I like Vanguard investment funds for long term individual investors.
Especially investors who follow a passive management style.
As I am not directly or indirectly compensated in any way by Vanguard I recommend them based solely on their merits.
That is not to say that other funds are poorer choices. I recommend a wide variety depending on a client’s investment objectives, desires, and available offering in their home jurisdiction. I believe in a “best of breed” approach for clients, not what is best for my revenue. And within the “best of breed” options, Vanguard funds pop up with regularity.
Why is this so?
Vanguard’s Passive Approach
I preach a passive investing style.
Hopefully in many previous posts, I have justified my faith in this approach. Active management tends not to outperform passive over time; active results in higher investor costs; good active funds grow and become the market; good managers may leave and new ones need to be assessed; or a manager’s stock picking ability reverts to average over time.
Morningstar offers a good summary of why Vanguard is often a strong company when choosing funds. This is because:
Vanguard has done an excellent job of driving down costs, choosing appropriate benchmarks, and replicating the performance of those benchmarks across its index lineup.
There are three keys to passive investing.
Cost minimization is extremely important. If you cannot beat the market consistently, you need investments that keep costs as low as possible. And lower than other investment options. In conducting your research, you will often find Vanguard funds in the lowest total expense ratio quartile.
Investors want investments that meet their personal objectives and constraints. Therefore, it is important to know what asset categories the fund invests in. By indexing against transparent and appropriate benchmarks, investors can find suitable fund matches for their needs. Knowing the index being replicated also helps determine each investor’s unique asset allocation calculations and in conducting periodic performance reviews.
Cost minimization is crucial if you cannot beat the market. But it is also critical to try and match the market as closely as is possible. So you need investments with minimal tracking error.
In each of these key areas, Morningstar and I agree that Vanguard does a good job.
Another investment consideration for some investors concerns that family of funds offered. The family of funds is the product lineup for a fund company.
Often there are perceived advantages for investors in dealing solely with one fund company. For example, there may be a monthly minimum of $500 for contributions. If there is only one fund, you need to invest in that one alone. But if there are multiple funds offered you can typically spread your monthly minimum between multiple funds. There may be no transaction fees charged when you sell a fund and use the proceeds to purchase another fund within the family. Or it could even just be the administrative ease in that all investments are under one roof, with one statement to deal with each month.
Many fund companies offer large families of funds. Make certain that if you choose to put all your investment eggs in one basket that the product line is high quality across the board. And that the fund company itself has a history of strong client service, innovative products, and financial solidity.
I think Vanguard is one fund company that meets these criteria. As Morningstar says:
The firm’s passive roster is packed with topnotch offerings. We have evaluated a good number of its index offerings and passive funds of funds thus far using the new Morningstar Analyst Rating, in fact, and these funds have received impressive ratings overall.
And Vanguard continues to be innovative to meet customer needs by continuing to improve their offering.
Vanguard has made four important moves in 2011 that should make its passive lineup even more attractive to indexing fans.
Vanguard is U.S. based and offer their most extensive product lines to U.S. residents. Vanguard does have some international companies that offer differing levels of investment products to residents of the specific country.
While currently with a limited international presence, Vanguard is slowly expanding its operations outside the U.S. For example, Vanguard will soon be offering Canadian domiciled and focussed ETFs.
You can purchase Vanguard’s exchange traded funds (ETFs) pretty much anywhere worldwide. So if you live where you cannot invest in Vanguard mutual funds, you can still buy their ETFs. As I tend to generally prefer ETFs over mutual funds (due to ETF trading advantages and lower investment costs), this works well for me.
If you are looking for simplicity, excellent global equity diversification, and a low cost structure, consider the Vanguard Total World Stock ETF (VT). A single fund with relatively low fees, VT tracks global equity markets based on each country’s market capitalization. The index holds about 2,800 stocks of companies in 47 countries and includes both developed and emerging markets. This well regarded ETF provides true global exposure at a reasonable cost.
As stated above, I receive no compensation from Vanguard. And there are other mutual and exchange traded companies that I also like and recommend. But whenever you are considering a mutual fund or ETF, always include Vanguard products in your analysis.
You will be happy you did.