by Bill Wysor | February 14, 2014 1:00 pm
Yes, it has been a rewarding time to be an investor with stock market exposure, whether it’s broadly through Vanguard funds or via other providers’ products. The S&P 500 itself was up 32% with dividends invested, and many other indices did even better … so as long as you were broadly in stocks in some way for 2013, you probably did well.
As we look back, the market in 2013 experienced just two negative months all year. And looking further back, nine of the past 10 calendar years have been “up” years for the market. Granted, the down year of 2008 was a rough one, but the fact remains that we have strung together some pretty fantastic results.
Possibly a little too fantastic — and we all know that greed is the undoing of many investors when it comes to long-term results.
If the recent market turbulence has you thinking of reducing risk, you might want to consider hunkering down in a few protective funds. I’m looking at Vanguard funds in particular because of the provider’s focus on low costs for individual investors.
So, here’s a look at the three best Vanguard fund options for the current situation — two fine low-cost no-load fund choices and a conservative ETF option:
Vanguard Equity Income (VEIPX) is a solid way to own large company stocks that pay above average dividends. This $15 billion fund is dedicated to finding slower-growing, stable companies that pay income in a meaningful way.
Michael Reckmeyer of Wellington Management handles a little more than 60% of fund assets, with Vanguard’s own equity investment group responsible for the balance of the portfolio.
The emphasis on dividend income helped the fund limit losses somewhat in the tough 2008 market, with the fund declining 31% vs. 37% for the S&P 500. Now, VEIPX is up 18% during the past year, placing it in the bottom third of its peer group. However, over the past 10 years this fund is up an annualized 7.9% and ranks in the top 10% of its category.
Financials are the leading sector here, accounting for 16% of the 163-stock portfolio, and industrials make up 15%. Recent top holdings include Johnson & Johnson (JNJ), Exxon Mobil (XOM), Chevron (CVX), Wells Fargo (WFC) and Microsoft (MSFT). Those big, dividend-paying blue chips help power a yield of 2.7%.
Annual turnover of 34%, and in typical Vanguard fashion, expenses are rock-bottom for an actively managed fund at 0.3%.
Keep in mind that last year smaller, riskier stocks were in favor. This trend will not last indefinitely … meaning VEIPX is among the best Vanguard funds to own right now.
Some products we just cannot seem to live without — and that spells opportunity for the Vanguard Consumer Staples ETF (VDC).
This $1.9 billion fund is chock full of megacap companies that cater to our most basic needs as a consumer. These firms are defensive in nature, yet they have real profits and earnings that are in style even when stocks do well in general.
This fund was up an impressive 28% in 2013 and held its own in the 2008 meltdown, losing 17% in a year that cost the S&P 500 37% of its value. Over the long haul, the VDC has returned 9.6% annually over the past 10 years, which places it in the top 1% of its Morningstar consumer defensive category. When it comes to reducing risk, VDC is a solid holding that can work in just about any market condition.
The portfolio contains a total of 111 stocks. About 20% of the VDC is committed to household products, while 18% of the holdings are in soft drink names. From distillers of spirits to tobacco, there is a product in this fund for pretty much every taste and habit. Current top holdings include Procter & Gamble (PG), Coca-Cola (KO), Walmart (WMT), Phillip Morris International (PM) and PepsiCo (PEP).
Fund expenses run a downright cheap 0.14%, or $14 for every $10,000 invested, and VDC also yields 2.6% in dividends.
Some products stand the test of time — Vanguard Wellington (VWELX) is one of the best examples of a portfolio that can endure.
VWELX isn’t just one of the best Vanguard funds out there — it’s also the nation’s oldest balanced fund, in existence since 1929. This portfolio skillfully mixes solid large-cap value stocks with intermediate-term investment-grade bonds in a package that has delivered fine results over time. This fund is up an annualized 7.7% over the past decade, good enough to rank in the top 5% of its Morningstar peer group.
All this performance has swelled assets to $80.3 billion — and as a result, Vanguard has restricted new account access to those that invest directly via Vanguard rather than through an intermediary such as a discount brokerage.
The fund’s current allocation is 64% stocks with 33% of the portfolio in bonds. Managers Ed Bousa and John Keough continue to favor quality stocks with strong balance sheets. Currently, 21% of the fund’s equity holdings are financial stocks, with 17% in healthcare names. Recent top holdings in the stock portion of the portfolio consisted of Wells Fargo, Merck (MRK), Microsoft, JPMorgan Chase (JPM) and Exxon Mobil. Average maturity for the bond portion of the fund stands at 8.4 years. All told, VWELX yields 2.4%.
Annual expenses run 0.25%, or $25 for every $10,000 invested. Investors with $50,000 to invest can access the Admiral shares of the fund (VWENX) and see expenses drop to 0.17% annually. Interestingly, the bulk of fund assets are in the Admiral share class.
Bill Wysor is the editor of The Relevant Investor. As of this writing, he did not hold a position in any of the aforementioned securities.
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