The 3 Best Vanguard Sector Funds

Vanguard gets most of its media attention from its low-cost index mutual funds but, some of the best of Vanguard funds are the sector funds.

VanguardThe majority of the sector funds Vanguard offers are ETFs, which total 11 by my count, with a smaller handful of mutual funds.

This sparse supply of sector funds may have something to do with John Bogle, the founder of Vanguard funds and pioneer of index investing, who once said, “You could go your entire life without ever owning a sector fund and probably never miss it.”

But despite Bogle’s passion for indexing and diversification without the sector funds, Vanguard offers some of the best sector funds investors can buy today. And with all due respect to the grandfather of indexing, sector funds can be used as a diversification tool and a performance enhancer if investors allocate a small but reasonable percentage — such as 5% to 10% to a few well-chosen sectors.

With that said, here are 3 of the best Vanguard sector funds.

Best Vanguard Funds: Vanguard Health Care (VGHCX)

vanguard-sector-funds-vghcxVanguard Health Care (MUTF:VGHCX) is one of the best Vanguard funds and also one of the best sector funds in the entire mutual funds industry.

With an inception dating all the way back to 1984, VGHCX has a rich history of top performance and sector leadership.

The original portfolio manager, Edward P. Owens, was at the helm from 1984 to 2012, and, before taking over management in 2008, current manager Jean M. Hynes had years of co-management experience under the direction of Owens.

Although the Vanguard Health Care fund lags behind the sky-high short-term performance of health sector funds heavy in bio-technology holdings, the diversified mix of health industry firms in the portfolio makes the fund much more attractive for long-term investors.

Top holdings include Bristol-Myers Squibb Co (NYSE:BMY), Actavis plc (NYSE:ACT), and UnitedHealth Group Inc. (NYSE:UNH).

The expense ratio for VGHCX is 0.35% — or $35 annually for every $10,000 invested — and the minimum initial investment is $3,000.

Best Vanguard Funds: Vanguard REIT Index (VGSIX)

vanguard-sector-funds-vgsixIf you want cheap exposure to a broad variety of REITs, the Vanguard REIT Index (MUTF:VGSIX) is the way to do it.

VGSIX tracks the MSCI US REIT Index and invests in real estate investment trusts — companies that purchase office buildings, hotels, and other real estate property. The holdings are a diverse cross-section of small-, mid- and large-cap U.S. real estate stocks.

For a passively-managed fund, VGSIX has still managed to maintain top-third to top-quartile ranks for performance among real estate sector funds in the 3-year, 5-year, 10-year, and 15-year returns.

Top holdings include Simon Property Group Inc (NYSE:SPG) and Public Storage (NYSE:PSA).

The expense ratio for VGSIX is 0.24% and the minimum initial investment is $3,000.

Best Vanguard Funds: Vanguard Consumer Staples (VDC)

vanguard-sector-funds-vdcWe round out our list of best Vanguard funds with an ETF — the Vanguard Consumer Staples ETF (NYSEARCA:VDC).

Some of the best Vanguard funds, in comparison to respective category averages, happen to be the Admiral share class of mutual funds, which have $100,000 minimum initial investment amounts — a difficult hurdle for most investors.

But ETFs don’t have such barriers to entry. For example, the Vanguard Consumer Staples Admiral Shares (MUTF:VCSAX) has that $100,000 investment threshold, but the performance ranks are top 1% in the Consumer Defensive category for the 1-year, 3-year and 5-year returns and is 15th percentile for 10-year performance.

If you don’t have an extra hundred grand laying around to invest, VDC offers the same holdings and nearly identical performance at the same cheap Vanguard expense, which is 0.12% on both funds.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.

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