5 Best Vanguard Funds for Beginning Investors | Investing Advice | US News

5 Best Vanguard Funds for Beginning Investors

Learn how to invest in Vanguard funds to build a portfolio.

U.S. News & World Report

5 Vanguard Funds for Beginning Investors

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There are a few things that set Vanguard funds apart from other index funds, particularly for new investors.(Getty Images)

For beginning investors, index funds can offer an easy entry point into the market.

This passive investing strategy allows you to buy mutual funds that track a stock market index. The goal is matching that index's performance.

Many index funds also pay dividends, which represent a percentage of company earnings that are paid back to shareholders.

There are plenty of options out there if you're looking for the best index funds for beginners, but Vanguard funds stand out among the competition.

What Are Vanguard Funds?

Vanguard introduced the concept of the index fund in 1976, with the launch of the Vanguard 500 Index Fund. That fund, which tracks the performance of the S&P 500, has become one of the largest mutual funds in the world.

Like other index funds, Vanguard funds attempt to keep pace with an underlying benchmark. But there are a few things that set them apart, particularly for new investors.

"Vanguard funds are best-in-class when it comes to passive index investing for low cost," says Andrew Chen, finance expert and founder of Hack Your Wealth. "What makes them stand out is their rock-bottom cost and passive management that allows investors to achieve market-matching returns for zero effort and near-zero cost."

On average, Vanguard funds have an expense ratio that's 84% less than the industry average. Keeping costs low should be a main concern for new investors, says Dejan Ilijevski, president of Sabela Capital Markets. "It's one of the few things that you can control and that can drastically reduce the odds of investment success in the long term."

Vanguard index funds are also attractive from a diversification perspective. Ilijevski points to Vanguard's target-date retirement funds as an example.

"The underlying funds that make up the Vanguard target retirement funds hold U.S. stocks, international stocks, U.S. bonds and international bonds," he says. "Buy one of these funds and you're done throughout your investment horizon."

Aside from cost and convenience, Vanguard funds have earned a reputation for being well-run.

"Vanguard, because of their size, attracts some of the best active money managers, and their passive or indexed investments track their underlying benchmarks exceptionally accurately," says Don Cody, president and CEO of Global Macro Asset Management.

If you're looking for the best Vanguard funds for new investors, consider these options:

  • Vanguard Balanced Index Fund (ticker: VBIAX)
  • Vanguard Total Stock Market Index Fund (VTSAX)
  • Vanguard Total International Stock Index Fund (VTIAX)
  • Vanguard Total Bond Market Fund (VBTLX)
  • Vanguard Target Retirement 2060 Fund (VTTSX)

Vanguard Balanced Index Fund (VBIAX)

VBIAX employs a balanced approach, with 60% of fund assets tracking the performance of the CRSP U.S. Total Market Index and 40% of fund assets tracking the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index.

Cody says the 60/40 portfolio has proven itself to be a prudent combination over the years, with bonds providing a cushion to poor stock market performance. "This fund has a low expense ratio of 0.07% and it offers instant diversification, being composed of both stocks and bonds."

The current yield is 2.33%, and this fund requires a $3,000 minimum to invest.

Vanguard Total Stock Market Index Fund (VTSAX)

The Vanguard Total Stock Market Index Fund may be one of the best index funds for beginners if you're interested in building a three-fund portfolio. A three-fund portfolio includes three mutual funds: one focused on domestic stocks, one that invests in international stocks and one that invests in bonds.

VTSAX tracks the entire U.S. equity market and provides well-diversified exposure to U.S. stocks, Chen says. Top holdings for this fund include Microsoft Corp. (MSFT), Apple (AAPL) and Amazon.com (AMZN).

This fund has one of the lowest expense ratios of any of Vanguard's index funds, at 0.04%. The current yield is 2.12%.

Vanguard Total International Stock Index Fund (VTIAX)

VTIAX is one of the best Vanguard funds for new investors if you're seeking exposure to international stocks. This fund tracks the performance of the FTSE Global All Cap ex U.S. Index, which measures stock market performance of companies in developed and emerging markets. Some of the fund's top holdings include Alibaba Group Holding (BABA), Nestle (NESN) and Tencent Holdings (TCEHY).

This fund has a slightly higher expense ratio, at 0.11%. But you have the advantage of a higher yield compared with some of the other best Vanguard funds for beginners, at 3.88%.

Vanguard Total Bond Market Fund (VBTLX)

Bonds can help to offset some of the risk associated with stock investing, which may be something you're interested in as a new investor. The Vanguard Total Bond Market Fund could be a solid complement to a three-fund portfolio if you're looking for bond market exposure.

This fund tracks the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Statistics Index, which invests in a variety of fixed-income securities, including corporate bonds and mortgage-backed securities.

Like other Vanguard index funds, VBTLX is low-cost, with an expense ratio of just 0.05%. This fund boasts a current yield of 2.62%.

Vanguard Target Retirement 2060 Fund (VTTSX)

Target-date funds can be appealing to beginning investors because of their simplicity. These funds adjust their asset allocation automatically as you age, decreasing your risk exposure as you approach retirement, Ilijevski says.

VTTSX could be a good fit if you're a 20-something investor who's just beginning to think about retirement planning. It's essentially an all-in-one fund that invests in other Vanguard index funds, including the Vanguard Total Stock Market Index Fund (VTSMX), the Vanguard Total International Stock Index Fund (VGTSX) and the Vanguard Total Bond Market II Index Fund (VTBIX).

This fund has an expense ratio of 0.15% and currently yields 2.63%.

How to Invest In Vanguard Index Funds

If you're interested in investing in these or any of Vanguard's other index funds, research is the first step.

Consider what type of portfolio approach you'd like to take first, such as a 60/40 portfolio, a three-fund portfolio or target-date funds. From there, you can look more closely at individual funds.

Start with the minimum investment required to buy into a particular fund to determine how many funds in which you can invest. Some Vanguard funds have higher minimums than others.

Next, compare dividends, expense ratios and performance for different Vanguard funds to gauge how they align with your investment goals. Remember, however, that past performance isn't an indicator of future returns.

The final step is opening a Vanguard account so you can purchase index funds. If you'd like to invest for retirement, you can open an individual retirement account. A traditional IRA allows for tax-deductible contributions, while Roth IRAs offer tax-free distributions in retirement.

If you need more variety, Vanguard also offers brokerage accounts. You can use a brokerage account to buy Vanguard mutual funds, as well as exchange-traded funds, stocks, certificates of deposit and bonds as a beginning investor.

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