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All Contents © 2020The Kiplinger Washington Editors
By Steven Goldberg, Contributing Columnist
| December 17, 2019
If you're looking to upgrade your portfolio in the new year, you'd be wise to look first at Vanguard – the proprietor of low-cost, high quality funds. The best Vanguard funds tend to have similar qualities. They're inexpensive. They're easy to understand. And when they're managed funds, they're managed well.
Jack Bogle, who the world lost about a year ago, will long be remembered for his passionate advocacy of low-cost investing in general, and the index fund in particular. Pursuing those two ideas relentlessly, he built Vanguard into one of the world's largest investment companies with more than $5.5 trillion in assets.
But Bogle possessed another talent that went virtually unnoticed. He was a superior judge of actively managed mutual funds.
Consider: When Vanguard opened for business on May 1, 1975, Wellington Management – where Bogle had worked previously – was already on board. Vanguard's Wellington (VWELX) is now one of the nation's largest and most successful balanced funds with more than $110 billion in assets. And Wellington remains the subadvisor on several more Vanguard funds.
In the mid-1980s, Bogle heard that several top managers wanted to leave the American Funds, which had a reputation of being such a good place to work that no one ever left. But those managers did leave, to start Primecap Management. Vanguard Primecap (VPMCX) and later Vanguard Primecap Core (VPCCX) were launched. They've been two of the most successful mutual funds ever.
Today, however, we're going to look at the best Vanguard funds to buy for 2020. While Bogle is no longer with us, his firm still is renowned for both its skilled management and its dirt-cheap indexed products. Here, we'll look at some of each that should serve investors well in the new year.
Returns and data are as of Dec. 16, unless otherwise noted. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Type: Dividend growth
Market value: $40.8 billion
Dividend yield: 1.7%
Expenses: 0.22%, or $22 annually on a $10,000 investment
More and more investors seem to be discovering the wonders of stock dividends of late. All I can say is, "Welcome aboard."
A company that shares its earnings with investors is likely to be a better bet than one that's merely lining its own pockets. Dividends serve as ballast in punk markets, too, meaning funds that emphasize dividends tend to hold up well in market downdrafts.
My favorite dividend funds are those that emphasize dividend growth. Companies that are growing dividends, even from a low base, have their eye on the future. Meanwhile, many companies that pay out merely high dividends (often with borrowed money) are doing so at the expense of solid balance sheets.
Vanguard Dividend Growth Investor (VDIGX, $31.49) isn't just among the best Vanguard funds to buy for the year ahead – it's the best of the actively managed dividend growth funds. Wellington Management's (yup, that Wellington) Donald Kilbride has capably captained the fund since 2006. At the moment, it holds a tight 42-stock portfolio heavy in Dividend Aristocrats such as Medtronic (MDT) and Coca-Cola (KO).
Over the past five years, it has returned an annualized 12.1% – a hair below the S&P 500. But here's the trick: It has produced those returns with roughly 15% less volatility than the index. Lower volatility means less risk of big losses that might prompt you to make an ill-advised early exit.
The 0.22% expense ratio is about as low as you can find for any actively managed stock fund.
Learn more about VDIGX at the Vanguard provider site.
Market value: $51.1 billion
Vanguard Dividend Appreciation ETF (VIG, $124.22) offers a similar approach to Vanguard Dividend Growth. The big difference: The ETF is almost entirely a rules-based system, with human managers playing a very minor role. Vanguard also offers a traditional mutual fund version of the ETF (VDADX) that charges a thin 0.08%.
Dividend Appreciation starts by excluding all stocks that haven't increased their dividends in each of the 10 previous calendar years. Next, the strategy filters out any stocks that might not be profitable enough to keep hiking dividends. Finally, it emphasizes large-cap stocks.
Just don't expect generous yields out of VIG. This ETF yields a meager 1.7%, because the focus is on dividend growth, not high income.
Not surprisingly, the ETF has held up best in lousy markets. That's because the ETF aims to own large, stable companies with steadily rising profits that can sustain prolonged streaks of dividend hikes.
Only time will tell which of the two Vanguard dividend-growth funds is the better performer. Over the past 10 years, though, the fund with a human at the controls has topped the rules-based fund by an average of 40 basis points (a basis point is one one-hundredth of a percent).
Learn more about VIG at the Vanguard provider site.
Type: Short-term bond
Market value: $61.5 billion
SEC yield: 2.2%*
If you like watching paint dry, you'll love Vanguard Short-Term Investment Grade Investor (VFSTX, $10.72). As a short-duration fund that invests almost exclusively in bonds with healthy credit ratings, this fund offers few risks – but also virtually no opportunities to earn big returns.
The fund invests mainly in corporate bonds, although about 25% of the fund is in securitized instruments, mainly mortgages, and another 10% is in U.S. government bonds.
Duration – a measure of risk – is just 2.5 years, which means the fund's price would fall only 2.5% if interest rates rose by one percentage point over 12 months. And the average weighted credit rating is single-A. These are the types of bond characteristics that lead to little in the way of yield, but also significantly tamp down risk.
Given what I see as a dismal outlook for bonds, VFSTX's super-conservative approach is a significant reason why it's among the best Vanguard funds to buy for 2020.
Also attractive is its tiny 0.2% annual expense ratio – many bond funds charge three or four times that much. The low expense ratio means the managers don't have to do anything fancy to post competitive returns.
Vanguard Short-Term Investment Grade has returned an annualized 2.4% over the past five years. And like so many bond funds, returns have shined so far this year: VFSTX has returned 5.5% year-to-date, which is better than 83% of its competitors.
* 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.
Learn more about VFSTX at the Vanguard provider site.
Type: Limited-term municipal bond
Market value: $29.5 billion
SEC yield: 1.3%
Expense ratio: 0.17%
Vanguard Limited-Term Tax-Exempt Investor (VMLTX, $11.08) isn't exactly a clone of the taxable version above, but it comes pretty darn close. Like Vanguard Short-Term, this fund has a duration of 2.5 years and an average credit quality of single-A.
In other words, VMLTX, which holds a basket of more than 6,000 municipal bonds – essentially defines low risk. Keep in mind, too, that municipal bonds are much less likely to default than corporate bonds.
Over the past five years, VMLTX has returned an annualized 1.7%. Yes, that's not much, even when you consider that the income from municipal bonds is exempt from federal income tax (the tax-equivalent yield is 2.5% for the highest federal tax bracket). But it's a good holding for a scary bond market.
Learn more about VMLTX at the Vanguard provider page.
Type: Health sector
Market value: $47.5 billion
Dividend yield: 1.1%
I'm not a big fan of sector funds with one exception: health-care funds. I've been writing about efforts to stem the rising cost of health care since the mid-1970s, and, of course, medical costs have done virtually nothing but rise further since then.
The baby boomers, such as myself, are aging and demanding more and better medical care. What's more, the drug industry, in particular, keeps coming up with innovative treatments for a wide range of diseases.
Vanguard Health Care Investor (VGHCX, $222.64) has been a solid long-term performer, returning an annualized 9.2% over the past five years and 14.2% over the past decade.
It's more conservative than most of its rivals largely because it has a smaller percentage of its holdings in volatile biotechnology stocks. Instead, it holds larger, established stocks such as insurer UnitedHealth Group (UNH) and pharmaceutical outfits AstraZeneca (AZN) and Bristol-Myers Squibb (BMY). Consequently, the fund tends to hold up better than its peers in rocky markets, making this one of the best Vanguard funds to buy when you expect turbulence.
Wellington Management runs VGHCX, too. Lead manager Jean Hynes has worked on the fund since 1991 taking over the lead position in 2012.
Hynes and her analyst colleagues are nothing if not patient. On average, the fund holds stocks for about seven years. About 25% of Vanguard Health Care's stocks are foreign – much more than most competitors.
Learn more about VGHCX at the Vanguard provider page.
Market value: $110.7 billion
SEC yield: 2.3%
Vanguard Wellington Investor (VWELX, $44.30) is old-fashioned and proud of it.
Launched in 1929 under the markedly less sexy name "Industrial Power Securities Company," Wellington is oldest among Vanguard's mutual funds and the nation's oldest balanced fund.
Like most balanced funds, Wellington – which is managed by Wellington Management – has about two-thirds of assets in stocks and the rest in bonds.
Wellington looks for stable dividend-paying companies such as Microsoft (MSFT) and JPMorgan Chase (JPM), putting it squarely in the large value corner of the market. But the managers also seek out growth stocks selling at temporary discounts.
For its bond holdings, Wellington sticks mainly to debt rated single-A or better. But it takes some risk on longer-term bonds. VWELX's bond duration averages 7.5 years.
One negative: You can only buy this fund directly from Vanguard.
Learn more about VWELX at the Vanguard provider page.
Type: Large blend
Market value: $874.5 billion
Vanguard Total Stock Market Admiral (VTSAX, $79.09) is the biggest, and some say the best, of all the Vanguard funds.
This index fund, which owns just about all investable stocks, has assets of $874.5 billion, making it the biggest fund in the business. You can also buy it as an ETF (VTI).
Vanguard Total Stock Market exhibits all the benefits of a broad-based index fund. Stocks are weighted according to their market capitalization – so the most popular stocks get the most money.
Turnover is microscopic – about 3% annually, which reduces the friction of trading.
And VTSAX's price tag is a parsimonious four basis points annually. Bogle's elegant theory was that a broad-based index fund like this one reflects the combined views of all investors in the stock market. Because the index fund costs less than what other investors pay, the index fund, on average, should beat the market by the weighted average per-share expense ratio of competing mutual funds.
Learn more about VTSAX at the Vanguard provider page.
Market value: $38.8 billion
Dividend yield: 1.2%
Vanguard International Growth (VWIGX, $31.93) is proof that not all Vanguard funds have to be conservative. Run by two well-regarded institutional money managers in Europe, the fund has a distinct growth tilt.
VWIGX has almost 25% of assets in emerging-markets stocks – much more than broad-based foreign stock benchmarks. Its top holdings include EM plays such as Alibaba Group (BABA) and Tencent Holdings (TCEHY).
That aggressiveness hasn't hurt long-term performance. Over the past 10 years, the fund has returned an annualized 8.6% – an average of 2.4 percentage points per year better than the MSCI ACWI Ex USA Growth Index, an index of growth stocks outside the U.S.
Learn more about VWIGX at the Vanguard provider page.
Type: Small cap stock index
Market value: $1.1 billion
Dividend yield: 1.4%
An index fund isn't the first thing that comes to mind when you're hunting for a good small-cap fund. But maybe it should be.
The Vanguard S&P Small Cap 600 ETF (VIOO, $150.22), which tracks the S&P 600 SmallCap Index, is much cheaper than most actively managed small-cap funds, many of which charge more than 1% annually. Vanguard also is careful to trade slowly in this fund.
VIOO has one important advantage in addition to its low costs. S&P looks at the index periodically and eliminates stocks that are financially weak. That has led to stronger returns on this index than in other small-cap indices.
It doesn't have much name recognition, but Vanguard S&P Small Cap 600 ETF certainly belongs among the best Vanguard funds to buy for 2020. The ETF has returned an average of 10.3% annually over the past five years – better than 93% of all blended small-cap ETFs.
Learn more about VIOO at the Vanguard provider page.
Market value: $10.8 billion
Dividend yield: 1.0%
Vanguard Primecap and Primecap Core grew like weeds as investors flocked to invest. Eventually, both closed to new investors.
However, Vanguard left a back door open to the Primecap managers. Primecap itself launched Primecap Odyssey Growth (POGRX) and Primecap Odyssey Stock (POSKX, $36.36). Odyssey Stock is my pick for 2020 because it's less risky than Odyssey Growth.
POSKX isn't quite as cheap as Vanguard's actively managed funds, but the returns have been solid. Its 10-year average annual returns of 13.1% are in the top quarter of its fund category.
The fund copies the American Funds multi-manager system. Each of the five fund managers is assigned a slice of the overall portfolio to run separately. Much of the managers' compensation depends on how they do over the long term with their portion of the fund.
Primecap is a growth-style manager. Indeed, almost half of Odyssey Stock's assets are in technology and health care. That makes this fund a fairly risky, albeit superior, offering for its fund type.
The managers do not like to trade, however. Stocks often stay in the fund for 20 years or more.
Learn more about POSKX at the Vanguard provider page.
Steve Goldberg is an investment adviser in the Washington, D.C., area.