When it comes to retirement, mutual fund powerhouse Vanguard basically wrote the book. The indexing giant has become a staple of retirement plans, both big and small. And lately, investors seem to prefer Vanguard exchange-traded funds to its traditional mutual funds. And there are good reasons why.
For starters, Vanguard ETFs feature the same indexing-hugging nature that that has allowed the investment manager to gather billions of dollars’ worth of investor assets.
There’s plenty of academic research that suggests that indexing outperforms active management by a wide margin over the long run. By using ETFs, investors can easily gain access to that power.
Even better is that Vanguard ETFs often have lower expense ratios than their mutual fund twins. This allows investors to keep more of their returns rather than pay them as fees. Low costs do matter when it comes to outperformance. Adding this to the intraday tradeability of ETFs and you have a recipe for long-term retirement gold.
With that in mind, here are three Vanguard ETFs that reperfect for retirement portfolios.
The Best Vanguard ETFs for Retirement: Vanguard Dividend Appreciation ETF (VIG)
Expense Ratio: 0.09%, or $9 per $10,000 invested
If there is one thing all retirement investors crave, it’s income and Vanguard ETFs make receiving dividend income a breeze. The Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) is the best way to get growing dividend income.
VIG tracks the NASDAQ U.S. Dividend Achievers Select Index. These so-called “dividend achievers,” “dividend aristocrats” or even “dividend kings” represent stocks that have decades worth of uninterrupted and increasing payouts.
The Vanguard ETFs underlying index tracks dividend stocks with a minimum ten years worth of dividend growth behind them. The fund’s 184 holdings read like a who’s who of dividend stalwarts such as Medtronic plc. Ordinary Shares (NYSE:MDT) and United Technologies Corporation (NYSE:UTX). The index does not include real estate investment trusts or MLPs and the vast bulk of its distributions are considered “qualified dividends” for tax purposes.
The fund’s current yield of 2.08% isn’t very high on the surface. But it is designed to grow over time as more of these firms hand over more cash year in and year out. This makes VIG a powerful and valuable tool for investors looking to fight inflation and keep the effects of interest rate hikes at bay.
And as a Vanguard ETF, VIG’s expenses are dirt cheap. The nearly $24 billion ETF only charges a measly 0.09% in expenses. Or about $9 per $10,000 invested.
The Best Vanguard ETFs for Retirement: Vanguard Small-Cap Value ETF (VBR)
Expense Ratio: 0.08%
Over long stretches of time, small-caps beat large-caps and value stocks beat growth. So when you put the combination together, small-cap value has managed to pretty much outperform everything on the sun.
So investors looking to save for retirement and that have long-term timelines should focus their efforts here. Vanguard ETFs make adding a dash of small-cap value possible with one ticker.
The Vanguard Small-Cap Value ETF (NYSEARCA:VBR) follows an index of the cheapest small-cap stocks in the U.S. The 827 stocks in the VBR trade currently for a price-to-earnings ratio of 25. The broader Vanguard Small-Cap ETF (NYSEARCA:VB) can currently be had for P/E of 33. Moreover, investors in VBR can pick up an extra 0.47% in dividend yield — currently 1.87% — over its broader small-cap rival.
That focus on cheapest has paid off. VBR has managed to rack up an impressive 9.26% annual total return since its inception in 2004. That has managed to outperform VB slightly during that time as well as the S&P 500.
For retirement investors, VBR makes a great core option. And as one of the earliest Vanguard ETFs, it’s one of the cheapest. Expenses are a rock bottom 0.08%.
The Best Vanguard ETFs for Retirement: Vanguard REIT Index Fund (VNQ)
Expense Ratio: 0.12%
REITs belong in everyone’s portfolio. But for retirement investors, and specifically, those using deferred or tax-free accounts, these owners of commercial real estate are even better.
Thanks to corporate tax benefits, REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends. Yields for the sector average 4 to 7%. The problem is those high dividends are treated as ordinary income for tax purposes. That means they are subject to a higher tax rate compared to the qualified dividend tax rate of 15%.
Using Vanguard ETFs makes placing a swath of REITs in a tax-deferred account such as an IRA the best strategy.
The Vanguard REIT ETF (NYSEARCA:VNQ) is the largest REIT fund at $65 billion in assets. Tracking the MSCI US REIT Index, VNQ holds 158 different REITs. These include office building owner Boston Properties, Inc. (NYSE:BXP) and storage unit specialist Extra Space Storage, Inc. (NYSE:EXR).
The combination of a high yield and capital appreciation has guided VNQ to some impressive returns since its inception. The Vanguard ETF has managed to return an average 9.22% since inception in mid-2004.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.