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All Contents © 2019The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| September 16, 2019
If the 401(k) world held a popularity contest, Vanguard would win. More Americans choose to stash their retirement savings in Vanguard 401(k) funds above all other firms’ funds in the country.
In this, our annual review of widely held 401(k) funds – mutual funds with the most in 401(k) assets – 32 Vanguard funds rank among the top 100.
Of course, just over a dozen of those are index funds, but Vanguard offers many actively managed funds, too. Good ones.
Today, we’re going to look at some of the best Vanguard funds for your 401(k) … and also weed out a few lesser options. We’ll review nine active Vanguard funds, as well as the popular Vanguard Target Retirement series of target-date funds. (Ten Vanguard target-date portfolios rank among the 100 most popular retirement funds). We’ll rate each Buy, Sell or Hold.
Returns and data are as of Sept. 13, 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. Three-, five- and 10-year fund returns are annualized.
Expense ratio: 0.27%
One-year return: 6.6%
Three-year annualized return: 11.9%
Five-year annualized return: 9.4%
10-year annualized return: 13.0%
Rank among the top 401(k) funds: #62
Best for: Stock investors looking for a smoother ride.
Consistency is Vanguard Equity Income’s hallmark. A focus on large companies that pay a dividend helps, of course. Over the past three, five and 10 years, Vanguard Equity Income – one of several Vanguard funds included in the Kiplinger 25 – has delivered above-average returns with below-average risk relative to its peers: funds that invest in large, discount-priced companies.
Having the same team of managers in place for more than a decade certainly has been a plus, too. Wellington Management’s Michael Reckmeyer, a co-subadviser since 2007, runs two-thirds of the assets; Vanguard’s in-house quantitative stock-picking group has been running the remaining third of assets for even longer, since 2003.
Together they build a portfolio of roughly 200 large companies – mostly domestic firms, including JPMorgan Chase (JPM), Verizon Communications (VZ) and Johnson & Johnson (JNJ) – that pay above-market-average dividends. The fund yields 2.8%; the S&P 500 yields 1.9%.
Expense ratio: 0.46%
One-year return: -1.8%
Three-year annualized return: 15.8%
10-year annualized return: 13.8%
Rank among the top 401(k) funds: #79
Best for: Mid-cap stock exposure. The fund’s performance is improving, but you may want to consider a small-company or midsize-company index fund as an alternative.
Lumpy returns and a revolving door of fund managers have been a longtime negative for Vanguard Explorer, which invests in fast-growing small and midsize companies. Between 2008 and 2017, Vanguard swapped out six subadviser teams and moved in three other firms. A slump in small-company stocks over the past year hasn’t helped.
But VEXPX’s performance is improving – a sign that perhaps Vanguard has a good team of managers in place at last. Since mid-2017, the remaining five subadvisory firms, which carve up the nearly $17 billion in assets and run them independently, have eked out an above-average record relative to its peers, funds that invest in small, growing companies. Each firm manages a portion of the assets in its own way – some are more price-focused, others home in on financial quality – but generally, they’re all looking for burgeoning, fast-growing companies.
It’s worth noting, however, that the resulting portfolio of 500 to 600 stocks tilts more toward midsize firms, such as top holdings Icon plc (ICLR) and Insulet (PODD), than small. At last report, 55% of the fund’s assets were invested in midsize firms and 6% in large companies. Only roughly a third of assets sat in shares of small companies, generally defined by Morningstar as companies with less than $800 million in market value. The holdings in the portfolio have an average market value of $4.9 billion.
Expense ratio: 0.20%
One-year return: 5.6%
Three-year annualized return: 2.1%
Five-year annualized return: 2.0%
10-year annualized return: 3.2%
Rank among the top 401(k) funds: #74
Best for: Bond investors who seek a safe investment that will stay ahead of inflation.
Vanguard Inflation-Protected Securities is a solid fund that delivers on its objective: to provide inflation protection and income. It invests in TIPS, or Treasury Inflation-Protected Securities. These bonds have fixed maturities and fixed coupon rates, but the principal value adjusts with inflation. If inflation rises, the principal value rises, which effectively boosts the payout of the bond. If inflation falls, the principal value also adjusts downward. But if you buy individual TIPS and hold to maturity, the Treasury will pay you back the principal value of the bond at the time it was issued – the par, or face value.
Two years ago, inflation expectations were on the rise; these days, it’s on the wane. The Federal Reserve Bank of Cleveland currently expects a 1.56% inflation rate over the next 10 years, compared with more than 2.1% a year ago. Indeed, ever since these securities were first issued in 1997, when expectations for increases in consumer prices hovered around 3%, inflation has been trending down. But Joe Davis, an economist with Vanguard, says that even in a low-inflation world, there’s always the risk that the price of goods and services will increase – or a fear of it – could break out. That’s one of the reasons you want to have TIPS in your portfolio – “as ballast and a diversifier,” he says.
That said, we like this Vanguard fund for investors who are looking for a sliver of exposure to hedge inflation.
Expense ratio: 0.45%
One-year return: 1.7%
Three-year annualized return: 12.5%
Five-year annualized return: 7.0%
10-year annualized return: 8.1%
Rank among the top 401(k) funds: #41
Best for: Investors looking for exposure to international stocks.
Many American investors have had eyes only for U.S. stocks lately, thanks to a long bull market here at home. But every diversified portfolio needs exposure to foreign stocks; if you like Vanguard funds, Vanguard International Growth is a worthy choice.
Compared with its benchmark, the MSCI All Country World Index (ACWI) ex USA Index, International Growth is a standout. In the calendar years between 2008 and so far in 2019, the fund outpaced the MSCI ACWI ex USA in all but two calendar years (2014 and 2016). And its 10-year annualized return beats 13% of its peers: funds that invest in growing, large foreign companies.
Two subadvisory firms, Baillie Gifford and Schroders, run the fund. They look for growing companies of any size in developed and emerging countries. Almost one-quarter of the fund’s assets are invested in emerging markets, much of that in Chinese companies: Internet conglomerate Tencent Holdings (TCEHY) and e-commerce giant Alibaba (BABA), are among the fund’s top holdings. Named managers will soon change at each subadvisory firm, but Morningstar says these transitions are being choreographed carefully.
Be prepared for volatility with International Growth, especially on the downside. International Growth is packed with fast-growing tech firms and e-commerce companies. An outsize 17% of the fund’s assets are invested in internet and catalog retail companies – far more than the typical 3% to 4% of assets in the typical foreign large growth stock fund. But in the past, the risk has been worth the reward. Over the past decade, VWIGX was 14% more volatile than its benchmark or its typical peer, but it outpaced both in annualized returns, by solid margins.
Expense ratio: 0.38%
One-year return: 0.8%
Three-year annualized return: 16.2%
Five-year annualized return: 12.0%
10-year annualized return: 14.6%
Rank among the top 401(k) funds: #7
Best for: Aggressive investors with long time horizons.
Vanguard Primecap is one of the most popular 401(k) funds and for good reason. The large-company stock fund, which is closed to new investors unless your 401(k) plan offers it, has been a stalwart for years.
Five managers from Primecap Management, the Pasadena, California-based money manager, pick the stocks. Each manager takes a slice of the fund’s assets and runs it independently, but they all have the same approach: looking for companies with better growth prospects than market prices imply. That means they typically buy stocks that are out of favor (underappreciated by others in the market) but have a catalyst for growth. And they’ll hold for as long as the company is performing well, typically for more than a decade. Adobe Systems (ADBE), Southwest Airlines (LUV) and Texas Instruments (TXN) shares have been in the fund since the early 1990s.
Their contrarian bent is showing its ugly side these days. VPMCX’s 0.8% gain over the past 12 months lags 82% of its peers – funds that invest in large, growing companies – and the S&P 500. It’s a good reminder for investors: The fund isn’t built to mimic any index, so there will be times it performs out of step with the broad market. Primecap managers favor technology and health-care companies – the sectors comprise 59% of the fund’s assets at last report. Health-care stocks in particular have been a drag.
If you’re lucky enough to have access to VPMCX through your 401(k) plan, load up on shares. Every fund manager goes through some occasional short-term lumps. The good ones prove themselves over time, and Primecap’s managers are established veterans. The fund’s 15-year annualized return ranks among the top 13% of all large-company growth funds and beats the S&P 500.
Expense ratio: 0.23%
One-year return: 9.2%
Three-year annualized return: 6.7%
Five-year annualized return: 6.2%
Rank among the top 401(k) funds: #76
Best for: Conservative investors who want to tilt heavily toward bonds, but still maintain some stock exposure.
In the olden days, funds with mandates to hold a mix of stocks and bonds were called balanced funds. (Morningstar now calls them “Allocation” funds.) Wellesley Income is one such fund, with a mandate to invest about two-thirds of assets in bonds, and one-third of assets in stocks. It differs from target-date funds because its stock-bond mix doesn’t change much over time. The managers at Wellesley Income have some wiggle room but they must stick within a range. Over the past five calendar years, for instance, the fund’s allotment to stocks has ranged as high as 38.5% of assets and as low as 36%.
Wellington Management’s Michael Reckmeyer takes charge of the stock side, zeroing in on large-company stocks – such as JPMorgan Chase and Cisco Systems (CSCO) – that pay a dividend yield above that of the S&P 500. Wellington’s Loren Moran and Michael Stack manage the bond side. They tend to skew more toward high-quality corporate bonds (roughly 70% of the bond portfolio at last report). Government debt (15%) and securitized bonds (7%) comprise the bond portfolio’s next biggest portfolios. The fund yields 2.5%.
Given its stock-bond exposure, VWINX tends to hold up well in bad markets, whether that’s on the stock or bond side. In 2008, for instance, when the S&P 500 dropped 37%, Wellesley Income lost just 9.8% (that same year, Bloomberg Barclays U.S. Aggregate Bond index gained 5.2%). And in 2013, when the broad bond index fell 2.0%, Wellesley Income gained 9.2%, lifted in part by a whopping 32% in the U.S. stock market.
Wellesley Income has been a mainstay among Vanguard funds for almost 50 years, and over the past decade, it has turned in spectacular results. But the team hasn’t been in place together for long. Reckmeyer’s tenure at the fund goes back to 2008. Moran and Stack have been with the fund since 2014, and only as named managers since January 2017. Since early 2017, VWINX has returned an annualized 7.5%, which outpaces the average 5.2% gain reported by its peers: funds that focus on stock-bond funds with an allocation of 30% to 50% stocks.
Expense ratio: 0.25%
One-year return: 8.7%
Three-year annualized return: 10.5%
Five-year annualized return: 8.0%
10-year annualized return: 9.9%
Rank among the top 401(k) funds: #9
Best for: Investors looking for a one-stop fund that holds stocks and bonds.
Vanguard Wellington has been a Kiplinger favorite since 2016, when it was first named to the Kiplinger 25, the list of our favorite no-load funds. One quirk about the fund is that if you’re buying shares in this fund outside of a 401(k) plan, you must buy it through Vanguard; otherwise it is closed to new investors.
Like the aforementioned Wellesley Income, Wellington is a balanced fund. But it holds more stocks than bonds. The managers must invest about two-thirds of the fund’s assets in stocks – mostly in large-cap dividend stocks – and one-third in high-quality bonds. Over the past 10 years, Wellington beats its typical peer: funds that allocate 50% to 70% in stocks.
Managers from the Boston-based firm Wellington Management have run since it launched in 1929. But recently, the team has changed a bit. Loren Moran and Michael Stack have been co-managers on the bond side since January 2017, but veteran bond picker John Keogh retired in June 2019. On the stock side, longtime manager Edward Bousa took on Daniel Pozen as a co-manager in March 2019, in anticipation of his mid 2020 retirement.
We’re watching this Vanguard fund a little more closely as a result, but so far, it’s business as usual at Wellington. Over the past 12 months, VWELX has recorded an 8.7% return – more than four percentage points better than its average competitor, and among the top 5% of its peer group. The fund yields 2.4%.
Expense ratio: 0.31%
One-year return: 2.2%
Three-year annualized return: 11.0%
Five-year annualized return: 6.8%
10-year annualized return: 11.4%
Rank among the top 401(k) funds: #31
Best for: Consider an S&P 500 index fund instead.
Vanguard Windsor’s long-term trailing returns are average, albeit a little ho-hum, but the fund isn’t a total dog. Even so, the biggest knock on it is how it tends to perform in down markets: In a word, badly.
A new manager, Wellington Management’s David Palmer, took over running 70% of assets in early 2018. (Pzena Investment Management, a deep-value style money management firm, runs the remaining 30% of assets.) Like his predecessor, Palmer is a contrarian at heart, investing in out-of-favor companies that trade at relative discounts to their peers and have a solid strategy to improve the business. We’re hopeful he can stage a turnaround of VWNDX’s fortunes.
But for now, we’d advise investors to consider an S&P 500 index fund instead.
Expense ratio: 0.33%
One-year return: 3.3%
Three-year annualized return: 10.9%
Five-year annualized return: 7.5%
10-year annualized return: 11.2%
Rank among the top 401(k) funds: #96
Best for: Stock investors are better off in an S&P 500 index fund.
Value-oriented Vanguard Windsor II, which invests in large- and midsize-companies, suffers from chronic middling performance. In six of the past 10 calendar years (between 2009 and 2018), Windsor II has lagged the S&P 500. Of course, value stocks have underperformed their growth counterparts for that period. But even against its value peers – funds that invest in large companies trading at bargain prices – Windsor II fails to shine brightly. Part of the problem is that VWNFX tends to lose more in down markets than its peers and the index, and it fails to rebound as strongly, too.
Windsor II, like many other Vanguard funds, charges a low expense ratio (its single upside for now). But we think you’re better off in an S&P 500 index fund, which will cost you even less and for the past decade has performed better.
Rank among the top 401(k) funds: 2015, #52; 2020, #20; 2025, #11; 2030, #14; 2035, #19; 2040, #24; 2045, #30, 2050, #42; 2055, #100
Best for: Investors who want an expert to make their investment decisions.
Target-date funds, for the uninitiated, hold a mix of stocks and bonds that starts out aggressive and shifts to a more conservative blend as the target year approaches. They’re designed for investors who want an expert to handle their retirement investments. Pick the fund with the year in its name that falls closest to the time you expect to retire, stash your savings in it, and let a team of experts handle the rest.
There’s a lot to like about Vanguard Target Retirement target-date funds. They are simple: Each target-date year holds just four to five index funds. They are cheap: The expense ratios of Vanguard’s Investor share-class retirement-geared funds range between 0.12% and 0.15%. (Chances are high that your retirement plan offers an even lower-cost share class of the fund.) And each fund boasts a solid long-term track record. Over the past 10 years, all of the funds delivered annualized returns that beat 70% or more of their target-date fund peers.
But the best part is, there are no surprises with this target-date series. It takes a middle-of-the-road approach to asset allocation – how a portfolio is divvied up between stocks and bonds and everything in between. For example, Target Retirement 2035 (VTTHX) – the fund for investors who expect to retire in 15 years or so – holds 75% in stocks and 24% in bonds. That’s about par for the peer group, which holds 74% in stocks and 19% in bonds (the typical 2035 fund devotes more to cash and other assets, just over 7%, than Vanguard’s portfolio).
Investors who want to set it and forget it can do so using Vanguard funds. The target-date series continues to shift the stock-bond mix over time for seven years after the target retirement year. For example, Target Retirement 2015 (VTXVX) still is modifying its allocation. At its retirement target year, the fund likely held closer to 50% in stocks and the rest in bonds or cash. Now, four years past its target year, the 2015 fund holds 37% of its assets in stocks. Over time, all of Vanguard’s target-date funds morph into Vanguard Retirement Income (VTINX), which at last report held just under 30% in stocks and 70% in bonds. Retirement Income currently yields 2.1%.