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All Contents © 2018The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| November 15, 2016
Vanguard is the biggest fund company in the land, with more than $3 trillion in assets. So chances are high that many retirement savers have access to Vanguard funds in their 401(k) plans. But size is no guarantee of good results.
Thirty-four Vanguard funds appear on a list of the 105 most popular mutual funds in employer-sponsored retirement savings plans. No other fund company comes close. Many of those Vanguard funds including index funds, actively managed funds and target-date funds are well suited for retirement savers. (Read more about the best Vanguard funds for your retirement savings.)
But some of the popular funds didn't make the cut based on our analysis of the funds' performance and prospects. Here are three Vanguard funds to avoid in your 401(k). You are better off investing your retirement savings in other better-performing funds.
The list of funds, based on 401(k) assets under management, was generated for Kiplinger by BrightScope, a financial-information company that rates retirement-savings plans. The funds are listed in alphabetical order. We used data for the Investor share class for each fund, but your retirement plan may offer a different share class that presumably charges a lower fee. Note that any funds nominally closed to new investors may be open to participants in a 401(k) plan. Returns are as of October 11.
Expense ratio: 0.49%
Assets: $11.4 billion
One-year return: 5.6%
Three-year annualized total return: 5.1%
Five-year annualized total return: 13.4%
Ten-year annualized total return: 7.1%
Once upon a time, Explorer was a solid, aggressive small-company stock fund. Now it’s “a poster child” for the “watered-down” results that come from funds that have multiple managers, says Dan Wiener, editor of The Independent Adviser for Vanguard Investors, a newsletter. Wiener is referring to Vanguard’s penchant for divvying up the assets of a large fund among multiple subadvisers. In this case, Explorer has 14 managers who hail from seven subadvisers. Vanguard believes the different stock-picking approaches of the advisory firms will complement each other and ultimately bolster the fund’s performance.
But Explorer’s results have been subpar. In eight of the past 11 calendar years (including so far in 2016), the fund has trailed its chosen benchmark, the Russell 2500 Growth index (which tracks stocks of 2,500 fast-growing small companies). On a trailing basis, it falls behind, too. Over the past 10 years through October 11, Explorer lagged its bogey by an average of 1.2 percentage point per year.
Explorer’s multi-manager setup has other problems. For one thing, Vanguard doesn’t publish each firm’s results separately. Moreover, subadvisers have taken control over a portion of the fund’s assets at different times (one firm, Wellington Management, came on as early as 1994; the latest additions, in 2014). Since they all started working as a group in June 2014, the fund has returned 3.9% annualized, trailing the Russell 2500 Growth index by an average of 1.4 percentage points per year.
A better bet, if it is available in your plan, is Vanguard Small Capitalization Index (NAESX). It has outpaced Explorer in seven of the past 11 calendar years (including so far in 2016). As its name indicates, the fund simply seeks to mimic an index—in this case, the CRSP US Small Cap index (CSRP stands for Center for Research in Security Prices).
Expense ratio: 0.20%
Assets: $25.3 billion
One-year return: 5.0%
Three-year annualized total return: 2.1%
Five-year annualized total return: 1.6%
Ten-year annualized total return: 4.3%
This actively managed fund does what it’s supposed to do. It invests in Treasury inflation-protected securities, or TIPS, which provide a hedge against rising consumer prices. These bonds, which are backed by the full faith and credit of the U.S. government, pay a modest guaranteed return above the rate of inflation. But the fund currently pays a negative yield in part because of the double whammy of generally low expectations for inflation and the persistently low interest-rate environment.
That hasn’t prevented manager Gemma Wright-Casparius from generating a positive return for investors, albeit a small one. Since she took over in August 2011, the fund has returned an annualized 1.3%. It’s not much, but it beat 88% of funds that invest in inflation-protection bonds. The annual rate of inflation over that time has dropped from 3.0% in 2011 to 0.8% in 2015, according to the Bureau of Labor Statistics.
Our main concern about the Vanguard fund is that it is highly sensitive to changes in interest rates. The fund’s average duration, a measure of interest-rate sensitivity, is 8.4 years. That implies that if rates were to rise by one percentage point, the fund’s share price would fall by 8.4% (bond prices and interest rates move in opposite directions). By contrast, the Bloomberg Barclays US Aggregate Bond index, a measure of the broad U.S. bond market, has a duration of 5.6 years. With rates more likely to rise than to fall from today’s microscropic levels, this fund looks too risky.
Expense ratio: 0.34%
Assets: $45.7 billion
One-year return: 5.3%
Three-year annualized total return: 7.1%
Five-year annualized total return: 13.2%
Ten-year annualized total return: 5.6%
Like sibling Vanguard Windsor (VWNDX), Windsor II invests in bargain-priced large-company stocks. But this fund has over twice as much in assets, and close to three times as many managers. And yet, with 11 managers from five subadvisers at the helm, Windsor II can’t manage to outpace its benchmark, the Russell 1000 Value index, which tracks shares of large, undervalued companies. The fund has lagged the index in seven of the past 11 years, including so far in 2016. It’s a sorry picture. Over the past 10 years, Vanguard 500 Index (VFINX) and Vanguard Value Index (VIVAX) would have served you better.
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