Investors looking for a one-stop shop for some of the best mutual funds on the market only have a few options — and one of those is Vanguard funds.
With 2015 going down as the worst year for stocks since 2011, and a bull market that appears to be growing tired, 2016 is looking to be a year where smart diversification will be crucial to successful portfolio management.
That’s where a diversified portfolio of index funds can come in awfully handy.
Vanguard funds include some of the market’s best index funds, as well as a variety of low-cost actively managed funds. So via one mutual fund company, investors can easily find the best funds to build a complete, diversified portfolio, not only for 2016, but also for the long term.
And as an added bonus — if you have a Vanguard account, you get to skip out on trading commissions on Vanguard funds, too.
With that in mind, we sifted through dozens of mutual funds to find the best Vanguard funds for investors to consider in 2016. Each of these funds can make a fine addition to an existing portfolio, though all 10 would work well as a diversified portfolio.
10 Best Vanguard Funds to Buy for 2016: Vanguard Total Stock Market Index (VTSMX)
Expenses: 0.17%, or $17 for every $10,000 invested
Minimum Initial Investment: $3,000
Whether you are looking for a low-cost, diversified mutual fund for 2016 or a solid core holding to buy for the long term, Vanguard Total Stock Market Index (VTSMX) can be a smart choice.
VTSMX is the biggest mutual fund in the world for a reason: It’s a low-cost index fund that provides exposure to the entire U.S. stock market. And in 2016, the market is all but guaranteed to see more of the uncertainty and volatility that dominated the financial big picture in in 2015.
Therefore, investors are smart to make diversification a central investing philosophy now.
VTSMX primarily holds high-quality large caps like Apple (AAPL), Microsoft (MSFT) and Exxon Mobil (XOM), but shareholders also get exposure to mid-cap and small-cap stocks, which makes VTSMX more diverse than S&P 500 index funds.
10 Best Vanguard Funds to Buy for 2016: Vanguard Mid-Cap Index (VIMSX)
Expenses: 0.23%
Minimum Initial Investment: $3,000
Although markets will likely remain volatile in 2016, there’s still room left for growth in funds like Vanguard Mid-Cap Index (VIMSX).
A passively managed mid-cap stock fund like VIMSX won’t have much overlap with a large-cap core holding, and it can expose investors to a market segment that can benefit from economic growth in the mature phase of the business cycle — exactly where the economy should be in 2016.
And, as plenty of research has shown, mid-cap stocks are in the “sweet spot” of the market capitalization spectrum when it comes to risk-adjusted returns.
In VIMSX, shareholders can capture much of the upside remaining in the bull market in 2016 with stocks like AvalonBay (AVB), Fiserv (FISB) and Electronic Arts (EA), while adding a diverse holding for the long run.
10 Best Vanguard Funds to Buy for 2016: Vanguard European Stock Index (VEURX)
Expenses: 0.26%
Minimum Initial Investment: $3,000
For international stocks, one of the best funds to buy in 2016 is Vanguard European Stock Index (VEURX).
As in 2015, slow growth in China is likely to keep negative pressure on emerging-market stocks. But a strong U.S. dollar can provide some positive lift for international companies. Thus, European stocks — such as VEURX top holdings Roche Holdings (RHHVF), Novartis (NVS) and HSBC Holdings (HSBC) — might be in the sweet spot for international-minded investors next year.
Also worth noting is that the median market cap of the fund’s 1,200-plus holdings is $38 billion, so the fund certainly has a large-cap bent. In turn, that provides a yield of more than 3%, which is a nice security blanket.
VEURX hasn’t been a category leader in performance recently, but it is the cheapest Europe stock fund on the market. It’s passively managed, too, which may prove to be a significant advantage in a year we can expect to be rife with volatility — just where active management can be riskier.
10 Best Vanguard Funds to Buy for 2016: Vanguard Health Care (VGHCX)
Expenses: 0.34%
Minimum Initial Investment: $3,000
A couple of sectors have to lead the rest, and in 2016, healthcare looks like a smart choice to fit that bill.
The healthcare sector is a market leader in 2015, and with no end to the tailwind of aging boomers and continued advances in keeping people alive for longer, it can remain relatively strong in 2016. Healthcare stocks are also a good defensive play, should the broader market enter a new bear market.
Vanguard Health Care (VGHCX) offers investors just what the doctor ordered in terms of a well-diversified mix of large-cap healthcare stocks, including Bristol-Myers Squibb (BMY), Allergan (AGN) and UnitedHealth Group (UNH).
And investors worried about high valuations will like that VGHCX isn’t too heavy in biotechnology stocks, which remain pretty loftily priced despite the beating they took in 2015 (not to mention the tough road that should continue in 2016).
10 Best Vanguard Funds to Buy for 2016: Vanguard REIT Index (VGSIX)
Expenses: 0.26%
Minimum Initial Investment: $3,000
Real estate could be another sector winner in 2016. Although the residential housing sub-sector of real estate is cooling, rental property is strong, primarily because of high demand and higher pricing power on rents. For one, U.S. citizens in the Gen X and Gen Y demographic — which generally includes people in their 20s, 30s and 40s — are content as renters. And that’s a trend that looks to continue for the foreseeable future.
Vanguard REIT Index (VGSIX) is one of the best funds to cover this area of the market.
VGSIX holds a broad and diverse basket of 154 U.S. real estate investment trusts, which are companies that typically purchase properties like office buildings, apartment complexes and hotels. Top holdings in VGSIX include mall operator Simon Property Group (SPG), storage outfit Public Storage (PSA) and apartment manager Equity Residential (EQR).
While REITs have struggled in 2015 amid worries that the Federal Reserve will finally hike interest rates, those worries have been known — and priced in — for some time now.
Besides, historically, REITs have actually fared pretty well in the face of Fed action.
10 Best Vanguard Funds to Buy for 2016: Vanguard Energy (VGENX)
Expenses: 0.37%
Minimum Initial Investment: $3,000
Investors looking into buying into a beaten-down energy sector would be wise to consider Vanguard Energy (VGENX).
While picking a bottom for oil can be a tricky and risky game, 2016 is arguably the best time to buy oil-related stocks in the past seven years or so. With the price of oil hitting a multiyear low in 2015, and more downside potential in the short-term, 2016 may prove to be a good place to buy energy stocks at depressed levels.
VGENX doesn’t hold the riskier small-cap stocks, and the portfolio consists of high-quality large-cap names like Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX).
And the industry mix is pretty straightforward — about 40% of the fund is dedicated to integrated oil and gas companies, while another 35% is invested in exploration and production companies.
10 Best Vanguard Funds to Buy for 2016: Vanguard Precious Metals & Mining (VGPMX)
Expenses: 0.29%
Minimum Initial Investment: $3,000
Like oil, precious metals are another beaten-down commodity area that investors can buy at multiyear lows. Investors ready to get back into gold — or silver or other precious metals — should consider Vanguard Precious Metals & Mining (VGPMX).
When investing in sectors or similarly narrow areas of the market, it’s generally wise to allocate a small percentage of the portfolio (say, 5%) for diversification purposes. However, by buying into funds like VGPMX now, you’re not just getting diversification — you’re setting yourself up to ride a potential bounce in gold and other metals.
Now, VGPMX is not a pure gold or precious metals fund, but instead invests solely within the precious metals and mining industries. Thus, top holdings aren’t bullion or coins, but miners such as Agnico Eagle Mines (AEM) and BHP Billiton (BHP).
Still, these miners are naturally tightly tethered to the price of their underlying metals, and thus VGPMX can still provide pretty good exposure to several metals in one package.
10 Best Vanguard Funds to Buy for 2016: Vanguard Total Bond Market Index (VBMFX)
Expenses: 0.2%
Minimum Initial Investment: $3,000
Like stocks, the outlook for bonds in 2016 looks uncertain, which makes the case for broadly diversified funds.
Enter Vanguard Total Bond Market Index (VBMFX).
What will interest rates do in 2016? Will the Fed raise rates slowly and steadily, or will they surprise the market with a faster pace of tightening monetary policy?
The market expects to find out more on Dec. 16 after the Federal Open Market Committee meeting’s conclusion, but it’s a good bet that whatever we discover then will hardly set 2016 in stone.
Investors who are simply too caught up in the uncertainty and merely want long-term exposure to the bond market without having to do much worrying from one Fed decision to the next would do best in a passively managed fund that covers the entire bond market at a rock-bottom expense ratio. And that’s what VBMFX does.
10 Best Vanguard Funds to Buy for 2016: Vanguard Short-Term Investment-Grade (VFSTX)
Expenses: 0.2%
Minimum Initial Investment: $3,000
Of course, if the U.S. economy remains relatively strong and interest rates resume a slow and steady climb upward, one of the best Vanguard funds to hold in 2016 may be Vanguard Short-Term Investment Grade (VFSTX).
Rising interest rates usually point to two other related market and economic trends: Short-term bonds can perform better than those with longer maturities, and high-yield bonds can continue to rise in price.
As the “investment grade” moniker for VFSTX suggests, most of the portfolio’s bond holdings have credit ratings hovering around investment grade (A-rated and higher B-rated bonds). This translates into yields that are higher than average short-term bond funds, and it creates a good balance between minimizing interest-rate risk on the short-term side without jumping too deep into the credit risk associated with most high-yield bond funds.
VFSTX can also make for a good compliment to VBMFX for a diversified fixed income portfolio in 2016.
10 Best Vanguard Funds to Buy for 2016: Vanguard Wellesley Income (VWINX)
Expenses: 0.25%
Minimum Initial Investment: $3,000
One of the best conservative funds to hold in 2016 is Vanguard Wellesley Income (VWINX).
Not every investor has a 10-year-plus investment time horizon, and not every investor has a high tolerance for risk. This is where a balanced fund like VWINX works well. VWINX can be used as a core holding or as a solid standalone mutual fund for conservative investors.
And with the potential for the emergence of a new bear market getting closer every day, a conservative balanced fund can be a smart tool for any investor.
The portfolio consists of about 35% stocks — including high-quality large caps like Microsoft, JPMorgan (JPM) and Wells Fargo (WFC) — and the remaining two-thirds of the portfolio is primarily invested in high-credit-quality bonds.
And conservative though VWINX might be, it can still win over the long-term. VWINX has averaged roughly 7% total returns over the past 15 years vs. less than 5% for the S&P 500.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds VTSMX, VBMFX and VWINX in some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
