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All Contents © 2019The Kiplinger Washington Editors
By Kent Thune
| April 4, 2017
The task of finding cheap Vanguard funds is simple, but filtering through them to find the cheapest Vanguard funds on the market takes a bit more time and research.
Fortunately, we’ve done the work for you and narrowed down the list to 10 Vanguard mutual funds with the lowest expense ratios. To qualify our list further, and to make it as useful as possible for everyday investors, we only screened for the cheapest Investor share class of Vanguard funds. Most of these shares require a $3,000 minimum initial purchase.
The Admiral share class and Institutional shares are where you’ll find some of the lowest expense ratios in the entire mutual fund universe. But not every investor has $10,000 or $100,000 or more to buy these lower-cost share classes.
We also eliminated a few fund types, such as Vanguard money market funds, that most investors don’t spend time researching and a few more that are only available to advisers or as underlying holdings in a fund of funds.
So without further ado, and in no particular order, we give you the 10 cheapest Vanguard funds on the market:
Prices and data are from the original InvestorPlace story published on March 31, 2017. Click on ticker-symbol links in each slide for current prices and more.
Expenses: 0.16%, or $16 annually for every $10,000 invested
Minimum initial investment: $3,000
If you want to buy the entire U.S. stock market for just a fraction of a penny on the dollar, look no further than Vanguard Total Stock Market Index.
VTSMX is the biggest mutual fund in the world by measure of assets under management. And no wonder. Frugal investors have flocked to this index fund to gain access to thousands of U.S. stocks in one low-cost mutual fund.
Vanguard Total Stock Market tracks the CRSP US Total Market Index, which consists of over 3,500 U.S. stocks. Although the fund holds small- and mid-cap stocks, the cap-weighted style has VTSMX holding mostly large-caps including Apple Inc. (AAPL), Alphabet Inc. (GOOGL), and Microsoft Corporation (MSFT).
The biggest bond fund in the world, Vanguard Total Bond Market Index, is also one of the cheapest and smartest to hold.
Like many of Vanguard’s cheapest funds, VBMFX is a broadly diversified index fund that makes for an outstanding core holding. Vanguard Total Bond tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which includes about 8,800 U.S. bonds covering a range of maturities.
The portfolio is allocated to roughly 30% corporate bonds and 70% U.S. Treasury bonds that average out to be an intermediate-term, six-year duration. As of this writing, that resulted in a 30-day SEC yield of about 2.4%.
Investors seeking income will love the high yield and low cost of Vanguard High Dividend Yield Index.
The last thing an income investor wants is to lose even a penny more than necessary on yield to fees and expenses. At just 15 basis points, the VHDYX expense ratio is 86% lower than category peers, which means it has a sizable head start on return and yield compared to other high-yield funds.
The VHDYX portfolio holds more than 400 stocks of companies that typically pay above-average dividends. Top holdings include MSFT, Exxon Mobil Corporation (XOM), and Johnson & Johnson (JNJ). Lumped together, they help this cheap Vanguard fund throw off a yield just under 3%.
Investors looking for cheap and broad exposure to the bond market outside of the U.S. will find one of the cheapest funds of its kind in Vanguard Total International Bond Index.
This passively managed fund tracks an index that covers the non-U.S. bond market, predominately from developed countries. Foreign bonds tend to carry more risk than domestic but the low allocation (less than 5%) to emerging markets and the exposure to more than 4,000 bonds in several categories keeps a lid on the greatest of foreign investing market risk.
VTIBX can make a solid compliment to a U.S. total bond index fund, such as VBMFX, another of Vanguard’s cheapest mutual funds. Just note that this might not throw off a ton of income; the SEC yield as of this writing is just 0.75%.
Investors looking to minimize interest-rate risk while protecting against inflation with a cheap mutual fund won’t find better than Vanguard Short-Term Inflation-Protected Securities Index.
TIPS funds like VTIPX attempt to provide shareholders a return that closely matches inflation in the near term. Since the average duration of the holdings is less than three years, the interest-rate risk is generally lower than that of TIPS funds that hold bonds of longer duration.
Do note that this fund does sport a negative 0.7% yield at the moment — that’s part of the nature of holding TIPS at times. Instead, investors should expect returns to come from price performance — and the rock-bottom expense ratio will help you keep more of that.
Investors looking for a cheap way to cover both the developed and emerging markets outside the U.S. can do it for just 18 basis points with Vanguard Total International Stock Index.
VGTSX is a passively-managed fund that tracks the FTSE Global All Cap ex US Index, which covers about 6,000 stocks all around the world with exception of the U.S. That kind of broad exposure will bring you all around the globe, including the major foreign regions of Europe, South America, Africa, Asia, and the Pacific Rim.
Top holdings include large-cap international stocks like Nestle SA (NSRGF), Royal Dutch Shell PLC (RYDAF), and Samsung Electronics (SSNLF). And while this isn’t a dividend-focused fund, it does yield a solid 2.7%.
The first publicly traded index fund on the market for individual investors is still one of the cheapest.
And that fund is none other than Vanguard 500 Index.
VFINX closely tracks the S&P 500 index, which is widely followed as the primary benchmark for the collective U.S. stock market. VFINX shareholders get exposure to approximately 500 of the largest U.S. stocks, as measured by market cap, which includes heavyweights like Apple, Microsoft and Alphabet. However, this doesn’t include the swath of smaller-cap stocks covered by the previously discussed VTSMX.
Investors and money managers of all levels of expertise can use VFINX effectively as a core holding in a diversified portfolio of mutual funds.
Bond investors wanting cheap exposure to the long-term range of the fixed-income market should take a close look at Vanguard Long-Term Bond Index.
Although long-term bonds have greater interest-rate risk than those of shorter maturities, they generally pay higher yields and average better returns in the long run.
VBLTX tracks the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index, which covers more than 2,000 bonds in a range of credit quality that averages investment grade. To capture the full range of duration and credit quality, Vanguard Long-Term Bond invests about 70% of assets in corporate bonds and 30% in government bonds.
That results in an ample SEC yield of 3.8%.
Another bond fund to make the list of cheapest Vanguard funds on the market, Vanguard Intermediate-Term Bond Index also makes the list of outstanding core holdings.
Compared to the more popular VBMFX, which holds about 30% corporate bonds and 70% government bonds, VBIIX holds a split portfolio of 50% corporates and 50% government issues.
Although this mix of bonds can add market risk, investors can potentially get higher yields and greater returns in the long run than portfolios heavier in low-risk, low-yield Treasuries. Currently, that’s reflected in a 2.7% SEC yield.
Vanguard has some of the cheapest dividend funds on the market, and Vanguard Dividend Appreciation Index is a fine example.
Income investors like to find quality stocks that tend to increase dividends and VDAIX mirrors this objective. This passively managed fund tracks a benchmark, formerly known as the Dividend Achievers Select Index, that represents nearly 200 stocks of companies that have a history of paying dividends and a capacity to increase them over time.
Most of the holdings are high-quality large-caps like Microsoft, J&J and PepsiCo, Inc. (PEP).
The VDAIX only yields 2% right now, but that’s to be expected — dividend appreciation funds often focus on dividend growth as a quality metric, and don’t target absolute yield.
This article is from Kent Thune of InvestorPlace. As of this writing, he held none of the aforementioned securities.