Almost any year could be a good year to consider holding Vanguard index funds. 2021 is likely to be no exception to this wisdom.
Last year taught investors that it's never wise to make broad predictions about capital markets and the broader economy – at least not without a backup plan. COVID wrecked just about every prediction out there, and some outside shock could do the same in 2021.
Even if it doesn't, the promise of a post-COVID 2021 could be disrupted by things we simply don't know: the timing of an economic recovery, and the degree, are both complete unknowns. All we know is that a few companies are distributing vaccines. But what percentage of the population will embrace them? Just how much of a shot in the arm to the economy will these vaccines bring? When will consumer activity return to 2019 levels? Not even the best of active portfolio managers knows the answers to these questions.
This is where Vanguard index funds come into play.
By taking the passive management route from any fund provider, investors can remove manager risk, diversify by tracking a broad market index, and potentially outperform the category averages. And when you invest in Vanguard specifically, chances are you're getting that passive exposure at a dirt-cheap rate.
In no particular order, here are seven of the best Vanguard index funds for investors seeking core holdings in 2021. And good news if you prefer exchange-traded funds: All but one of these come in an ETF wrapper, too.
Returns and data are as of Jan. 24, 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. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Vanguard Value Index Admiral
- Category: Large value
- Assets under management: $63.7 billion
- Dividend yield: 2.6%
- Expenses: 0.05%, or $5 for every $10,000 invested
It's an understatement to say we're in unusual times. Nonetheless, investors can assume that the 2021 stock market will eventually follow some of the usual hallmarks of a market recovery. One such hallmark is that early-phase business cycle stocks – such as the large-cap value stocks that VVIAX holds – could outperform growth after a long drought.
"Investors should also favor value stocks over growth stocks," says BCA Research. "Commodity producers are overrepresented in value indices, while banks will benefit from steeper yield curves."
Indeed, financials are the largest part of Vanguard Value Index's holdings at nearly 20% of the portfolio. Healthcare, a smart play for offense and defense alike, is second at 19%, followed by industrials at 13%. Top holdings at the moment include Berkshire Hathaway (BRK.B (opens in new tab)), Johnson & Johnson (JNJ (opens in new tab)) and JPMorgan Chase (JPM (opens in new tab)).
And like most Vanguard index funds, VVIAX charges a pittance of 0.05% annually.
Note: This fund also is available as an ETF – the Vanguard Value ETF (VTV (opens in new tab)), which charges 0.04% annually.
Learn more about VVIAX at the Vanguard provider site. (opens in new tab)
Vanguard Extended Market Index Admiral
- Category: Mid-cap blend
- Assets under management: $95.8 billion
- Dividend yield: 0.88%
- Expenses: 0.06%
Investors looking for a little more "oomph" in their portfolio might want to consider Vanguard Extended Market Index Admiral (VEXAX (opens in new tab), $133.85), which invests primarily in mid-cap stocks, as well as some small caps.
Large-caps tend to lag behind stocks of smaller capitalization during economy recoveries. Although the coronavirus recession certainly hasn't been a garden-variety one, a rebounding U.S. economy still stands to benefit smaller firms as it would have in past recoveries. And VEXAX is one of the best Vanguard index funds to reap these rewards.
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 an S&P 500 Index fund because it covers stocks with smaller capitalizations than those in the blue-chip index. That's how you get the "Completion" moniker.
Vanguard Extended Market Index is decidedly growth-focused, with a quarter of assets plowed into technology stocks, and another 11% in consumer discretionary. But you also get a healthy chunk of healthcare (16%), industrials (13%) and financials (13%). Top holdings include the likes of Zoom Video Communications (ZM (opens in new tab)), Square (SQ (opens in new tab)) and Uber Technologies (UBER (opens in new tab)).
Note: This fund also is available as an ETF – the Vanguard Extended Market ETF (VXF (opens in new tab)), which charges 0.06% annually.
Learn more about VEXAX at the Vanguard provider site. (opens in new tab)
Vanguard Emerging Markets Stock Index Admiral
- Category: Diversified emerging markets
- Assets under management: $101.4 billion
- Dividend yield: 1.9%
- Expenses: 0.14%
Vanguard Emerging Markets Stock Index Admiral (VEMAX (opens in new tab), $44.78) could outperform U.S. stock index funds in 2021, if early-year GDP forecasts hold true.
JPMorgan, for instance, is looking at a rebound in emerging markets GDP growth to 7.3% in 2021, versus 5.5% for the U.S. A low-cost index fund like VEMAX can be a smart way to take advantage of this potential opportunity.
"We are upgrading our Emerging Market Equities guidance from neutral to favorable," says the Wells Fargo Investment Institute. "We expect a broader trade recovery, a weakening U.S. dollar, higher commodity prices, and the COVID-19 vaccine to provide tailwinds for emerging market equities over the next 12 months."
VEMAX holds more than 5,000 emerging markets stocks from dozens of countries – primarily China (43%), but also Taiwan (17%), India (11%), Brazil (6%) and others. Top holdings such as Taiwan Semiconductor (TSM (opens in new tab)), Alibaba (BABA (opens in new tab)) and Tencent Holdings (TCEHY (opens in new tab)) aren't necessarily household American consumer names, but they're still well-known to many investors at this point
Emerging markets, with all of their growth potential, have still had a hard time competing with U.S. stocks in most years. But now might be a good time to add this kind of diversification to your portfolio, with EMs poised to briskly snap back.
Note: This fund also is available as an ETF – the Vanguard FTSE Emerging Markets (VWO (opens in new tab)), which charges 0.10% annually.
Learn more about VEMAX at the Vanguard provider site. (opens in new tab)
Vanguard Real Estate Index Admiral
- Category: Real estate
- Assets under management: $60.6 billion
- Dividend yield: 3.9%
- Expenses: 0.12%
Vanguard Real Estate Index Admiral (VGSLX (opens in new tab), $121.58) had a rough 2020 that saw it lose 5% while the broader market ramped up by 18%.
But it should have an easier path in 2021.
A positive outlook for economic growth, coupled with historically low interest rates, bodes well for the real estate sector in 2021. For example, battered commercial real estate companies should be able to borrow at low rates and collect rents more reliably this year compared to last year.
Another aspect of the real estate sector that may look good to some investors is that the yields on real estate investment trusts (REITs), at 3% to 4%, are generally good and especially attractive compared to the low yields on the S&P 500 index, at around 1.6%.
The VGSLX portfolio is a basket of REITs that invest in various types of real estate, from office buildings to hotels to strip malls to self-storage units, and a lot more in between. To give you an idea, top holdings include the likes of telecommunication infrastructure REIT American Tower (AMT (opens in new tab)), logistics specialist Prologis (PLD (opens in new tab)) and data center play Equinix (EQIX (opens in new tab)).
While investors wait for a recovery in these shares, they'll be paid a handsome yield of nearly 4%. Little of that will be eaten up by expenses; Vanguard offers one of the cheapest real estate index funds around at 0.12%.
Note: This fund also is available as an ETF – the Vanguard Real Estate ETF (VNQ (opens in new tab)), which charges 0.12% annually.
Learn more about VGSLX at the Vanguard provider site. (opens in new tab)
Vanguard 500 Index Admiral
- Category: Large Blend
- Assets under management: $636.9 billion
- Dividend yield: 1.5%
- Expenses: 0.04%
Vanguard 500 Index Admiral (VFIAX (opens in new tab), $354.73) should be one of the best Vanguard index funds for 2021, 2022 and every year after for the plainest of reasons: It's cheap. It's passively managed. It's diversified. And it's invested in U.S. stocks.
Looking back at the volatile, unprecedented market action of 2020, one might assume that it was a year for stock pickers, especially after the pandemic hit the U.S. markets in late February. But VFIAX finished the year ahead of 56% of other large blend funds. More impressive is the long-term track record, with VFIAX's 10-year return besting 68% of category peers.
The VFIAX is invested in 500 mostly U.S. large caps, but other than that, its makeup will shift depending on how the S&P 500 changes over time. At the moment, it's heavily weighted in information technology stocks (28%) such as Apple (AAPL (opens in new tab)) and Microsoft (MSFT (opens in new tab)), with large weightings in healthcare (14%) and consumer discretionary (13%) – that latter sector is bolstered by large slugs of Amazon.com (AMZN (opens in new tab)) and Tesla (TSLA (opens in new tab)).
Note: This fund also is available as an ETF – the Vanguard S&P 500 ETF (VOO (opens in new tab)), which charges 0.03% annually.
Learn more about VFIAX at the Vanguard provider site. (opens in new tab)
Vanguard Balanced Index Admiral
- Category: Moderate allocation
- Assets under management: $51.9 billion
- SEC yield: 1.2%*
- Expenses: 0.07%
Vanguard Balanced Index Admiral (VBIAX (opens in new tab), $45.06) might find its best purpose in 2021 as a diversified core holding for investors who are concerned about market volatility and long-lasting pandemic fallout.
Since VBIAX is a moderate allocation fund, typically investing in a roughly 60/40 split of stocks and bonds, investors won't likely log in top performance for any one-year period. This fund simply doesn't operate at a breakneck pace.
But if you want to get average returns that significantly outpace inflation, while taking a moderate level of market risk, VBIAX is a smart holding in the short term and in the long run.
Performance history helps to tell the story for Vanguard Balanced. In a volatile year like 2020, when the S&P 500 ended 18.4% higher for the year, VBIAX was up 16.4%. These returns are not significantly different, but when you can still get strong performance with less risk, you have a smart holding.
You can't get much more diversified than VBIAX. This Vanguard index fund invests in roughly 3,400 stocks and another 8,500 bonds. The stock portion is primarily large-cap blend, while the bond portion is mostly medium-maturity, highly rated debt.
* 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.
Learn more about VBIAX at the Vanguard provider site. (opens in new tab)
Vanguard Total Bond Market Index Admiral
- Category: Intermediate-term bond
- Assets under management: $303.2 billion
- SEC yield: 1.1%
- Expenses: 0.05%
But it still ranks among the best Vanguard index funds to hold in the fixed-income space right now.
VBTLX is a nearly 10,000-holding portfolio of U.S. investment-grade debt. It provides exposure to Treasuries, investment-grade corporates, government mortgage-backed securities and more.
Vanguard investors understand the wisdom of passive investing, and VBTLX could confirm this wisdom in 2021. In a year where uncertainty could hang over capital markets, having a broadly diversified bond index fund to fade that uncertainty seems wise.
One known factor affecting the markets in 2021 is the commitment by the Federal Reserve to maintain its low-interest-rate policy through 2023. Since interest rates aren't likely to go much higher, then, a mix of bonds that average intermediate terms in maturity can be smarter than long- or short-term bonds.
In short, VBTLX should be a decent store of safety and provide modest performance in the fixed-income space.
Note: This fund also is available as an ETF – the Vanguard Total Bond Market ETF (BND (opens in new tab)), which charges 0.035% annually.
Learn more about VBTLX at the Vanguard provider site. (opens in new tab)
Kent Thune did not hold positions in any of these bond funds as of this writing. This article is for information purposes only, thus under no circumstances does this information represent a specific recommendation to buy or sell securities.
Kent Thune, CFP, is a financial professional that helps individuals and businesses achieve their goals through a variety of delivery methods, including investment advice, financial planning and writing.
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