The 11 Best Vanguard Funds for 2021
It'd be easy to put together a full 2021 gameplan using nothing but a mix of the best Vanguard funds. Here are 11 that stand out for the year to come.
There's no question that Vanguard has one of the best lineups of low cost, no-load mutual funds for almost any kind of investor. The prices and performance bear that out.
But the challenge for investors in the moment is this: Which are the best Vanguard funds to buy in 2021?
As any smart investor or wealth manager would do before building a portfolio for the coming year and beyond, we first looked at the economic and capital markets backdrop for the coming year:
- Recovering GDP: General consensus is for the U.S. economy to see gross domestic product (GDP) grow at a rate of about 3.6%. Kiplinger forecasts a more robust 4.4% advance.
- Distribution of coronavirus vaccines: The U.S. has approved vaccines from Pfizer/BioNTech and Moderna, and they're expected to OK a third from AstraZeneca. The rollout of the first two vaccines has begun, which in time should help rejuvenate economic growth. The question now is "when."
- Pent-up consumer demand: Consumers have cabin fever; those still with means are ready to get out and spend. If the U.S. follows other countries that are further ahead of the COVID curve, consumers likely will get out into the world and spend their money. That's good, given that consumer spending is about two-thirds of the U.S. economy.
- Economic stimulus: The election of President Joe Biden, who will now have the benefit of a razor-thin majority (thanks to the vice presidential tiebreaker) in the Senate, increases the likelihood of another round of stimulus.
Based primarily on these expectations, we've come up with 11 top Vanguard mutual funds to invest in during 2021, from a diverse range of categories. And while they're all focused on success in the year to come, many of these funds also make excellent long-term core holdings.
Read on, then, as we highlight 11 of the best Vanguard funds to buy for 2021.
Returns and data are as of Jan. 6, unless otherwise noted, and are gathered for the share class with the lowest required minimum initial investment – typically the investor share class or A share class. The share class available in your 401(k) plan may be different.
Vanguard 500 Index
- Fund category: Large blend
- Assets under management: $177.8 billion
- Dividend yield: 1.5%
- Expenses: 0.04%, or $4 annually on every $10,000 invested
Vanguard 500 Index (VFIAX, $345.91), which tracks the S&P 500 Index, was the market's first index fund for individual investors and Vanguard's flagship index fund. As such, it makes an outstanding core holding for 2021, not to mention for the rest of your investing "career."
A good rule of thumb: It's difficult to go wrong with a combination of rock-bottom expenses, strict rules and broad diversification across sectors.
As a cap-weighted U.S. large-cap fund, you get the most exposure to mega-cap stocks including Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN) and, more recently, Tesla (TSLA). These companies held up well in a pandemic environment, as we saw in 2020. While they could be subject to a rotation to "value," the diversification across the rest of the portfolio should help pick up some of the slack.
You've heard for a decade now that a majority of active fund managers underperform their benchmark, and that includes the S&P 500 – so on average, for large-cap blend exposure, you're better off holding the index. Vanguard 500 is up 17.6% over the past year, making it better than 59% of its peers. Longer-term performance is far more superior, though. Its 13.7% and 9.6% annual averages over the trailing 10- and 15-year periods are better than 88% and 80% of peers, respectively.
That makes VFIAX one of the best Vanguard funds to buy not just for 2021, but for a much longer time after that.
Note: Investors also can track the S&P 500 via the Vanguard S&P 500 ETF (VOO), which sports an expense ratio of 0.03%.
Vanguard Equity-Income
- Fund category: Large value
- Assets under management: $40.2 billion
- Dividend yield: 2.6%
- Expenses: 0.27%
Vanguard Equity-Income (VEIPX, $38.43) is a high-quality, low-cost fund that provides exposure to U.S. equities in the large-cap value space, which many analysts are hot on as we enter 2021.
If there is a rotation from growth and into value, VEIPX should be among 2021's top Vanguard funds. Its manager, Wellington Management, targets stocks of companies that consistently pay dividends. That style results in a portfolio of slower-growing, but value-priced and higher-yielding stocks including top holdings Johnson & Johnson (JNJ), JPMorgan Chase (JPM) and Procter & Gamble (PG).
This Kip 25 selection is chock full of big, blue-chip stocks, in fact. The average holding among the 185 components is $106.5 billion in market capitalization. Financials (20% of assets) and healthcare (18%) are the best-represented sectors.
Vanguard Selected Value
- Fund category: Mid-cap value
- Assets under management: $5.7 billion
- Dividend yield: 1.3%
- Expenses: 0.33%
Along the same lines, the actively managed Vanguard Selected Value (VASVX, $27.02), which focuses on value-priced mid-cap stocks, could be one of the best Vanguard funds for 2021.
"As the economy makes additional progress toward a return to normal in the coming year, we would expect participation in this young bull market to broaden and potentially help boost cyclical value stocks," says Jeff Buchbinder, equity strategist for LPL Financial. Indeed, value typically tends to outperform growth in the early stages of economic recovery.
Fund management for VASVX is divided among three sub-advisors, each focusing on a portion of the portfolio. The 125-stock portfolio currently is very heavy in financials (27%) and industrials (24%). Top holdings include the likes of Gildan Activewear (GIL), AerCap Holdings (AER) and Arrow Electronics (ARW).
Shareholders should note that the portfolio's tighter concentration, as opposed to many mid-cap index funds, increases market risk, but also provides the potential for stronger upside.
Vanguard Explorer
- Fund category: Small growth
- Assets under management: $19.1 billion
- Dividend yield: 0.1%
- Expenses: 0.45%
Vanguard Explorer (VEXPX, $131.25) is taking the other side of the value-growth bet. The fund invests in small- and mid-cap stocks with high growth potential. While the growth factor in general isn't expected to do well, smaller companies are, given the prospects for a U.S. economic recovery – these firms typically derive most of their revenues domestically.
With VEXPX, shareholders get broad exposure to nearly 700 small- and mid-sized stocks with an average market capitalization of about $6 billion. This diversification, in addition to the fund's multi-advisor approach, can help to reduce market risk, compared to a more concentrated approach like VASVX's.
VEXPX holds a 26% slug in the growthy technology sector, and has a quarter of the portfolio in healthcare, which is more of a go-anywhere sector. The only other double-digit sector is consumer discretionary, at 18%.
Top holdings include Five9 Inc (FIVN), Insulet Corp (PODD), and TriNet Group (TNET).
Vanguard Emerging Markets Select Stock
- Fund category: Diversified emerging markets
- Assets under management: $760.2 million
- Dividend yield: 1.0%
- Expenses: 0.93%
Vanguard Emerging Markets Select Stock (VMMSX, $27.18) is one of the best Vanguard funds for investors looking for growth opportunities outside of the U.S. this year.
America obviously wasn't the only nation that was hit by COVID-19 in 2020. By the same token, it's not the only place expected to stage a global recovery in 2021. As coronavirus vaccines are distributed and risk appetites for foreign markets return, stocks in developing nations could enjoy a brisk resurgence, too. They also could get a lift if the U.S. dollar remains weak compared to foreign currencies.
Vanguard Emerging Markets Select Stock is a portfolio of 280 mostly large-cap companies from primarily emerging market countries, though about 20% of holdings are from developed nations in the Pacific, Europe and North America. Like in many EM funds, China is the best-represented nation at a third of holdings, followed by 12% in Taiwan, 9% in India and 8% in South Korea.
At the moment, that means top holdings such as Chinese internet giants Alibaba (BABA) and Tencent Holdings (TCEHY). But be warned: The U.S. is cracking down on American listings of Chinese stocks, and a recent report has those two stocks in regulators' crosshairs. So the very short term could be tumultuous for how this portfolio is constructed.
That said, this is a young but well-managed Vanguard fund that has beaten 69% of its peers over the past three years, and 77% over the past five.
Vanguard Health Care
- Fund category: Healthcare sector
- Assets under management: $49.2 billion
- Dividend yield: 0.8%
- Expenses: 0.32%
If you want to get much more specific with your 2021 bets, you can consider sector plays such as Vanguard Health Care (VGHCX, $217.26).
The VGHCX portfolio consists of more than 90 primarily large-cap health stocks that cover all the major industries: pharmaceuticals, biotechnology, medical devices, insurers, life sciences tools and more. Current top holdings include large U.S. insurer UnitedHealth Group (UNH), as well as Big Pharma names Pfizer and AstraZeneca (AZN).
Fund manager Jean Hynes, from Wellington Management, has been in place for more than a decade and provides a steady hand. But she keeps the fund light on biotech stocks – a traditional source of high growth – compared to its peers.
Thus, VGHCX is more geared toward investors that want to enjoy in the growth of healthcare while limiting volatility. Indeed, Morningstar points out that risk is below the category average, and a beta of 0.73 indicates the fund is only 75% as volatile as a broader healthcare index.
Vanguard Total Bond Market Index
- Fund category: Intermediate core bond
- Assets under management: $68.1 billion
- SEC yield: 1.1%
- Expenses: 0.05%
Vanguard Total Bond Market (VBTLX, $11.54) is the ideal core bond holding, especially during times of uncertainty, which is sure to play a large role in fixed income markets in 2021.
In general terms, bond mutual funds see their best performance when interest rates are falling, and their worst performance when interest rates are rising. This is because bond prices typically move in the opposite direction as rates.
Bond prices also can move on the anticipation of rate movement. If investors see bad times coming, they might move some of their assets over to bonds and bond funds. This can push prices higher. But the opposite is also true: Bond funds can see declines when investors are rotating out of fixed income and into equities.
Economic conditions in 2021 are likely to improve, so while the Federal Reserve is likely to hold its benchmark rate steady, it's possible that bond funds still won't see much price appreciation. But if we get a scenario where the pandemic lingers longer than expected, or the economy is otherwise negatively impacted in a serious way, bonds could still see some interest in 2021.
A broadly diversified bond fund like VBTLX, which holds literally 10,000 investment-grade bonds across a broad range of maturities, could hold its own in a year of uncertainty.
Note: Investors preferring ETF exposure can buy the Vanguard Total Bond Market ETF (BND) at 0.035% in annual expenses.
Vanguard Ultra Short-Term Bond
- Fund category: Ultra-short bond
- Assets under management: $14.4 billion
- SEC yield: 0.5%
- Expenses: 0.20%
Vanguard Ultra Short-Term Bond (VUBFX, $10.08) is a collection of short-term bonds that can act as a higher-yielding alternative to money market funds, while reducing interest rate risk in the fixed-income portion of your portfolio.
For the foreseeable future, possibly through 2023 or longer, the Federal Reserve will hold interest rates at near-zero. This means savings accounts, certificates of deposit and money market accounts aren't going to do much better. The national average rate is 0.05% for savings accounts, 0.09% for money market accounts and 0.16% for CDs.
The challenge for getting decent yields on short-term money is that you'll need to take some risk to get them. It's not wise to hold this money in stocks, and you might not be comfortable with the interest-rate risk of intermediate- to long-term maturities on bonds.
This is where ultra-short-term bonds come into play. The yields are better than the aforementioned alternatives, and their shorter durations carry far less interest-rate risk than their longer-duration brethren.
The current SEC yield for VUBFX is 0.50%, and consider that it returned 2.1% across all of 2020. So it won't make you rich. But if trouble strikes, this could end up being one of the best Vanguard funds for 2021.
Vanguard Inflation-Protected Securities
- Fund category: Inflation-protected bond
- Assets under management: $34.3 billion
- SEC yield: -1.4%
- Expenses: 0.20%
Vanguard Inflation-Protected Securities (VIPSX, $14.40) could be one of the best Vanguard funds for 2021, at least assuming that the economy does open up as planned and inflation begins to creep up a little faster.
You can read more about TIPS here, but the general idea is that Treasury Inflation-Protected Securities (TIPS) are tied to the Consumer Price Index (CPI). If inflation rises, TIPS – and thus, the shareholders of funds like VIPSX – benefit. And many believe that we could enjoy that kind of environment this year.
VIPSX, which is one of our best bond funds for retirement savers, is not for those seeking out yield. Indeed, the portfolio's collection of inflation-protected securities actually produces a negative yield. But the fund can work well as a diversification tool and a hedge against inflation, which could very possibly tick higher in the second half of 2021 and beyond.
Vanguard Emerging Markets Bond
- Fund category: Emerging markets bond
- Assets under management: $1.5 billion
- SEC yield: 2.8%
- Expenses: 0.60%
Vanguard Emerging Markets Bond (VEMBX, $12.18) is another interesting Vanguard fund for 2021, as emerging markets could see breakneck growth compared to their developed peers.
Specifically, in 2021, GDP for emerging market economies is projected to grow by 5%, while growth for developed countries is expected to be 3.9%. So after years of slow performance, emerging markets' stocks and bonds alike might be underappreciated, yet ready to jump in 2021.
VEMBX provides a tight portfolio of roughly 200 bonds across a number of emerging markets, including Mexico (11%), Panama (7%) and Colombia (5%). The average maturity of its bonds is a little more than 12 years. And the quality of the portfolio is better than you might expect. Some 55% of the portfolio garners investment-grade ratings, and another 21% is in the highest "junk" tier.
Meanwhile, the SEC yield of 2.8% is hardly generous, but it's in the high range for bonds in the current interest-rate environment.
Vanguard Wellington
- Fund category: Moderate allocation
- Assets under management: $112.0 billion
- Dividend yield: 2.0%
- Expenses: 0.25%
Vanguard Wellington (VWELX, $44.29) has long been among the best Vanguard funds the provider has on offer, and it's an ideal one-stop shop for a well-managed, medium-risk balance of stocks and bonds.
The equity side of VWELX, which is about 65% of assets, is extremely large-cap in nature; the 59 stock holdings average $181.6 billion in market cap and include the likes of Apple, Microsoft and Google parent Alphabet (GOOGL). Meanwhile, the fixed-income side consists of more than 1,000 bonds averaging 11 years in maturity and is entirely investment-grade in nature.
The fund's slightly lower exposure to technology compared to is peers held performance below category averages in 2020. However, VWELX, launched in 1929 has a long track record of outperformance – especially in the long-term, where it counts most. Its 9.8% average annual return over the past decade puts VWELX ahead of 87% of its peers, and its 15-year average of 8.3% is better than all but 9% of its competitors.
As for 2021: By spreading its bets across equity sectors and fixed-income types, Wellington enables shareholders to participate in 2021's upside potential while minimizing the downside risk.
Learn more about VWELX at the Vanguard provider site.
