When it comes to building a portfolio, Vanguard ETFs and funds are often the top draws for investors. And there’s a good reason for that. The firm and investment pioneer John Bogle created the idea of the index fund back in the 1970s. Moreover, the asset manager’s philosophy stems from low-cost investing. So, naturally, Vanguard ETFs are some of the least expensive funds to own. When putting all the pieces together, it becomes really easy to see why Vanguard ETFs have attracted billions of dollars’ worth of assets from investors both big and small.
The question is which Vanguard funds make sense for you?
The firm has a line-up of 80 different ETFs and the bulk of those offerings can be a bit heavy. For example, the Vanguard S&P 500 ETF (NYSEArca:VOO) holds more than $106 billion in assets, while the Vanguard FTSE Emerging Markets ETF (NYSEArca:VWO) holds roughly $62 billion. As a result, just a few Vanguard ETFs get most of the press. That’s a shame as the firm’s low-cost and index-hugging mantra extends to the rest of its ETF line-up as well.
With that, here are three wonderful, but commonly overlooked Vanguard ETFs that should be right at home in your portfolio.
Vanguard Extended Market ETF (VXF)
Over the long haul, small- and mid-cap stocks have long outperformed their bigger counterparts. However, most investors still remain woefully underweight smaller stocks and finding successful individual winners here can be incredibly difficult. This is where Vanguard ETFs can come to the rescue.
The Vanguard Extended Market ETF (NYSEARCA:VXF) allows investors to tap into both small- and mid-cap stocks at the same time with one ticker. VXF tracks the S&P Completion Index. As the name implies, the fund owns everything that isn’t in the large-cap focused S&P 500. And we’re talking literally everything. VXF currently holds more than 3,260 different small- and mid-cap stocks. When you combine the fund with large-cap holdings, you basically have the U.S. stock market covered. The best part is, by using this ETF, the volatility and single-company risks are minimized to almost zero. With it, investors can instantly overweight the economies real growth engines.
It turns out this is a powerful thing to do.
When it comes to Vanguard ETFs, VXF has been a top performer. Over the last ten years, the fund has averaged a 16.61% annual total return. That’s not too shabby by any means. And as a Vanguard fund, VXF is pretty cheap to own. Expenses for the ETF clock in at just 0.07%- or just $7 per $10,000 invested.
In the end, VXF does everything a Vanguard ETF should do. That’s broad indexing a rock-bottom price.
Vanguard Mortgage-Backed Securities ETF (VMBS)
When it comes to bonds, Treasury securities are often the first stop for investors and there are plenty of Vanguard ETFs looking at these. However, there is a way to get a slightly higher yield and still keep that government guarantee. We’re talking about mortgage-back securities or MBS bonds.
Mortgage-backed securities are bonds secured by home and other real estate loans. There are all different flavors of these, but the vast bulk of them are residential-focused and issued by federal government agencies like Ginnie Mae (GNMA) or government sponsored-enterprises Fannie Mae (FNMA), or Freddie Mac (FHLMC). Moreover, MBS bonds typically pay slightly more than comparable Treasury bonds thanks to the higher risk that you or I could default on our mortgages or pay them back earlier. However, GNMA bonds are backed by the full faith and credit of the U.S. government, while the recession taught us that the government will bail out Freddie and Fannie when the water’s get rough.
With that, the Vanguard Mortgage-Backed Securities ETF (NYSEARCA:VMBS) could be a good bet for investors looking for a bit more. VMBS tracks Bloomberg Barclays U.S. Mortgage-Backed Securities Float Adjusted Index — which only focuses on U.S. agency mortgage bonds. None of the funny stuff. As a result, the ETF has been pretty steadfast since inception and yields a healthy 3.02%.
By using the Vanguard ETF, investors can get access to an esoteric asset class for a cheap 0.07% in expenses.
Vanguard International Dividend Appreciation ETF (VIGI)
With $34 billion in assets, the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) is a star player among Vanguard ETFs. VIG follows those stocks that have long histories of increasing their dividends every year. This strategy provides a way for investors to grow their income potential and provides with great long-term returns.
But it’s not U.S. stocks that benefit from growing dividends, international ones also win here.
Which is why the smaller and often ignored Vanguard International Dividend Appreciation ETF (NYSEARCA:VIGI) can be a great compliment to the more popular VIG.
VIGI also tracks a basket of large-cap stocks that have increased their dividends consistently over the last seven years. This time, the ETF combs both non-U.S. developed and emerging markets to find its dividend champions — currently at a 75%/25% spilt between developed and emerging market stocks. The top 400 stocks are included in the index.
This provides a way for investors to not only score some much-needed international exposure but also income growth as well. Currently, VIGI yields about 1.89%. However, that yield could be worth even more over the long haul. As foreign currencies fluctuate against the U.S. dollar, a drop in the dollar would boost the Vanguard ETFs underlying yield, as weaker local currencies convert into the stronger dollar.
All in all, VIGI should belong in your portfolio just as much as VIG. Expenses run a cheap 0.25%.
Disclosure: At the time of writing, Aaron Levitt did not hold a position in any of the ETFs mentioned.