Proper investing takes time, research, and due diligence to find the best options available.
Most people with a basic understanding of investing have come across the term index funds. One of the most popular and well-respected index fund companies is Vanguard. They offer low-fee diversified exposure to bonds, equities, commodities, and real estate within index funds.
In this article, we hope to explain everything you will need to know about Vanguard index funds for complete beginners.
First of all, it is important to understand what exactly an index fund is before buying one. An index fund is a type of mutual fund or exchange-traded fund (ETF) that matches or tracks a particular market index.
In the case of the S&P 500, an index fund would replicate the performance as closely as possible of this index. The S&P 500 is a collection of the 500 largest publicly-traded companies in the US. It is a common index used to track the overall performance of the stock market.
There are a variety of market indexes for assets such as stocks, bonds, real estate, or commodities. In fact, Vanguard has dozens of different ones to choose from. You can also find these index funds from other popular fund companies like iShares and BlackRock.
Index funds are an excellent way to diversify your risk when investing because market indexes are made up of a variety of individual stocks or bonds. This way you can minimize your risk by investing across multiple securities instead of in one single stock or bond.
When you invest in a single stock, your investment may rise or fall in price dramatically in relatively short periods of time. However, a large price swing of one of the stocks within an index find isn't likely to effect the price of the index fund all that much.
Index funds are passive investments that typically have lower fees than actively managed funds. This is because instead of paying a money manager to pick and choose your assets, you can passively invest in the entire market index.
If you own an S&P 500 Index fund, you own a small piece of the 500 largest publicly-traded companies in the US.
Savvy investors often invest in Vanguard index funds because they have some of the lowest fees in the industry.
Vanguard may be a good option for beginner investors for multiple reasons. In fact, you don't necessarily have to buy shares of Vanguard funds through their website. You can buy shares of these index funds through ETFs or exchange-traded funds with any brokerage you choose.
Vanguard mutual fund index funds require an investment of at least $1,000 to $10,000 to invest directly through their site. Investors have to cover the annual fee of the fund, which is also called the expense ratio.
However, a more popular option is to invest through ETFs using a brokerage account. In that case, the minimum investment is the cost of a single share of the ETF. ETFs typically have lower expense ratios than mutual funds.
Later on, we will discuss a commission-free brokerage that allows you to invest in these ETFs using fractional shares. Meaning you can essentially invest any amount of money in these funds.
Assuming you are investing in funds directly through the Vanguard site, here are your options. Starting off, individual investors have a choice between two types of Vanguard index fund shares:
Recently Vanguard dropped the account minimum for Admiral Shares from $10,000 to $3,000 in 38 index funds.
The idea behind admiral shares is passing the savings associated with larger accounts to the customers. That is why the minimum investment is higher than the Investor Shares. On average, these Admiral Shares are 41% cheaper than the Investor Shares. Vanguard has largely phased out the Investor Shares on their site.
The third option, and the most popular one, is to invest in these funds through ETFs.
Index fund investments track a market index like the S&P 500. The two ways people buy these index funds is through mutual funds or ETFs. Vanguard offers investments in index funds using both ETFs and mutual funds.
There is no wrong way to invest in index funds, however many people prefer the ETFs as they are easier to trade and do not require minimum investments of $1,000 or more.
Mutual funds combine the funds of investors pooling their money so that they can buy securities. When someone invests in a mutual fund, they are buying underlying shares of the securities owned within the fund.
Mutual funds can track market indexes such as the S&P 500, like the Vanguard S&P 500 Mutual Fund (VFINX). Shares are bought and sold by investors in mutual funds when a trading session comes to an end, not throughout the day like stocks.
That is one key advantage to ETFs is that they can be traded throughout the entire trading day, not just in one trading window like mutual funds.
Exchange-Traded Funds or ETFs are similar to mutual funds as they contain baskets of stocks, bonds, or commodities. ETFs are traded more similarly to stocks on an exchange, and prices fluctuate intraday. Most ETFs are passive funds that track market indexes such as the Vanguard S&P 500 ETF (VOO) which tracks the performance of the S&P 500.
Essentially, an index fund is chopped up into individual shares. Then, these shares change hands on an exchange just like a stock.
If you have decided to invest in Vanguard index funds, you have to choose a fund. All of the funds mentioned below are offered as both mutual funds or ETFs.
Admiral Shares: VFIAX
Also referred to as the Vanguard S&P 500 Index, it is among the most popular. This fund provides investors with exposure to 500 of the largest companies in the US. These companies make up for 75% of the total value of the stock market in the country.
In addition to getting exposure to all of these companies, you'll be paying a small 0.03% expense ratio, significantly lower than the average among ETFs.
Starting with a solid core fund is a good option as a beginner investor. Based on your objectives and risk tolerance, you can expand your portfolio later on.
Admiral Shares: VTSAX
The Total Stock Market Index Fund provides you with access to the entire equity market in the US. Investing in the Total Stock Market Index fund may be a great choice as it allows considerable diversification and provides great growth potential.
Since you own all of the companies instead of just the largest 500, there is a lot more exposure to small cap or smaller sized companies.
Admiral Shares: VIGAX
The Vanguard Growth Index Fund is geared towards investing in large US companies with the potential for growth. Some sectors include consumer services, technology, or finance. This can be considered as a smart choice for long-term investors that are attracted by a rather aggressive mix made of 80% stocks and 20% bonds.
Your time horizon and specific situation will dictate how aggressive you'll want to be in your investing.
First of all, you should know the key metrics of the Vanguard index fund you’re interested in purchasing. You can find all the information you need on the Vanguard website. Some of the key information includes:
Vanguard’s website is easy to use and navigate so you should have no problem finding the information you need. You will find a variety of different funds available on the site. This includes ETFs that hold stocks, bonds as well as real estate.
You can even find some sector-specific ETFs if you want to invest in one segment of the economy. One example of this is the Vanguard Information Technology ETF or mutual fund. This fund holds a diversified basket of stocks in the IT sector.
As mentioned earlier, there are two types of Vanguard index funds; mutual funds and ETFs or exchange-traded funds. Mutual funds usually have a higher expense ratio.
For example, consider the Vanguard 500 index fund. If you buy shares of the ETF, the expense ratio is 0.03% while with the mutual fund it is 0.04%.
Another difference in Vanguard funds is the minimum amount of money to get you started. Mutual funds require $1,000 but need at least $3,000 to get you started. ETFs, on the other hand, enable you to invest with the minimum being the cost of one share.
If you wish, you can purchase one share of an ETF for just $50, if it's trading at that price. There are also some brokerages offering fractional shares which make that share price totally irrelevant.
Lastly, ETFs allow you to trade your index fund throughout the trading day. On the other hand, mutual funds are only bought and sold in 1 trading window throughout the day on the Vanguard website.
In many cases, buying ETFs is a better choice than investing through a mutual fund.
Once you know the type of index fund you want to invest in, you need to choose a brokerage.
This is what will enable you to buy and sell shares of stocks and ETFs. The good news is there are a lot of fantastic options available today. All of these options outlined below offer Vanguard ETFs. They each carry some unique benefits.
This is our top pick for investing in Vanguard ETFs.
M1 Finance is a commission-free brokerage designed for passive, long term investing. They also have fractional shares which allow you to buy as little as 1/10,000th of a share of any stock or ETF they support. They also have a variety of prebuilt portfolios that are totally free to invest in, many of which include Vanguard ETFs! The minimum to open an account with them is just $100 or $500 for a retirement account.
Here's our full review of M1 Finance!
This is our top pick for active stock traders who also want to invest in ETFs.
Webull is a robust commission-free trading app which has lots of useful research data and charting available at your fingertips. One advantage Webull has over M1 Finance is the open trading window. With M1 Finance, you are unfortunately limited to just 1-2 trading windows per day. If you plan on doing a lot of stock trades, this could be a great option.
Here's our full review of Webull!
Lastly, this is our top pick for those who need guidance.
Betterment is a robo-advisor which means they build you a portfolio tailored to your specific goals and risk tolerance. You simply fill out a questionnaire and Betterment designs a portfolio for you. Betterment invests your money in low-fee index funds from popular fund companies like Vanguard and BlackRock. They do collect an asset management fee of 0.25-0.40% depending on what plan you use.
Here's our full review of Betterment!
There's no such thing as a free lunch, and the same is true about investments.
While we've mentioned that Vanguard index funds have some of the lowest fees on the market, that doesn't mean you don't have to think about fees. The fact is, even a small fee can have a dramatic impact on your returns over time.
Actively managed mutual funds can have expense ratios of upwards of 1 - 2%. While 1% might not look like a big number, a 1% fee can do some serious damage to your returns over time.
For example, if you invested $500 per month into a fund that returned 8% over a 30 ear timeframe, you'd end up with just shy of $750,000. However, when you toss on a 1% fee, you're left with only about $600,000. That's 20% less cash thanks to a 1% fee!
How does that happen? This is a result of compound interest. As a 1% fee compounds over time, the impact that it has on your total return becomes larger and larger.
Thankfully the fees charged by Vanguard index funds are nowhere near 1%. Vanguard's S&P 500 ETF, VOO, has an expense ratio of 0.03%. When applied to our example above, this expense ratio would only reduce your overall return by about $4,000 over 30 years. That's a far cry from the $150,000 cost of the 1% fund.
Most Vanguard index funds will have expense ratios below 0.10%, making them very attractive for long term investors looking to minimize fees.
But, when considering different index funds, you'll want to take other factors into consideration as well other than just the fee.
Index funds offer a great way to diversify your investment portfolio. They are also a great pick for complete beginners. Since you are simply tracking a market index, there are significantly fewer management fees and fund operation fees. For this reason, Vanguard index funds have some of the lowest fees in the industry.
One of the most well-respected investors, Warren Buffett, recommends investing in a low-fee index fund that tracks the performance of the S&P 500. This is a time-tested strategy that the wealthy have been using to grow their money for decades.
You’ll want to check out the Vanguard website to read more details about their index fund offerings. You may also want to check out iShares and BlackRock for some additional funds. Depending on the sector or specific index you are looking to track, there are no doubt dozens of index funds out there to choose from.
It does not matter if you’re an experienced investor or a beginner just starting out. All investors can benefit from Vanguard index funds. The most significant advantage is the low cost, making these funds attractive for beginners. Vanguard index funds are a great way to start building wealth. It is easy to get started and these funds have low operating costs and fees.
The ability to create a diversified portfolio with one single investment is a massive perk for many newer investors. It can be intimidating to create a portfolio from scratch, so having a one-and-done solution can be quite appealing.
When it comes to investing, the sooner you start, the better. Before you make any moves, make sure you define your goals, time horizon, and objectives to help you come up with a relevant strategy.