Editor’s note: “Take Buffett’s Advice: 5 Vanguard Funds to Buy” was previously published in November 2020. It has since been updated to include the most relevant information available.
Vanguard Funds should probably be thanking Warren Buffett.
In Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) 2014 shareholder letter, Buffett mentioned Vanguard funds in a big way. Since then, he hasn’t backed down in a big way.
Specifically, he recommended that the cash left to his wife be invested 10% in short-term government bonds and 90% in a very low-cost S&P 500 index fund. Not just any index fund mind you, but a Vanguard fund in particular.
Whether it be exchange-traded funds (ETFs) or mutual funds, the Oracle of Omaha believes Vanguard funds are the way to go. With that in mind, I’ve put together a portfolio of two ETFs, two mutual funds and a fifth wildcard. The resulting portfolio should be appropriate for Buffett’s wife — or anyone else, for that matter.
- Vanguard 500 Index Fund Admiral Shares (MUTF:VFIAX)
- Vanguard Mid-Cap Index Fund Admiral Shares (MUTF:VIMAX)
- Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEARCA:VSS)
- Vanguard Short-Term Treasury ETF (NASDAQ:VGSH)
- Vanguard Consumer Staples ETF (NYSEARCA:VDC)
Vanguard Funds: Vanguard 500 Index Fund Admiral Shares (VFIAX)
Allocation: 50% of Portfolio
10-Year Performance: 14.22%
The goal is to keep costs to a minimum while generally sticking to Buffett’s hypothesis when it comes to his wife’s investments. Although Vanguard Funds do do offer commission-free ETFs, I recommend a mutual fund for the S&P 500 investment.
The Vanguard 500 Index Fund Admiral Shares charges an annual expense ratio of just 0.04%, or $4 on a $10,000 investment.
Your annual fees would amount to a mere $20 on a $50,000 portfolio. That’s hard to beat, and Buffett knows it. The largest holdings in this fund include Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The minimum investment is $3,000.
Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)
Allocation: 20% of Portfolio
10-Year Performance: 12.62%
The VFIAX covers the large-capitalization portion of the portfolio quite nicely.
While Buffett might not be fond of mid-cap stocks being added to the mix, evidence suggests mid-caps outperformed large-cap stocks over a four-year period between 2009 and 2013.
In fact, John Hancock published a report cautioning investors about underweighting mid-caps because of an assumption that a large-cap fund combined with a small-cap fund will do the job. That’s simply not the case.
Mid-cap stocks tend to provide an attractive combination of risk and reward. For this reason, I recommend the Vanguard Mid-Cap Index Fund Admiral Shares, which tracks the CRSP Mid Cap Index, an index composed of stocks that fall between the top 70%-85% of investable market capitalization.
They’re big enough to survive an economic hit but small enough to still be growing. With an expense ratio of 0.05%, this entry on our list of Vanguard funds is giving you safety and performance in one. Top holdings include Idexx Laboratories (NASDAQ:IDXX), Microchip Technology (NASDAQ:MCHP) and Chipotle (NYSE:CMG).
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
Allocation: 10% of Portfolio
10-Year Performance: 5.3%
Although I just said mid-cap stocks are a key part of any portfolio and tend to outperform small-caps while utilizing less risk, there is always a place for small-caps in your portfolio.
That’s especially true when the two previous picks from Vanguard Funds are almost 100% invested in the U.S. with virtually no international exposure. For this reason, a little bit of love outside America makes total sense.
My recommendation is to go with the Vanguard FTSE All-World ex-US Small-Cap ETF, a fund that tracks the performance of the FTSE Global Small Cap ex US Index, which consists of over 3,000 stocks in dozens of countries. Investing in both developed and emerging markets, the fund provides good exposure to some of the world’s future stars at an annual expense ratio of just 0.11%.
With such low fees, it’s no wonder $9.4 billion is invested in this ETF.
Vanguard Short-Term Treasury ETF (VGSH)
Allocation: 10% of Portfolio
5-Year Performance: 1.67%
Buffett recommends that 10% of his wife’s portfolio go to short-term government bonds. Vanguard Funds has an ETF that does exactly that.
The Vanguard Short-Term Treasury ETF invests in investment-grade U.S. government bonds with average maturities between one and three years. The risk, on a scale of one to five, is one — meaning this Vanguard ETF is for conservative investors looking for stable share prices.
And with an expense ratio of 0.05%, this ETF should give you peace of mind for your short-term needs.
Vanguard Consumer Staples ETF (VDC)
Allocation: 10% of Portfolio
10-Year Performance: 11.38%
On this final piece of the puzzle, I’m going defensive. The mutual fund version of the S&P 500 has less than 10% invested in consumer staples. I mean to remedy that by putting the final 10% in the Vanguard Consumer Staples ETF, a collection of 92 household names including Procter & Gamble (NYSE:PG) and Coca-Cola (NYSE:KO).
Since its inception in 2004, VDC has had but one year of negative annual total returns, and that was in 2008 when it experienced a 17% decline — 20 percentage points better than the S&P 500. When the you-know-what hits the fan, you’ll be glad you own this particular low-cost ETF. It has an expense ratio of just 0.1%.
It seems the “keep it simple” rule holds true, and Warren Buffett is the No. 1 follower.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.