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The Bogle Way: 7 Index Funds for Passive Investors

index funds - The Bogle Way: 7 Index Funds for Passive Investors

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The investment community lost a giant Wednesday when John Bogle, the founder of Vanguard, passed away at 89. Bogle kick-started the index fund revolution, introducing the first such fund, which created an industry that now has $1.5 trillion in assets under management.

“Mr. Bogle had legendary status in the American investment community, largely because of two towering achievements: He introduced the first index mutual fund for investors and, in the face of skeptics, stood behind the concept until it gained widespread acceptance; and he drove down costs across the mutual fund industry by ceaselessly campaigning in the interests of investors. Vanguard, the company he founded to embody his philosophy, is now one of the largest investment management firms in the world,” according to Vanguard.

Bogle, a native Pennsylvanian and Princeton alumnus, did more for everyday investors than any fund manager, investor or Wall Street maven before or after him. Whether or not index fund investors own Vanguard funds, they are benefiting from Bogle’s efforts to lower costs.

Known as the “Vanguard effect” in index fund circles, the firm’s emphasis on keeping costs low so investors can keep more of their returns is a main reason why so many rival fund issuers offer low fees on index funds and exchange traded funds (ETFs).

Today, Vanguard manages over $5 trillion in assets and the average annual fee of 0.11% on its funds is a big reason why the non-profit company is one of the world’s largest asset managers.

Here are seven Vanguard index funds that Bogle himself probably would have liked.

Vanguard 500 Index Fund — Admiral Shares (VFIAX)

Expense Ratio: 0.04% per year, or $4 on a $10,000 investment

The Vanguard 500 Index Fund — Admiral Shares (MUTF:VFIAX), an S&P 500 tracking fund, is the index fund that started it all. Today, Vanguard’s S&P 500 index funds and ETFs have over $400 billion in combined assets under management, according to issuer data.

To get the benefit of this index fund’s low fee, investors are required to make a minimum investment of $3,000. Minimum investments are required on many Vanguard index funds, but that can be avoided by embracing the comparable ETFs, of which Vanguard has many to go along with its index funds. The Vanguard S&P 500 ETF (NYSEARCA:VOO), one of the world’s largest ETFs, has no minimum investment requirement and shares that 0.04% expense ratio.

VFIAX holds 509 stocks with a median market value of $99.1 billion.

Vanguard Total Stock Market Index — Admiral Shares (VTSAX)

Expense Ratio: 0.04%

While the aforementioned VFIAX started the index fund revolution, the Vanguard Total Stock Market Index – Admiral Shares (MUTF:VTSAX) is a juggernaut in its own right. With its low fee and massive roster of holdings, this index fund and its ETF equivalent are perfect ideas for novice investors.

VTSAX’s low annual fee makes it 96% cheaper than the average fees of competing strategies, a trait that likely explains the whopping $672.2 billion in assets across those index fund’s various share classes. Speaking of big, VTSAX holds over 3,500 domestic stock, putting the “broad” in broad market fund.

Vanguard Total Bond Market — Admiral Shares (VBTLX)

Expense Ratio: 0.05%

Index funds helped democratize fixed-income investing and the Vanguard Total Bond Market — Admiral Shares (MUTF:VBTLX) is one of the leaders of that charge. Thanks to index funds and passive ETFs, investors can access broad baskets of bonds at reasonable costs.

VBTLX is a domestically focused fund, and its asset mix usually somewhere around 70% U.S. government debt and 30% investment-grade, domestic corporate bonds. Home to nearly 8,600 bonds, one of the largest rosters in the fixed income index fund space, VBTLX features little in the way of credit risk as essentially all of its holdings carry investment-grade ratings.

This index fund’s holdings have an average maturity of 8.3 years and an average duration of 5.9 years. VBTLX has a 12-month yield of 2.8%.

Vanguard Value Index Fund — Admiral Shares (VVIAX)

Expense Ratio: 0.05%

Among index funds focusing on a particular investment factor, value funds are among the most popular. The Vanguard Value Index Fund — Admiral Shares (MUTF:VVIAX) offers cost-efficient exposure to a broad basket of U.S. large caps with the value designation. Factor funds usually carry higher fees than cap-weighted counterparts, but VVIAX is one of the cheaper value funds on the market.

This index fund holds 344 stocks with a median market capitalization of $89.3 billion. Its price-to-earnings ratio of 14.3x reflects a modest discount to the S&P 500 and other broad domestic equity benchmarks.

As is the case with many value index funds, this Vanguard fund is heavily allocated to the financial services sector. That sector accounts for 23.5% of VVIAX’s weight. The healthcare and technology sectors combine for over 28% of the fund’s weight.

Vanguard Mid-Cap Index Fund — Admiral Shares (VIMAX)

Expense Ratio: 0.05%

Index funds have their roots in domestic large caps, but the industry evolved to bring cost-effective exposure to smaller stocks to investors. That includes mid caps and the Vanguard Mid-Cap Index Fund — Admiral Shares (MUTF:VIMAX), which is cheaper than 95% of competing funds, according to Vanguard data. Long-term investors should consider mid caps.

“The S&P Mid-Cap Index is the winner for 25-year total return, by a mile. The mid-caps haven’t taken home the prize for any of the other periods. However, they have beaten the S&P 500 for all the listed periods of 10 years or more,” according to MarketWatch.

VIMAX holds 366 stocks with a median market value of $12.5 billion, which is above the $10 billion mark that signals the official definition of mid-cap territory. This index fund devotes 20.5% of its weight to financial stocks while industrial and technology names combine for over 34%.

Vanguard Short-Term Corporate Bond Index Fund — Admiral Shares (VSCSX)

Expense Ratio: 0.07%

When the Federal Reserve raise interest rates, as it did four times last year, investors often move to shorter duration bonds and the related index funds. The issue with trimming interest rate risk is that investors’ income streams can be hit by that move.

One way of ameliorating that scenario is with short-term corporate bond index funds, such as the Vanguard Short-Term Corporate Bond Index Fund — Admiral Shares (MUTF:VSCSX). VSCSX yields 2.7% and 90% cheaper than competing short-term corporate bonds funds.

Credit risk is minimal with this index fund as almost 87% of VSCSX’s 2,200-plus holdings are rated A or BBB. The index has an average duration of 2.7 years.

Vanguard Total World Stock Index Fund — Investor Shares (VTWSX)

Expense Ratio: 0.19%

Prior to the advent of index funds, investors looking for international equity exposure were forced to stock pick or embrace high-fee, actively managed mutual funds. Today, the universe of international equity index funds is chock full of funds appropriate for rookie and cost-conscious investors alike. The Vanguard Total World Stock Index Fund — Investor Shares (MUTF:VTWSX) is one of the leading index funds in that group.

As its name implies, VTWSX is a total market fund, meaning it offers exposure to a broad swath of regions and stocks. VTWSX, which holds over 8,100 stocks, has some emerging markets exposure to the tune of 9.9%, but the fund is dominated by developed markets. While VTWSX uses different terminology, it is essentially a global index fund, meaning its largest geographic exposure is the U.S. Japan, the U.K. and China combine for almost 17% of the fund’s weight.

Global and international index funds usually feature higher fees than counterparts focusing on domestic stocks, but VTWSX is still less expensive than 83% of rival funds.

As of this writing, Todd Shriber did not own any of the aforementioned securities.

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