a leveraged fund that seeks to deliver three times the daily performance of the S&P 500 Index (before its rather substantial fees, of course).

This goal is attractive to some aggressive investors and for good reason. SPXL surged nearly 700% from the March 2020 bear-market bottom through the start of 2022, significantly outperforming the broader index.

Although Direxion's ETF aims to triple the index's daily movement, longer-term performance can vary greatly in either direction. It should go without saying that while SPXL can generate outsize profits when things go well, you can lose just as much when the S&P 500 goes south.

At a hefty 0.84% in fees, or $84 annually on every $10,000 invested, costs can hold back performance over the very long term, too.

We can't stress enough that leveraged funds such as SPXL are not meant for most individuals who are primarily investing with an eye toward retirement. They're meant for highly experienced tactical investors and day traders — and even then, they should be purchased in modest amounts.

* Includes 0.03% in acquired fund fees and other expenses

Learn more about SPXL at the Direxion provider site.

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There's no denying it's been a rough stretch for emerging market (EM) stocks.

Following a year in which COVID-19 caused the global economy to collapse, EM stocks – and by proxy emerging market ETFs – have more recently been hit by regulatory concerns out of China.

But investors would be wise to not leave emerging market stocks for dead. In fact, the International Monetary Fund (IMF) estimates the global economy will grow 6% this year and 4.9% the next. And EMs as a whole are projected to see 6.3% economic growth in 2021 and 5.2% in 2022 – compared to expectations for growth in advanced economies of 5.6% and 4.4%, respectively.

Plus, according to a report from Touchstone Research, emerging market stocks look attractive right now relative to their U.S. counterparts. Specifically, the price-to-trailing-10-year earnings for the MSCI Emerging Market Index was at 18x at the end of May, compared to 36x for the S&P 500 Index.

And for those worried about volatility associated with investing in overseas stocks, one way to protect portfolios is to take a broad approach. Emerging market ETFs provide diversification by spreading out risk across a basket of stocks and number of countries, thereby mitigating some of the uncertainty that can come with investing in less-developed markets.

Here are 10 of the best emerging market ETFs to gain exposure to a global economic bounce. While most American investors likely have a home-country bias, these exchange-traded funds will ensure you don't miss out on diversification and potential growth in emerging markets, as well.

Data is as of Aug. 3. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.

• Assets under management: $84.1 billion
• Expenses: 0.10%, or $10 annually for every $10,000 invested
• Dividend yield: 2.1%

When it comes to emerging market ETFs, the Vanguard FTSE Emerging Markets ETF (VWO, $51.65) is the largest U.S.-listed one with a massive $84.1 billion in total assets. One of the best things about owning Vanguard funds – including ETFs and the best Vanguard mutual funds – is that its scale allows it to provide some of the lowest costs among providers. And that's the case with VWO, which charges just 0.10% in management fees, or $1 per every $1,000 invested in the fund.

You can't even get a cup of coffee for a buck these days.

The index tracks the performance of the FTSE Emerging Markets All Cap China Class A Inclusion Index, a market-cap-weighted index that invests in the emerging markets across all market caps, including large-, mid- and small-cap stocks. As indicated in the index name, VWO not only invests in Chinese stocks headquartered in Hong Kong, but also "A Class" shares for companies listed in Shenzhen and Shanghai.

The ETF is currently made up of more than 5,000 stocks from roughly 25 different countries, including the likes of e-commerce firm Alibaba Group (BABA), internet titan Tencent Holdings (TCEHY) and chipmaker Taiwan Semiconductor (TSM). China has the largest representation at 40.2% of the fund, followed by Taiwan at 17.6% and India at 12.7%.

The median market cap of a VWO holding is $28.1 billion, and the turnover rate is just 10.1%. That means you're getting a wide basket of stocks that lean toward the large side, with a mostly buy-and-hold mentality. Plus, this is a growthy group of stocks, with estimates for annual earnings-per-share (EPS) growth averaging 12.2%.

The currency risks of ETFs for emerging markets are considerably higher than an S&P 500 tracker. But additional growth justifies at least a small portion of your assets if you're a risk-averse investor.

To learn more about VWO, visit the Vanguard provider site.

• Assets under management: $20.7 billion
• Expenses: 0.39%
• SEC yield: 3.7%*

While U.S. investors can't dip their toes into frontier markets bonds via exchange-traded funds, they can tap the next best place – emerging markets bonds. And they can do this via the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB, $112.58).

The ETF tracks the performance of the J.P. Morgan EMBI Global Core Index. EMB gives investors access to U.S.-dollar denominated debt in more than 30 emerging markets for a paltry 0.39% fee.

The top three countries at the moment are Mexico (5.5%), Indonesia (4.9%) and Saudi Arabia (4.5%), but it offers exposure to dozens of other countries, including Argentina, Nigeria and Hungary. That's strong geographic diversification.

The iShares J.P. Morgan USD Emerging Markets Bond ETF offers 3.7% in yield at the moment. The weighted average coupon of the 573 bonds held is nearly 5%, while the weighted average maturity is 13.6 years. More than half of the portfolio (56%) carries an investment-grade rating.

To learn more about EMB, visit the iShares provider site.

*SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.

• Assets under management: $6.0 billion
• Expenses: 0.11%
• Dividend yield: 2.0%

The SPDR Portfolio Emerging Markets ETF (SPEM, $43.31) is one of State Street's 22 ETF "building blocks." These funds are meant to provide investors with a low-cost core: the foundational pieces of a well-constructed portfolio.

Of the 11 portfolio building blocks in the equity category, SPEM is one of four international equity ETFs, and the only emerging markets fund. And a fee of just 0.11% to gain exposure to nearly 2,600 stocks in 30 different EMs is a bargain.

The ETF tracks the performance of the S&P Emerging BMI (Broad Market Index), which is a subset of the S&P Global BMI. The index is market-cap weighted and float-adjusted, which means representation in the fund is determined by the company's size, but only those shares available to the public are included in the index's calculation.

SPEM's top 10 holdings account for a decent 20% of the ETFs portfolio. The top three sectors by weight are financials (19.3%), technology (16.8%) and consumer discretionary (16.3%).

Geographically, like most of the emerging markets ETFs, the top three country allocations are China (36.0%), Taiwan (16.9%) and India (14.2%).

As for the holdings themselves? The weighted average market cap is $105.9 billion, with the largest checking in at $535.4 billion. This isn't a place for small fries, but SPEM is pretty spry, with annual EPS expected to grow 19%, on average, over the next three to five years.

To learn more about SPEM, visit the State Street Global Advisors provider site.

• Assets under management: $7.3 billion
• Expenses: 0.25%
• Dividend yield: 1.3%

For those interested in environmental, social and corporate governance (ESG) investing, there are a number of ESG funds to consider.

The iShares ESG Aware MSCI EM ETF (ESGE, $42.83), which tracks the performance of the MSCI Emerging Markets Extended ESG Focus Index, allows you to invest in roughly 347 mid- and large-cap stocks across 24 different countries. They also exhibit positive ESG characteristics, whether that's low carbon footprint, charitable actions or diverse corporate boards.

ESG investing has become so popular with investors that BlackRock, which expects sustainable and ESG investments to hit $1 trillion in assets by 2030, has an entire section of its website dedicated to ESG and sustainable investing.

Emerging market ETFs such as ESGE will help the industry get there faster.

Top countries aren't anything out of the ordinary: China heads the list at 33.3% of assets, followed by Taiwan (16.0%), South Korea (12.9%) and India (10.4%). The top three sectors are financials (22.5%), technology (21.8%) and consumer discretionary (15.4%).

The ETF is decently concentrated at the top, with the top 10 holdings – including Taiwan's TSM and South Korea's Samsung Electronics – commanding 26% of assets. The best part about the iShares ESG MSCI EM ETF is that it gives you many of the same stocks held by the iShares MSCI Emerging Markets ETF (EEM) for 43 fewer basis points (a basis point is one-one hundredth of a percentage point) in expenses, and you get an ESG overlay.

To learn more about ESGE, visit the iShares provider site.

• Assets under management: $4.7 billion
• Expenses: 0.39%
• Dividend yield: 2.4%

The Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE, $31.67) specifically hones in on the biggest EM companies.

The FNDE tracks the performance of the Russell RAFI Emerging Markets Large Company Index, which selects a group of large-cap stocks from the emerging markets segment of the FTSE Global Total Cap Index, using a rating system that evaluates companies based on fundamental measures such as adjusted sales, retained operating cash flow and dividends plus buybacks. The top 87.5% of companies, based on their fundamental score, are included in the index.

The weighted average market cap of the ETF's 360 holdings is $85.5 billion. Broken down by size, companies larger than $70 billion account for nearly 30% of the portfolio. Another 68% is invested in companies between $3 billion and $70 billion, and the remainder is in stocks smaller than $3 billion.

FNDE turns over the entire portfolio every four years. Geographically speaking, China is tops at nearly 25% of the fund (a little less than other emerging market funds), Taiwan is more than 18% and Russia comprises 13% of assets. Financials (26.4%), energy (21.0%) and information technology (15.2%) are the most heavily weighted sectors, with stocks like Taiwan Semiconductor and Russian energy firm Gazprom (OGZPY) leading the way.

To learn more about FNDE, visit the Schwab provider site.

• Assets under management: $4.8 billion
• Expenses: 0.32%
• Dividend yield: 2.2%

For those investors who don't like to own state-owned enterprises, which abound in places such as China, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE, $39.44) is the ETF for you.

XSOE, which tracks the WisdomTree Emerging Markets ex-State-Owned Enterprises Index, will not invest in any EM stock with government ownership of more than 20%. This index is one of three WisdomTree emerging market ETFs specifically designed to exclude state-owned enterprises; the other two are focused on China and India exclusively.

So … why avoid state ownership?

WisdomTree's research shows that over the past 10 years, non-state-owned enterprises in emerging markets generated an annual return of 6.3%, which is 549 basis points greater than state-owned enterprises.

This cap-weighted, float-adjusted portfolio of stocks is reconstituted annually in October. Each component's weighting is calculated by multiplying its market cap by the Standard and Poor's Investability Weighting Factor. The same calculation is repeated for each component. All of the components' scores are added together. Each stock's score is then divided into the total, providing a weighting for each individual company.

The top three sectors by weight are technology (23.4%), consumer discretionary (19.6%), and financials (13.1%). The top 10 holdings account for nearly 31% of the portfolio.

The roughly 500-stock XSOE charges a very reasonable 0.32%, which is why it has managed to gather $4.8 billion in assets in less than seven years.

To learn more about XSOE, visit the WisdomTree provider site.

• Assets under management: $665.6 million
• Expenses: 0.65%
• Dividend yield: 2.1%

As its name suggests, the SPDR S&P Emerging Markets Small Cap ETF (EWX, $60.61) invests in small-cap stocks with market caps between $100 million and $2 billion.

This float-adjusted, market cap-weighted index includes all small-cap stocks from the S&P Global BMI that fit the market size requirements and have sufficient liquidity. The weighted average market cap of the 2,100-plus holdings is $1.7 billion.

Because EWX is a small-cap ETF, the holdings have a much higher earnings growth rate estimate, at 21.6% annually over the next three to five years.

Taiwan is actually the best-represented country at nearly 31% of holdings, followed by India at 14.5% and China at 14.3%. And unlike many larger ETFs for emerging markets, financials aren't a big part of EWX, at less than 10% of assets. Instead, the fund is dominated by information technology stocks (21.1%), industrials (13.9%), materials (13.3%) and consumer discretionary (12.9%).

One downside of this fund is a 0.65% expense ratio that's costlier than most of the emerging markets ETFs on this list, though that's still a fair price for this kind of exposure.

To learn more about EWX, visit the State Street Global Advisors provider site.

• Assets under management: $161.4 million
• Expenses: 0.59%
• Dividend yield: 0.7%

Consumer spending should continue to accelerate as COVID-19 dissipates – not just here in the U.S., but in emerging markets, as well. Investors can position for that eventuality with the Columbia Emerging Markets Consumer ETF (ECON, $25.73), which identifies consumer discretionary, consumer staples and communication services companies in EMs that are expected to grow as their middle-class populations expand.

The ETF tracks the performance of the Dow Jones Emerging Markets Consumer Titans Index, a tight collection of roughly 60 emerging market companies in the three aforementioned sectors. The top holding is India-based consumer goods company Hindustan Unilever, which is a subsidiary of U.K. personal care product firm Unilever (UL). ECON's top 10 holdings account for roughly 40% of its net assets.

In terms of style, ECON is considered a large-cap blend, with a weighted average market cap of $102.6 billion. It does offer a dividend, albeit a modest one.

China really throws around its heft at 51% of assets, followed by India (13.2%) and Taiwan (11.8%). As far as sectors, Consumer discretionary is tops at 38% of the fund, followed closely by communication services (36%) and the rest in staples – an excellent mix of offense and defense.

At 0.49%, ECON isn't overly expensive. But compared to fellow emerging market ETFs VWO or SPEM, it isn't cheap, either.

To learn more about ECON, visit the Columbia Threadneedle Investments provider site.

• Assets under management: $1.3 billion
• Expenses: 0.86%
• Dividend yield: 0.2%

The investment case for e-commerce stocks was made long before COVID-19 reared its ugly head. Pair that with the growth potential of emerging markets, and you really have something special.

Enter the Emerging Markets Internet & Ecommerce ETF (EMQQ, $51.99), which has received even more spotlight thanks to the COVID effect on internet spending.

EMQQ's performance since its launch in November 2014 has been off-the-charts good, justifying its 0.86% management expense ratio. EMQQ has more than doubled on a total-return basis (price plus dividends) since then.

According to EMQQ, consumption in emerging markets will swell to $30 trillion by 2030, with more than 50% of the estimated 5.5 billion people in what it describes as the "consumer class."

And emerging market stocks account for only 13% of total global market cap, but their economies represent roughly 41% of global gross domestic product (GDP). This is according to a report from Touchstone Investments.

To be included in the EMQQ Index, a company must generate at least 50% of its revenue from the internet or e-commerce industries in both emerging and frontier markets. It is rebalanced twice a year on the third Friday in June and December.

The fund currently holds 119 stocks from 17 countries, with China the overwhelming presence at 62% of assets, followed by South Korea and India at 6.6% and 5.1%, respectively. The top 10 stocks – which include Tencent, Alibaba and Pinduoduo (PDD) – account for almost 58% of total assets.

To learn more about EMQQ, visit the EMQQ provider site.

• Assets under management: $5.1 billion
• Expenses: 0.73%
• Dividend yield: 0.4%

The KraneShares CSI China Internet ETF (KWEB, $49.59) holdings are 100%, China-based publicly traded companies that engage in internet-related businesses. If you're not comfortable holding emerging markets ETFs that are exclusively concentrated in one country – China or otherwise – this fund is definitely not for you.

KWEB tracks the performance of the CSI Overseas China Internet Index, a collection of companies that are traded on the Hong Kong, New York and Nasdaq stock exchanges. The ETF currently has 51 holdings, and the top 10 account for 63% of assets. American investors are likely familiar with most, if not all, of the top 10, which includes several names we've mentioned already (Alibaba, Tencent, Pinduoduo, for instance).

The fund is extremely concentrated from a sector perspective: 45% in consumer discretionary, 35% in communication services, and 6% in technology. The remaining 14% is divided amongst real estate, health care, financials and industrials.

Large caps account for 91% of the portfolio, with the remainder in mid-caps and a tiny sliver of small-cap stocks.

KWEB got its start in July 2013, and like EMQQ, has done exceptionally well since inception, up nearly 120%.

To learn more about KWEB, visit the KraneShares provider site.

The obvious source for positive returns in bonds during 2021's robust economic recovery is high-yield, or junk, a category always known to piggyback on rollicking growth and booming oil prices.

But as usual, and despite the uptick in interest rates and all the apprehensions that inflation is about to stay stubbornly higher, tax-exempt bonds are also in the green. I like to say municipals are steely stuff. I am on the verge of upgrading them to titanium.

The numbers for 2021 are not spectacular. A clutch of broad-based municipal indexes is up 0.5% to 1%, exemplified by Standard & Poor's state general obligation index, at 0.6%. But its three-year annualized gain is 4.5%, and Vanguard's benchmark Total Bond Market ETF (BND) is at minus 2.4% for the year to date – hurt by its lack of tax-frees. (Prices and returns are through June 4.)

Municipals' prices are not nearly as sensitive to interest-rate bumps as are Treasuries or corporate bonds. There is less trading, and more municipal bondholders stay put until maturity, so the prices are stickier until and unless rates seriously soar.

And the perception now is that high-income investors are due for big income tax increases, so they are frantic for shelters, and tax-free bonds are easy to buy. (For more on tax-wise investing, see How to Invest for a Higher-Tax Future.)

But tax-policy talk is always a questionable explanation for municipal bonds' success.

I have found that people just do not want a tax liability when it is optional. It does not matter whether their personal tax rate is low, they live in a tax-haven state, or Congress puts them into a combined 50% state and local bracket.

It also does not matter whether the yield on tax-frees is unusually low compared with what is available from taxable debt – which it is now, with triple-A muni yields at near-record lows relative to 10-year Treasuries. In some asset classes, this would trigger a burst of profit-taking and rebalancing. Not here. Repeat after me: Folks. Just. Hate. Taxes.

Prosperity is a Plus

There is another powerful force propping up munis in 2021: U.S. prosperity. Treasury bonds gain in value when banks, pension funds, foreign nations and other giant investors seek maximum safety and soundness; municipal bonds' good fortunes reflect healthy employment and consumer spending, robust business activity, and rising real estate sales and property values.

Hence, the S&P Infrastructure Plus tax-free index is up 2.3% so far this year – four times the gain in the index of state general obligations. Airport bonds are ahead 2.1%; hospital bonds, 1.9%; and toll-road bonds, 1.7%. Almost none of these bonds fell apart in value or missed payments a year ago, helped by sizable cash reserves.

Fitch Ratings did put the Pennsylvania Turnpike and the South Jersey Transportation Authority on negative watches – but has now removed them. Fitch forecasts U.S. toll-road traffic to get back to 2019 levels by the fourth quarter of this year. It may need to advance that target.

As for income, in April 2021, New Jersey Turnpike toll revenue exceeded April 2020's depressed take by 203%. There is a reason these are called revenue bonds.

Few mutual funds are devoted specifically to revenue bonds, but high-yield portfolios including the incomparable Nuveen High Yield (NHMAX, yield 4.6%) have a heavy share of them. The Nuveen fund has a year-to-date total return of 6.3%.

Closed-end BNY Mellon Municipal Bond Infrastructure Fund (DMB, $15, 4.3%) has returned 7.3% so far in 2021. After spending years at a discount, it now trades at net asset value – a fair price.

I've recommended these funds for years, but it's still not too late to buy.

We're climbing out of the economic shock of a lifetime, and nothing terrible happened to bond investors. Better times are rolling. Enjoy the ride.