Vanguard ETFs aren’t among the most novel, ground-breaking funds on the planet. But what they do offer is, for most investors, far better: cheap, straightforward index investing across just about every major theme on the market.
Heck, when I opened an IRA several years ago, the Vanguard S&P 500 ETF (NYSEARCA:VOO) was one of the first holdings I plunked into my account. It was S&P 500 exposure at what was then the cheapest price on the market. (It’s currently tied for first right now.)
Since then, I haven’t added any other Vanguard ETFs into the fold, but that’s only because I like a little weird in my portfolio. I want preferred stocks … but I want them without the financial sector. I want thematic plays like robots and fintech.
Vanguard doesn’t do weird. And that’s OK — because it’s plain as day that several Vanguard ETFs are perfect for many investors, even if none of those investors are me.
Today, I’ve put together this short list of Vanguard’s best exchange-traded products that provide useful exposure to three important swaths of the market.
My Favorite Vanguard ETFs: Total Stock Market ETF (VTI)
Type: All-cap stock
Expenses: 0.04%, or $4 annually on every $10,000 invested
I’m not the most aggressive investor on the planet, but I do like to play around a little with my IRA, so a one-stop-shop fund simply isn’t for me. But it doesn’t mean I don’t appreciate the idea of absolute simplicity, and for some investors, less really is more.
Enter the Vanguard Total Stock Market ETF (NYSEARCA:VTI).
I love the VTI because it’s one of the cheapest yet most thorough ways to get exposure to the lion’s share of the U.S. stock market. While funds like the VOO do provide wide large-cap exposure, you’re missing a lot of the growth potential found in mid- and small-cap stocks.
Not so with VTI, which invests in a whopping 3,606 stocks as of this writing. Yes, larger companies comprise the majority of this fund, at 71%. Yes, companies like Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL) are the heaviest weights, just like in a blue-chip ETF. But a 19% mid-cap allocation, with the rest split between small- and even micro-cap stocks, gives you a fair lot of every kind of American stock you’d want to invest in. You get some growth, and at 1.86% in annual yield, you’re not far behind the dividends you’d collect from the VOO.
The downsides are obvious. If you want your portfolio to be more growth-oriented, this doesn’t have enough firepower. If you want international exposure, you’ll have to buy another fund. But if you simply want to sit on a broad swath of U.S. stocks for dirt-cheap … well, VTI hasn’t racked up $580 billion in assets by being a slouch.
My Favorite Vanguard ETFs: Long-Term Corporate Bond ETF (VCLT)
Type: Long-term corporate investment-grade bond
The Vanguard Long-Term Corporate Bond ETF (NASDAQ:VCLT) is a “Goldilocks” ETF to me. It’s not too aggressive. It’s not too risky. It’s just right.
VCLT invests in investment-grade debt of mostly (but not entirely) U.S.-based companies. The fund has an 87% American tilt, with small allocations to Canadian, United Kingdom and Dutch companies, among others.
Corporate debt strikes a fair balance. Companies like Anheuser Busch Inbev NV (ADR) (NYSE:BUD) and CVS Health Corp (NYSE:CVS) issue bonds that are far less risky than junk-rated debt (which has a much larger chance of default). However, corporate debt necessarily yields more than Treasuries, as few companies’ bonds are graded higher than the U.S. government.
To help push the yield a little higher, however, VCLT invests in bonds at the longer end of the maturity spectrum — between 10 and 25 years. This does create more interest-rate risk should the Federal Reserve continue hiking the Fed funds rate, but it’s a tradeoff most investors should be willing to take for what is a very secure 4.2% yield at the moment.
Combine that with a 7-basis-point expense ratio, and there’s little to complain about.
My Favorite Vanguard ETFs: Global ex-U.S. Real Estate ETF (VNQI)
Type: International real estate
Here’s a cruel dose of reality: Most international stock market funds are crap.
Yes, it’s important to diversify globally in the event that U.S. markets take a drastic turn. That might make sense as a trade — if international markets don’t follow us lower, which they occasionally can — but if you’re holding onto these over the long-term, chances are you’re losing out. That’s because if you’re investing in 20, 30 countries at once, gains in some are likely to be muted by losses in others.
Consider that since inception in 2007, the Vanguard FTSE All-World ex-US ETF (NYSEARCA:VEU) has underperformed the S&P 500 in seven of the past nine full years. And on average, over the past decade, the S&P 500 has produced an average annual total return of 7.53% versus just 1.91% for the VEU. That includes the big 2008-09 U.S. market dip.
There are only two ways, then, to get ahead on an international basis. You can invest in single-country funds and hope to ride the hot hand. Or you can seek out an emphasis on high dividends, which can help cover up some of that underperformance.
Vanguard Global ex-U.S. Real Estate ETF (NASDAQ:VNQI) taps the real estate investment trust (REIT) sector of companies that own and operate real estate. Their structure dictates that they pay out high dividends, and VNQI reflects that with a nearly 4% yield. Because international stocks pay on different schedules, and often not as frequently as U.S. REITs, VNQI’s quarterly payouts are all over the place, but are fairly steady over time.
VNQI has the same issues as other international funds in that, say, a bad housing market in China might hamper gains from a strong housing market in Australia. So pure price performance tends to be similar to VEU and other global ex-U.S. ETFs. But if you’re going to be internationally diversified, get as much returns in dividends as possible — because at least you know those dividends will be there, year in and year out.