8 Great Vanguard ETFs for a Low-Cost Core
Vanguard is best known as one of the foremost pioneers of low-cost investing, including in the exchange-traded fund (ETF) space.
Vanguard is best known as one of the foremost pioneers of low-cost investing, including in the exchange-traded fund (ETF) space. It's hardly alone in low costs anymore, of course. Providers such as Schwab, iShares and SPDR have all hacked away at each other with ever-shrinking fees.
Don't sleep on Vanguard ETFs, however. The provider isn’t always No. 1 among the cheapest index funds like it used to be, but it remains a low-cost leader across several classes. No matter where you look, it's usually among the least expensive funds you can buy.
And expenses matter. Let’s say you put $100,000 into Fund A and another $100,000 into Fund B. Both funds gain 8% annually, but Fund A charges 1% in fees while Fund B charges 0.5%. In 30 years, that investment in Fund A will be worth a respectable $744,335. But Fund B? It'll be worth $865,775. That's about $120,000 lost to fees and missed opportunity cost as those expenses suck away returns that could compound over time.
Here, then, are eight of the best low-cost Vanguard ETFs that investors can use as part of a core portfolio. All of these index funds are among the least expensive in their class and offer wide exposure to their respective market areas.
Data is as of March 10. Yields represent the trailing 12-month yield, which is a standard measure for equity funds. All eight ETFs also are available from Vanguard as mutual funds.
Vanguard S&P 500 ETF
- Market value: $123.4 billion
- Dividend yield: 2.0%
- Expenses: 0.03%
Any portfolio can use a fund that tracks the Standard & Poor’s 500-stock index. Every year, investors are reminded that the majority of active portfolio managers are unable to beat their benchmark indexes, and that includes a wide swath of large-cap managers that simply can’t top the S&P 500.
And it does pay to merely match the index. The S&P 500 has returned an average of about 10% annually between 1928 and 2018. Based on the “rule of 72,” the index has doubled investors’ money about every seven years during that time.
If you can’t beat ‘em, join ‘em.
The Vanguard S&P 500 ETF (VOO, $263.81) and the SPDR Portfolio S&P 500 ETF (SPLG), at just 3 basis points each (a basis point is one one-hundredth of a percentage point), are the cheapest ways to track the S&P 500.
The S&P 500 is an index of 500 mostly large-cap companies (those with market values of more than $10 billion) and a few mid-cap companies ($2 billion to $10 billion in market value) that trade on U.S. exchanges. And the bigger the company is, the greater its representation in the index. Right now, Microsoft (MSFT), Apple (AAPL) and Amazon.com (AMZN) are the three largest companies in the index. Thus, they also represent the largest percentages of assets in S&P 500 trackers such as VOO.
If you have a Vanguard account, you can buy and sell VOO and other Vanguard ETFs without paying commissions, saving you even more money.
Vanguard High Dividend Yield ETF
- Market value: $26.4 billion
- Dividend yield: 3.5%
- Expenses: 0.06%
Dividends are cash payments that many companies pay out (typically regularly, say, every quarter) as a way of rewarding shareholders for hanging on to the stock. This isn’t altruism – it’s a great way of compensating executives and other insiders who hold massive piles of shares, but ultimately, this benefit trickles down to all of us.
Each stock might deliver only a dollar or two every year, but over time, across many shares, that adds up in a big way. A Hartford Funds study shows that between December 1960 and December 2017, a $10,000 investment in the S&P 500 became $460,095 simply based on price returns alone. But the total return – that is, what you would accumulate from collecting dividends and then reinvesting them – was more than quintuple at roughly $2.6 million.
Dividends also are a critical source of income for retirees, who often rely on regular cash payouts to help pay their ongoing expenses.
The Vanguard High Dividend Yield ETF (VYM, $79.52) immediately sticks out among the best Vanguard ETFs for this purpose. VYM tracks an index of high-yielding, primarily large-cap stocks whose dividend yields are better than the market average.
While there are literally hundreds of ETFs that deliver more yield, most of them invest in other areas of the market that might be more income-friendly but either carry higher risk or little to no growth potential. VYM, however, currently provides shareholders with 73% more yield than the market average while still keeping them invested in blue chips with some appreciation potential.
Vanguard Small-Cap ETF
- Market value: $24.2 billion
- Dividend yield: 1.7%
- Expenses: 0.05%
While dividends are treasured by people on the back half of their investing timeline, younger investors typically are expected to pile into growth to build their portfolios. And a common place to find growth is in small-cap stocks.
Small caps range between $300 million and $2 billion in market value, and it’s their very size that gives them so much growth potential. Just consider the effort it would take to double revenues from $1 million to $2 million … but then think about the effort it would take to double revenues from $1 billion to $2 billion. Naturally, the underlying shares of these high-growth companies tend to move higher, faster, than larger, less explosive companies.
Of course, smaller companies might only have one or two revenue streams, leaving them much more vulnerable to industry disruption. And if they get caught up in the tide of a broader-market swoon, they usually won’t have the cash hoards and access to capital that larger companies can use to keep their heads above water. But you can mitigate that risk somewhat by investing in numerous small caps at once.
The Vanguard Small-Cap ETF (VB, $136.33) holds about 1,350 mostly small-cap stocks. That huge portfolio shields you from “single-stock risk” – the potential for a big drop in one stock to have an outsize negative effect on your portfolio. Even top holdings Leidos Holdings (LDOS) and Atmos Energy (ATO) represent less than 1% of the overall portfolio.
While VB is among the best vanguard ETFs you can own, it isn't risk-free. In fact, it can be one of your most volatile fund holdings. That’s because small caps as a whole tend to struggle when investors become more defensive. But when risk appetites swell again, VB can help you enjoy the resulting growth without worrying about one company imploding and setting you back.
Vanguard Information Technology ETF
- Market value: $26.1 billion
- Dividend yield: 1.3%
- Expenses: 0.10%
Certain areas of the market ebb and flow depending on market and economic conditions, so you might want to be a little more tactical with your holdings. Utilities, for instance, tend to do well when investors are nervous because utility companies have dependable earnings that pay considerable dividends. Financial stocks typically do well when the economy is expanding and can benefit when interest rates rise, as that allows them to charge more for products such as loans and mortgages without paying out much more in interest to customers.
Technology is one of the better sector bets simply because it’s becoming more pervasive in every aspect of the human experience. We use more technology at home and at work. Other sectors – whether it’s utilities, health care or industrials – are incorporating more technology into their operations. Seemingly, there’s always somewhere that technology can keep growing.
As a result, tech ETFs have become a hot commodity, and Vanguard is among the lowest-cost ETF options in the space.
The Vanguard Information Technology ETF (VGT, $230.52) is the best Vanguard ETF for the job. This robust portfolio of about 320 stocks includes consumer-tech stocks like Apple, software companies like Microsoft, component companies like semiconductor maker Intel (INTC) and even payments processors like Visa (V) and MasterCard (MA). And that just scratches the surface.
Just one note: The technology sector recently underwent a major change as certain companies were reclassified – that includes titans such as Facebook (FB) and Google parent Alphabet (GOOGL) that previously were considered technology stocks, but now are in the ranks of the newly created communications services sector.
Vanguard Real Estate ETF
- Market value: $34.4 billion
- Dividend yield: 3.7%
- Expenses: 0.12%
Investors seeking out a more targeted income play than, say, the VYM have a few areas to explore, including the real estate sector.
Real estate investment trusts (REITs) are businesses that typically own and sometimes operate physical real estate such as office buildings or shopping malls, though sometimes they can hold real estate “paper” such as mortgage-backed securities. And the rules are designed to make them dividend friendly. These companies aren’t required to pay federal income taxes, but in exchange, they must distribute at least 90% of their taxable income as dividends to shareholders.
The result is a typically high yield on many REITs, which explains why the Vanguard Real Estate ETF (VNQ, $86.54) is paying out a little less than double the S&P 500 in dividends right now.
The VNQ holds a diverse selection of real estate – apartment buildings, offices, strip malls, hotels, medical buildings, even driving ranges. Right now, its top holdings include telecom infrastructure company American Tower (AMT), logistics and supply-chain REIT Prologis (PLD) and data center REIT Equinix (EQIX).
The S&P 500 doesn’t provide investors with an even distribution of all its sectors, and real estate is woefully sparse in many large-cap funds, including S&P 500 trackers. Thus, while you might use some sector funds to occasionally amplify your holdings in a particular sector, it might behoove you to hold a REIT fund such as VNQ in perpetuity to improve your exposure to this income-happy part of the market.
Vanguard FTSE All-World ex-US ETF
- Market value: $22.8 billion
- Dividend yield: 3.6%
- Expenses: 0.08%
There are several ways to diversify your portfolio. You can hold different types of assets (stocks, bonds and commodities), you can diversify by style (growth versus value), you can diversify simply by numbers (owning more stocks to lower single-stock risk) … and you can diversify geographically.
The Vanguard FTSE All-World ex-US ETF (VEU, $45.99) is a bargain-priced fund that plugs you into more than 3,000 stocks from nearly 50 countries across the globe. The primary focus is developed markets (countries with more established economies and stock markets, but typically lower growth) in areas such as western Europe and the Pacific, though a little less than a quarter of the fund is invested in emerging-market countries in regions such as Latin America and southeast Asia.
Right now, Japan (16.9%) makes up the largest country weight, followed by the United Kingdom (11.0%) and China (8.6%). But VEU's investments span countries large and small, including even a little exposure to the likes of Peru, Kuwait and the Philippines.
Also noteworthy is that this is a predominantly large-cap fund holding the likes of food titan Nestle (NSRGY) and pharma multinational Roche Holdings (RHHBY). Many developed-market blue chips yield significantly more than their American counterparts; hence, the VEU is a much better yielder than VOO.
For the record, numerous Vanguard ETFs fit the international bill depending on your specific needs. Income hunters can target big dividends in mostly developed countries via Vanguard International High Dividend Yield ETF (VYMI), while growth-oriented investors can trade the Vanguard FTSE Emerging Markets ETF (VWO) that targets markets such as China and India.
Vanguard Total Bond Market ETF
- Market value: $54.5 billion
- SEC yield: 1.9%*
- Expenses: 0.035%
Bonds – debt issued by governments, corporations and other entities that pay a fixed income stream to holders – are an important asset class for many investors. Typically, investors nearing or in retirement that are trying to protect their wealth lean on bonds. Of course, they also become uber-popular in times of unrest, such as the current stock market correction.
But bonds are problematic because they’re harder to invest in on an individual basis than stocks, and they’re far more difficult to research in large part because individual debt securities typically get little to no media coverage.
Many investors instead depend on funds for their bond exposure, which is where the Vanguard Total Bond Market ETF (BND, $86.59) comes in.
There are several targeted Vanguard ETFs that range from short-term corporate debt to long-term U.S. Treasuries, but if you’re looking for an inexpensive way to invest in a wide swath of the bond world, BND has you covered. Vanguard Total Bond Market holds a massive trove of more than 9,000 debt securities, including Treasury/agency bonds, government mortgage-backed securities, corporate debt and even some foreign bonds.
All of BND’s bonds have an “investment-grade” rating, which means that the major credit agencies perceive all of these to have a high likelihood of being repaid. It also has a duration (a measure of risk for bonds) of 6.2 years, which essentially means if interest rates rise by one percentage point, the index should lose 6.2%. As a result of investors piling into bonds over the past few months, BND is paying out a lean 1.9% – about on par with the S&P 500 right now.
* 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.
Vanguard Emerging Markets Government Bond ETF
- Market value: $1.8 billion
- SEC yield: 4.1%
- Expenses: 0.25%
Whether it’s stocks or bonds, you typically have to take on a little more risk to get a little more yield. The Vanguard Emerging Markets Government Bond ETF (VWOB, $77.50) is an example of how to make this kind of compromise without going overboard.
VWOB allows you to invest in the sovereign debt of about 50 developing countries, ranging from China and Mexico to Angola and Qatar. As you would imagine, when you invest in developing countries such as these, you’re going to take on a bit more risk. Only around 60% of the fund’s debt holdings have an investment-worthy score, with the rest deemed “junk” by the major credit rating agencies. The downside to junk? A higher risk of default.
The upside? A higher yield. That’s why you’re getting more than double the yield of BND right now.
You’re also defraying risk a bit by investing a basket of nearly 1,100 holdings across so many countries. Moreover, the effective maturity (how long before the average bond in the portfolio matures) of 10.5 years is intermediate-term in nature – not short, but not long either, which helps mitigate the risk from rising interest rates a little more.