Despite turbulent economic news and a volatile market, I still say the Vanguard family is the best place to build long-term wealth.
But 8 out of 10 people who invest there settle for much lower profits than they should. In fact, some Vanguard funds that made sense as recently as a few months ago are suddenly profit pitfalls!
Which ones are they?
If you own any of these four Vanguard funds, SELL THEM NOW! If not, avoid them at all costs!
Flunking Fund #1: U.S. Growth (VWUSX)
It’s got a lot of technology (currently 30.6% of assets), which makes it seem timely. And now that large-cap growth stocks appear to be making their long-awaited and even longer-predicted comeback, is it time to put a buy rating on one of Vanguard’s senior-most funds, the 48-year old U.S. Growth?
Vanguard likes U.S. Growth. It continues to recommend it to investors. Fund-rater Morningstar, Inc. seems to have an ongoing love affair with the fund—or at least they can’t seem to say much negative about it.
But that’s not good enough for me. There are a few things I do like about this fund. Despite having two different teams of managers, the fund sports a fairly concentrated portfolio of about 70 stocks and about one-third of its assets in its 10 largest positions. The trouble is that management hasn’t added a whole lot of value.
The proof is in the numbers: U.S. Growth is up just 9.1% per year over the last 5 years. That’s not even close to the 11.9% return of the 500 Index Fund. These managers are adding no value!
So the short answer to my question about returning U.S. Growth to a “buy” is a decided no. Despite years of trying to get it right, Vanguard still hasn’t found the magic formula for success.
Are You Holding U.S. Growth? Here’s What You Need to Know Now
Three years ago, Vanguard finally admitted that something was seriously wrong with the way Alliance Capital (now called AllianceBernstein) was running its large-cap growth fund, U.S. Growth.
Assets had fallen from $11.6 billion when Alliance took the fund over, to $7.3 billion (they’re now at $5.6 billion). Performance was abysmal. The fund had lost 23.5% during the Alliance tenure, compared with a loss of 3.5% for Growth Index.
Even Growth Equity, which doesn’t exactly shine in bear markets, had only dropped 10.5% over the term. A new manager was needed, so Vanguard handed 30% of the fund’s assets to William Blair & Co., a Chicago investment firm with a solid reputation.
Slowly, U.S. Growth began to show some index-beating oomph, finally overtaking Growth Index and soaring to as much as a 7.5% performance advantage over the index fund. But the outperformance was short-lived. The fund continues to suffer, having lagged its index-fund counterpart by 2.5% in 2007.
The MCL is poor, too.
This once-mighty $22.3 billion fund now has less than $7 billion in assets. U.S. Growth’s -70.6% MCL, or Maximum Cumulative Loss, is worse than that of any other fund. I have recommended selling this turkey since early 2001. If you still own it, sell. Now.
</>
Flunking Fund #2: Precious Metals & Mining (VGPMX)
This aggressive growth fund invests at least 80% of assets in stocks of companies that explore, mine, fabricate, process or distribute precious metals and minerals. With gold reaching new highs, and the rest of the metal market on a bull run, this fund begins to look attractive. In fact, it was up 36.1% in 2007.
Despite Vanguard’s mission to diversify their metals investments, Precious Metals & Mining is no better fit for investors now than in the past. It tracks a small market segment, it’s extremely volatile and can whipsaw the unprepared. Up 47.2% in May of ’06, it dropped 26% over the next 4 weeks.
Or, consider the fund’s MCL. Recovering from a devastating 63.8% drop that ended in August 1998, it took until August 2002 before longtime shareholders were finally made whole. Two months later, they lost another 27.6%.
This isn’t an easy fund to own. So don’t buy this fund as an investment. Buy it to speculate if you are an aggressive risk-taker. But most investors should ignore it completely!
Flunking Fund #3: High-Yield Tax-Exempt (VWAHX)
This is the riskiest of Vanguard’s long-term tax-exempt bond portfolios and as such offers the highest yields of all the municipal bond funds. It buys less creditworthy bonds. It also tends to buy bonds with long maturities–a double dose when it comes to risk.
While 2006 looked like it might be a risky year for the fund, it remained solid putting up a 5.5% return, the highest mark for any of Vanguard’s tax-free funds. But 2007 was a different story: Returns for the year were only 1.6%.
Since this fund is risky, there is a risk of principal loss, too. It could have a place in your portfolio if you like tax-free cash coming in every month and don’t mind the risk. Just make sure you don’t over-allocate.
Flunking Fund #4: Short-Term Treasury (VFISX)
When it comes to investing in Vanguard bond funds, you can’t go wrong with their short-term funds. Expenses are low, relative yields are high, and risk is minuscule.
But there are much better options for your money than Short Term-Treasury. This fund had a mediocre 2007 and a sub-par 2006, performing near the bottom of the list of Vanguard funds.
A much better bet is Short-Term Investment Grade (VFSTX). Formerly known as Short-Term Corporate, it’s extremely safe, produces steady returns and offers some diversification that the Treasury and Federal funds don’t.
Simply put, there are too many bad Vanguard funds out there. Some of them are among their newest and most popular. Many of them are poorly managed or overexposed in certain industries facing big losses right now. Learn more about Vanguard’s biggest flunking funds in Dan Wiener’s just-released report, “25 Vanguard Funds to Sell Immediately.” It’s your special bonus free when you accept your risk-free trial to The Independent Adviser for Vanguard Investors by clicking here.
Learn more about getting the most from your Vanguard investments with these articles:
