Vanguard Investing Basics
Useful Information
To learn some basics about investing in Vanguard mutual funds and ETFs, I’ve provided a few starting points for you to review. We primarily feature Vanguard investment products because Vanguard is an acknowledged leader in low cost investing (which means you get to keep more of your money).
Mutual Funds
Mutual funds are the traditional pooling of stocks—investing in hundreds of individual securities thru one fund. Although requiring a minimum initial investment (which can be $1000 or more), you can make subsequent investments in smaller, exact dollar amounts (sometimes as low as $50). A drawback is that they are priced (and can only be purchased or sold) at market close (4 pm EST). Additional mutual fund info can be found at https://investor.vanguard.com/mutual-funds/.
Exchange Traded Funds (ETF)
ETFs are essentially mutual funds with a few extra features. ETFs are unitized “baskets” of stocks that are built like a mutual fund, but trade on an exchange throughout the day like a stock. Benefits of ETFs are that they are easier to invest in, often have a lower expense ratio, and typically have lower investment minimums (minimum purchase of an ETF is one share).
Many mutual funds have corresponding ETFs; the performance between the two is essentially identical. I generally recommend investing in ETFs when available. Two main drawbacks of ETFs are: 1) they generally cannot be used for automatic monthly investing (however, you can reinvest ETF capital gains and dividends); and, 2) ETFs may incur commission fees when buying or selling (though currently not Vanguard ETFs). Additional ETF info can be found at https://investor.vanguard.com/etf/faqs.
Money Market Funds (MMF)
When your cash is not invested, there are various Vanguard money market funds (MMF) where you can park it. The main Vanguard MMF is their federal money market fund. Its “ticker symbol” (unique identifier) is VMFXX. Money market funds are basically glorified savings accounts that typically earn more interest (usually much more) than at your local bank. Below are links to additional information. You can easily transfer between the money market fund and your bank account, so keep most of your uninvested money in the MMF rather than your bank (to maximize your earned interest).
VMFXX - federal money market fund (this is also your settlement fund)
https://investor.vanguard.com/mutual-funds/profile/VMFXX
Recent yield 5.2% expense ratio 0.11% minimum $3000
NOTE: The settlement fund is the default money market fund for buying and selling Vanguard funds (when you buy funds, the money is pulled from your settlement account; when you sell funds, the money is deposited into your settlement account).
Introduction
First, a quick briefing on the difference between traditional mutual funds versus (relatively newly popular) ETFs (exchange traded funds). Detailed information on the difference between mutual funds and ETFs can be found at https://investor.vanguard.com/etf/etf-vs-mutual-fund. A glossary and explanation of investment terminology is located at the end of this article (if you run into a term you don’t understand, look it up at the bottom before proceeding).
Mutual funds and ETFs are both baskets of stocks, bonds or other securities that allow individual investors to participate in the market without being at the mercy of the (often unexpected) volatility of a single security. There could be a few dozen stocks in a particular fund, or thousands. Some funds merely try to match the market, so you’ll be riding along with the stock market’s overall gains or losses, while others target specific sectors (like tech stocks), which could zoom or drop apart from the overall market.
*VIGI [ETF - expense ratio 0.20%]
or: VIAAX - international dividend appreciation index mutual fund
Expense ratio 0.20% [+0.50% load] minimum $3000
https://investor.vanguard.com/etf/profile/VIGI
VIGI is a group of established foreign companies that is expected to grow their dividends (interest payments to you) over time. Once you’ve accumulated your initial US funds, branching out overseas is considered a good way to diversify your portfolio (advanced topic beyond the scope of this article). I do not recommend investing in the mutual fund version of this fund because of the additional load fee that you have to pay for buying and selling (I recommend the ETF instead).
There are many more funds available, but these are the ones I suggest for starting out. Once your portfolio has grown, you can expand into other fund areas such as small company, other international, or sector funds (and yes, bond funds).
Investment Choices
I only list stock funds (and not bond funds) because stocks have historically been the better investment (bond funds are for later, once you’ve become a more seasoned invester). Keep in mind that the greater your investment percentage in stock funds (versus in an MMF or bond funds), the more “aggressive” (and riskier) your investment portfolio is considered (terminology). Being more aggressive is how you can garner the highest returns (and incur the most losses if things turn out bad).
Vanguard has lots of funds; the following is a very abbreviated list of the funds to start with. I recommend the ETF if available (marked with an asterisk*) rather than the associated mutual fund. However, for your periodic (e.g., monthly) investments, you must stick with a mutual fund (that’s just a current investment rule that you have to deal with).
*VTI [ETF - expense ratio 0.03%]
or: VTSAX - total stock market mutual fund
Expense ratio 0.04% minimum $3000
https://investor.vanguard.com/mutual-funds/profile/VTSAX
VTI is a basic, yet excellent, investment fund. It invests in all 3600+ companies listed in the US. Although broadly diversified, it is still weighted towards the big companies you are familiar with (Amazon, Microsoft, Google, Apple, Netflix, etc.). VTI should be your first investment when starting out (research shows that funds that track the entire market offer the best potential for the largest gains.
*VOO [ETF - expense ratio 0.03%]
or: VFIAX - S&P 500 mutual fund
Expense ratio 0.04% minimum $3000
https://investor.vanguard.com/mutual-funds/profile/VFIAX
VOO is also a basic investment fund. It invests in all 500 companies that make up the S&P 500 index. These are basically the 500 biggest companies you are familiar with. This fund tracks “the market” that you hear about daily in the news. VOO can be an alternative first investment when starting out since it includes a large number of companies and is therefore also well diversified.
*VOT [ETF - expense ratio 0.07%]
or: VMGMX - mid-cap growth index mutual fund
Expense ratio 0.07% minimum $3000
https://investor.vanguard.com/mutual-funds/profile/VMGMX
The VOT fund invests in companies that are smaller (mid-sized companies). Because good mid-sized companies will become large companies, there is more potential for greater investment returns from this fund. However, it is more volatile. This fund is great for younger investors because you have a longer timeframe to make up for any economic pullbacks. This fund should make more money in the long run than the S&P 500 fund.
*VIG [ETF - expense ratio 0.06%]
or: VDADX - dividend appreciation index mutual fund
Expense ratio 0.08% minimum $3000
https://investor.vanguard.com/mutual-funds/profile/VDADX
VIG is a subset of the S&P 500 that is expected to grow their dividends (interest payments to you) over time. I like this fund because dividends are important in the near term investing environment (dividends are expected to provide a significant portion of investment returns during the coming decade).
Buying Funds
To invest, you must first create your online Vanguard account either thru the Vanguard app or at https://investor.vanguard.com/home. The first step is to link your bank account (typically checking) to your Vanguard account. To assure security, this process will take several days (so plan ahead).
You will likely have multiple Vanguard brokerage accounts of various types (just deal with it, it’s because of how tax laws were set up). Each brokerage account is treated as a separate entity linked to its own settlement fund MMF. You may create one or as many brokerage account types as desired/needed.
Typical brokerage accounts (there are others) include:
BROKERAGE - This is the name Vanguard uses for a basic standard (taxable) brokerage account. Think of this as analogous to a regular savings account for stocks.
IRA BROKERAGE - This is just like a regular brokerage account, but the tax treatment is different.
ROLLOVER IRA BROKERAGE - This is like an IRA brokerage account (same tax treatment as IRA). This account type is only used for transferring a normal 401(k) from your (former) employer to Vanguard.
ROTH IRA BROKERAGE - This is also like an IRA brokerage account, but different tax treatment than an IRA. Your goal is to put as much in here as you legally can (unless you believe taxes will be lower in the future – which I believe is unlikely).
A visual representation of a typical portfolio containing the various types of brokerage accounts is shown below to help with understanding the setup.
Typical Vanguard Account (containing multiple brokerage accounts)
Brokerage
MMF (Settlement Fund)
VOO
VDADX
VIGI
IRA Brokerage
MMF
(Settlement Fund)
VTI
Roth IRA Brokerage
MMF (Settlement Fund)
VOT
VIG
VIGI
Rollover IRA Brokerage
MMF
(Settlement Fund)
VTI
VIGI
Moving funds around within each type of brokerage account (normal investing) is normal. However, transferring funds between different brokerage accounts may result in a taxable event and should be researched in advance.
To (finally) buy funds, log into your account and navigate to “Buy Vanguard Funds” and select “New Vanguard Fund”, then type in the letter code for the fund you want to purchase. Follow the onscreen prompts. If you need to call Vanguard for help, speak the phrase “stock trade” at the voice prompts. This will put you in the shortest line to talk to a human (I sometimes say “I’d like to order a pizza”, which works occasionally).
Investing Terminology
Ticker Symbol
The funds’ letter codes (e.g., VIG, VDADX) are called their ticker symbols - it’s how you look the fund up online (for pricing and other info).
Expense Ratio
The fee that the fund charges annually for investment management and administration (in the old days, funds would charge several percent; now, anything over 1% is considered high). The lower the expense ratio, the more money you get to keep.
That fee depends heavily on which investment strategy the fund uses: active—whereby the portfolio manager actively selects securities based on valuation, momentum or other traits—or passive, in which the fund is expected to hew to an index, such as the S&P 500.
ETFs often have lower expenses than mutual funds because they tend to be passive and so don’t require the research that comes with active management. However, mutual funds that are passive also tend to have lower expenses than their active counterparts. For example, the average expense ratio for all (passive) stock-index mutual funds and ETFs were about 0.12% at the end of 2020. Compare that with an expense rate of 0.71% for active equity mutual funds.
Minimum
The minimum initial investment needed to invest in a mutual fund (e.g., $3000). Once you make the initial investment, you can set up monthly investments from your bank account into that mutual fund with smaller amounts (e.g., $50). The minimum initial and subsequent investment for an ETF is one share (whatever price that ETF is trading for at the time you buy it).
Load Fee
In addition to annual fees, certain mutual funds (load funds) impose additional fees. These fees may include a transaction fee, a sales load (that is, a charge based on the amount purchased or held), and a 12b-1 fee, which is for marketing and distribution of the fund. Mutual fund companies charge these fees because they can. There is no difference in fund performance between funds that charge load fees and funds that do not (no-load funds). Most Vanguard funds are no-load funds.
Passive vs Active Fund Management
Active fund management involves a fund manager who (with the aid of an investment team) picks all the securities for the fund based on their expectations for maximum gain (or other metric). The salaries and expenses of this team, along with the costs of buying and selling the underlying securities, results in higher expenses (and higher expense ratios) for those funds. Passive fund management involves a fund manager (and a much smaller team – or a computer) assembling a fund based on pre-existing indices (such as the Dow Jones Index, the Russell 2000 Index, the S&P 500 Index, etc.). Much lower costs.
Nothing has disrupted the fund industry more in the past few decades than the rise of low-cost indexing. About 86% of actively managed U.S. equity funds underperformed their benchmark index over the 20-year period ended in 2020 (i.e., the passive index performed better than the higher cost active fund managers). In summary, you have only about a 14% chance of beating the market by paying more for an active fund manager – and you might not beat it by more than the extra fees you pay.
ETF Specific Terminology
Bid Price
The price a buyer is willing to pay you for the ETF (always the lower of the two prices). This is what you will pay when selling (at that instant in time).
Ask Price
The price a seller is willing to accept for the ETF (always the higher of the two prices). This is what you will pay when buying (at that instant in time).
These prices change continuously while the market is open, based on supply and demand (driven by greed and fear). The difference between the bid and ask (the “spread”) is the fee brokerages collect for processing the trade (in addition to any commission).
Quantity
Number of shares you want to purchase. Assume you want to invest $2000. To calculate how many shares to buy, simply divide $2000 by the price of the ETF (e.g., if the ETF costs $40/share: $2000/$40 = 50 shares).
NOTE: When buying ETFs, you will almost never be able to invest the exact desired dollar amount. Using the previous example, if the ETF instead costs $40.33/share: $2000/$40.33 = 49.59 shares. However, since you cannot purchase fractional ETF shares, you need to decide between purchasing 49 shares ($1976.17) or 50 shares ($2016.50). Only mutual funds allow fractional share purchases (so you could invest exactly $2000).
Order Type
The manner in how you want to purchase the ETF. The two most common order types are market and limit orders.
A market order allows you to buy an ETF immediately at the market price. This executes your order quickly. However, there is no guarantee on the price.
With a limit order, you specify the price you are willing to pay for the ETF and the order is only fulfilled when that price (or lower) is reached. Although the price is guaranteed, if that price isn’t available, then your order will not be executed (unless the price drops to your limit price at some time in the future).
Generally, I will use a market order. Sometimes, to try and get a slightly better deal, I will pick a reasonable recent low price for the desired ETF (using a free online source like Yahoo Finance) and place a limit order using that price.
Order Period
The length of time you want your limit order to be active: either just for that day (day) or open ended (GTC - good till cancelled). GTC orders typically expire after 60 days. This is not applicable to market orders since they execute immediately.
Additional Details
(Below is an expanded list of top Vanguard funds. This list includes the funds discussed above and provides additional options to expand your portfolio - you may decide to not venture beyond them.)
Best Vanguard broad-based index funds investing in U.S. stocks:
Vanguard S&P 500 ETF/Vanguard 500 Index VOO VFIAX
Vanguard Dividend Appreciation ETF/Index VIG VDADX
Vanguard Extended Market ETF/Index VXF VEXAX
Vanguard Growth ETF/Index VUG VIGAX
Vanguard Large-Cap ETF/Index VV VLCAX
Vanguard Mid-Cap ETF/Index VO VIMAX
Vanguard Mid-Cap Growth ETF/Index VOT VMGMX
Vanguard Mid-Cap Value ETF/Index VOE VMVAX
Vanguard Small-Cap Growth ETF/Index VBK VSGAX
Vanguard Small-Cap Value ETF/Index VBR VSIAX
Vanguard Total Stock Market ETF/Index VTI VITSX
Vanguard Value ETF/Index VTV VVIAX
Some of the above funds track the S&P 500 and therefore provide access to large-cap stocks representing about 80% of the U.S. stock market. Other index funds on the list follow much broader market indexes that include more stocks, some of which are smaller-cap names. Meanwhile, other funds on the list are more narrowly focused, tracking indexes based on a company’s size (capitalization: mid or small-cap stocks) or investment style (growth stocks or value stocks).
For broad international-stock categories, consider the following mutual funds and ETFs:
Vanguard FTSE All-World ex-US ETF/Index VEU VFWAX
Vanguard Total International Stock ETF/Index VXUS VTIAX
Vanguard Total World Stock ETF/Index VT VTWAX
There is some variety in the above list also. Some funds track global indexes that include U.S. stocks; others follow global indexes that exclude U.S. stocks.
Next is a list of the best broad-based Bond index mutual funds and ETFs (if you definitely feel the need to invest in bonds):
Vanguard Long-Term Bond ETF/Index BLV VBLLX
Vanguard Long-Term Corporate Bond ETF/Index VCLT VLTCX
Vanguard Short-Term Corporate Bond ETF/Index VCSH VSTBX
Vanguard Short-Term Treasury ETF/Index VGSH VSBSX
Vanguard Tax-Exempt Bond ETF/Index VTEB VTEAX
Vanguard Total Bond Market ETF/Index BND VBTIX
Several of these bond index funds are in the intermediate-term bond category. As such, they’d make great choices to anchor the bond portion of an investor’s portfolio, assuming the goals for the money are six or more years away. Those saving for a shorter-term goal in the next three to five years might consider short-term bond funds instead. Those investors with longer time horizons might consider a longer-term bond fund—but they should also be prepared for the enhanced volatility that comes along with investing in long-term bonds.
Below, are three mutual funds and ETFs in specialized stock or bond categories:
Vanguard FTSE Europe ETF/Vanguard European Stock Index VGK VEUSX
Vanguard Real Estate ETF/Index VNQ VGSLX
Vanguard Short-Term Inflation-Protected Securities ETF/Index VTIP VTAPX
The top-rated mutual funds and ETFs on the above list are good choices for investors looking to fill more niche roles in their portfolios. For instance, retirees often hold a fund that’s meant to blunt the impact of inflation on their portfolios; two funds on this list are designed to do that.