When it comes to owning Vanguard funds, most investors gravitate to its passive offerings. After all, Vanguard created the concept of indexing and billions of dollars now sit in funds like the Vanguard Total Stock Market ETF (NYSEARCA:VTI).
Like their passive twins, these active Vanguard funds offer low costs. This allows them to overcome the main hurdle against active management — high fees. In the end, this provides their managers the opportunity to actually outperform and add real alpha to a portfolio.
In the end, these active Vanguard funds could be your portfolio’s best friend. With that in mind, here are three active Vanguard funds you should buy today.
It’s no secret that investing in gold, silver and other precious metals is a pretty volatile affair. Just take a look at the swings in the Market Vectors Gold Miners ETF (NYSEARCA:GDX). That’s why buying an index might not make the most sense. Investors may prefer a steady hand that knows the sector inside and out, which is what you get with the Vanguard Precious Metals and Mining Fund Investor Shares (MUTF:VGPMX).
VGPMX owns all sorts of mining firms — including precious metals and industrials. So investors get exposure to both copper and gold. The fund can even hold up to 20% of its portfolio in physical metals. The key for the active Vanguard fund, however, is that its managers can shift between mining sectors to take advantage of long-term trends and bargains. That means running a concentrated portfolio of the best stocks in its benchmark index — the S&P Global Custom Metals & Mining — as well as one that has different sector allocation weights.
But it really does is help steady the performance. Since 1984, VGPMX has managed to post a 5% annual total return. And while that may seem weak, it’s pretty impressive considering how volatile the commodities sector is. Also helping drive that performance is the fund’s reasonable expense ratio of 0.43%. The category average for gold funds is a sky-high 1.5%.
In the end, if you’re going to go with a precious metals fund, VGPMX is the fund to own.
One of the most fertile areas for active managers happens to be small- and mid-cap stocks. The reason being is that there is less research and focus on larger institutional investors. This leads to the mismatched pricing of stocks relative to their growth and value prospects. One of the best Vanguard funds exploit this fact.
Vanguard Selected Value Fund Investor Shares (MUTF:VASVX) looks to grow investors capital and provide income from mid-cap stocks. Mid-caps have historically provided high returns as they blend the best of large and small caps. That is high growth and stability. VCVSX takes this one-step further by using fundamental analysis to find those mid-cap stocks that are undervalued and out of favor. Top holdings include Micron Technology Inc. (NYSE:MU) and Discover Financial Services (NYSE:DFS). Add in a dose of concertation (VCVSX only holds 160 or so stocks versus 600 for its benchmark), and you have a receipt for success.
The fund has managed to post a 9% annual total return since its inception in 1996. That turns a $100,000 investment into more than $210,000 — crushing its benchmark. And when you have an expense ratio that is lower than some index funds, you have one of the best active mid-cap funds around.
Some of the best active Vanguard funds can be found on the fixed-income side. For investors looking for a cash alternative, this is great news — especially, if you are willing to take on a little risk.
The Vanguard Short-Term Investment-Grade Fund Investor Shares (MUTF:VFSTX) focuses its attention on short-term and intermediate-term investment-grade fixed income securities. That can include Treasury bonds and corporate securities. Unlike its indexed twin, however, VFSTX tends to hold more corporate bonds. That allows it to generate a higher yield (the fund currently pays 2.1%). The focus on corporate debt, however, doesn’t mean that there is a ton of added risk to the fund.
VFSTX’s managers use rigorous credit research and only buy bonds backed by fundamentals. This includes emphasizing sectors and securities that represent good relative value. That active fund will also adjust its duration to reflect the near-term interest rate estimates, the shape of the yield curve and other factors. These risk controls help keep a relatively stable value of the fund’s shares. This makes VFSTX an excellent choice to find stability in a portfolio.
Meanwhile, the fund charges an index-like 0.2% in annual fees. That little amount is important when you’re dealing with low-interest rates. It also helps boost the fund’s yield over rivals. In the end, VFSTX is a prime example of the best Vanguard funds available to investors in fixed income.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.