Vanguard funds have been steadily attracting big inflows of investor assets in recent years. And their index funds have been the biggest benefactor of this trend. But it’s not just the low expenses that are attracting investors. Outstanding performance, both in the short term and in the long run, is also keeping many of Vanguard’s index funds ahead of the pack.
Conventional wisdom says that the low fees of the cheapest index funds can provide enough of a performance edge that helps them beat their actively-managed counterparts in the long run.
While that wisdom is generally true, the passive nature of index funds is also an advantage when the skill and experience of active managers isn’t enough to successfully navigate the whims and unpredictable nature of capital markets.
For example, the cheapest 500 index funds are beating their large-cap blend category peers in 2016 as well as longer holding periods. To prove our point, we picked three passively-managed Vanguard funds that are beating their respective category averages in 2016 and in the long run.
Check out these three Vanguard funds that make the active managers weep.
Vanguard Funds That Make Managers Weep: Vanguard 500 Index (VFINX)
Expenses: 0.17%
Minimum Initial Investment: $3,000
The cheapest S&P 500 index funds are beating actively-managed funds in the short term and in long-term returns, and the Vanguard 500 Index (VFINX) is a strong case-in-point.
Long-term investors have been singing the praises of cheap index funds like VFINX for years by pointing to long-term returns that outperform the category averages.
The proponents of actively-managed stock funds argue that a good stock picker can prove their worth in volatile and negative markets. But VFINX has proven to be a winner in the ugly 2016 correction as well as the past decade. Year-to-date 2016, VFINX beats more than two-thirds of large-cap blend funds. And it beats at least 80% of category peers for 1-, 3-, 5- and 10-year returns.
So if investors want to hold large-cap stocks like Apple (AAPL), Microsoft (MSFT) and Exxon (XOM), and they like the proven performance qualities of cheap S&P 500 index funds, VFINX is an outstanding holding.
Vanguard Funds That Make Managers Weep: Vanguard Intermediate-Term Bond Index (VBIIX)
Expenses: 0.20%
Minimum Initial Investment: $3,000
Some of the biggest winners in the battle of index funds versus actively-managed funds are Vanguard’s bond funds, and the Vanguard Intermediate-Term Bond Index (VBIIX) is a shining example of this outperformance.
The Vanguard Total Bond Market Index (VBMFX) is the largest bond fund in terms of assets under management and is beating most intermediate-term bond funds in the short-term. And the long-term returns rank around 50th percentile for periods longer than five years.
But VBIIX handily beats the competition in the short- and long-term returns. For example, the year-to-date gain of 1.23% for VBIIX is ahead of 99% of intermediate-term bond funds, and it beats the Barclays Aggregate Bond Index.
Other than a rock-bottom expense ratio, VBIIX gets most of its performance advantage from focused exposure to the fixed-income sweet spot of investment-grade, intermediate-term bonds. In translation, returns are boosted by focusing more on corporate bonds and by avoiding the price risk of long-term bonds and the low yields of short-term bonds.
Vanguard Funds That Make Managers Weep: Vanguard Balanced Index (VBAIX)
Expenses: 0.08%
Minimum Initial Investment: $3,000
One of the best set-it-and-forget-it funds money can buy, Vanguard Balanced Index (VBAIX), is another shining example of Vanguard funds that win in the long run while also putting up good short-term numbers.
Year-to-date for 2016, VBAIX beat 75% of moderate allocation funds. The 1-, 3-, 5-, 10- and 15-year returns also beat at least 80% of category peers.
VBAIX does this by maintaining a simple allocation of 60% stocks and 40% bonds. The stocks are mostly large-cap and the bonds average at AA credit quality and intermediate-term maturities.
As with the other two Vanguard funds highlighted in this story, VBAIX has a dirt-cheap expense ratio. And the passive nature of index funds like it removes the manager risk that comes with their active counterparts.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. 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.
