Vanguard ETFs have become the mainstay in the world of passive investing, so much so that reviewing what is the best Vanguard ETF is atop many investors’ research agenda to kick off 2021.
But the current popularity of Vanguard ETFs as high-quality, low-cost, and passively managed funds goes back to the investment bank’s founding mission.
American investor John Bogle created Vanguard Group in 1975 to promote his then-emerging philosophy of passive investing. He had seen how active investors failed to beat the market, incurring high costs and taxes in the failed process, and wanted to change the way that one could approach the stock market.
“Active management [e.g., most mutual funds] has a very high bar because managers have to take enough risk to get back the costs they charge,” says Mark Fitzgerald, Head of Product Specialism at Vanguard, in an interview with Sarwa. “Meanwhile, the price of indexing is so much lower on average than active management.”
Consequently, Bogle founded Vanguard Group on the idea that high-quality, low-cost, and passively managed funds are the best way to build wealth over the long-term.
With Vanguard’s average expense ratio being 82% less than the industry average, Bogle’s heirs have kept true to their founding father’s principles. Lower fees mean more of your money is working for you (rather than ending up in the mutual fund’s pocket), which means you generate more returns.
Bogle also embraced the Modern Portfolio Theory, which posits that investors’ primary goal is to minimise risk and that the best way to do that is to build a diversified portfolio of non-correlating assets.
Another reason for the continued popularity of ETFs (and Vanguard) is their democratic and transparent nature.
“The beauty of an ETF is it’s democratic,” said Fitzgerald.
“If you or I want to buy an ETF product, we pay the same price as a sovereign wealth fund. There’s no other share class. There’s no hidden pricing. The cost is the cost…someone who spends $10,000 will pay the same amount as someone who puts $500 million into an ETF. I struggle to think of another financial instrument that is as democratic.”
By creating and promoting transparent and democratic ETFs, Vanguard has become a household name in the investing world.
One of Vanguard’s unique selling propositions is that they focus on building-block funds rather than outcome funds.
A broadly diversified portfolio can easily be created with Vanguard ETFs since each ETF serves as a foundational point of gaining exposures to all of the main asset classes across every possible way of diversification.
In other words, every Vanguard ETF is designed to complement another one in a diversified portfolio that helps you achieve your investment goals.
However, with over 81 Vanguard ETFs to choose from, creating a portfolio with Vanguard ETFs is still a big job.
To help you discover what is the best Vanguard ETF going into 2021, we will now consider the 10 best Vanguard ETFs on our radar.
[Looking to invest in Vanguard ETFs? Sarwa offers access to Vanguard through portfolios that make investing easy and affordable using smart technology. Schedule a free call with a wealth advisor that can help put your investment goals on track.]
1. Vanguard Total Stock Market Index Fund ETF (VTI)
Summary
VTI is an equity ETF that seeks to track the performance of the CRSP U.S. Total Market Index, an index that contains almost 4,000 mega, large, small, and micro-cap U.S. companies.
VTI is passively managed and fully invested in the equity market.
The fund’s goal is to generate value and growth.
Holdings and diversification
Currently, there are 3,586 stocks in the VTI, and the fund has total net assets of over $1 trillion.
VTI diversifies its holdings by industry with stakes in companies across 11 sectors: tech (27.80%), consumer services (14.7%), industrials (11.70%), healthcare (13.40%), and financials (15.50%) constitute the top five.
VTI also diversifies by market capitalisation. There are various mega, large, small, and micro-cap companies in its holdings.
ETF overview
- 5-year performance (returns): 13.95%
- Dividend yield: 1.82%
- Expense Ratio: 0.03%
2. Vanguard Real Estate Index Fund ETF (VNQ)
Summary
VNQ is an equity ETF that holds the stocks of Real Estate Investment Trusts (REITs) and companies that purchase office buildings, hotels, and other real estate properties.
This ETF tracks the performance of the MSCI U.S. Investable Market Real Estate 25/50 Index, an index that consists of large, mid, and small-cap companies in the real estate sector.
The fund’s goal is to generate both growth and passive investment income through high dividends.
With dividend yield of 4.20%, VNQ pays the highest dividend of all the Vanguard ETFs on this list.
This high dividend yield is in keeping with this ETF’s goal of generating passive investment income for investors. Indeed, REITs are mandated by law to pay a minimum of 90% of their income as dividend.
Holdings and diversification
With 180 stocks, VNQ has total net assets of over $298 billion.
VNQ’s holdings are diversified across 12 types of real estate assets, with specialised REITs (39%), residential REITs (13.60%), industrial REITs (10.90%), healthcare REITs (8.9%), and office REITs (7.8%) constituting the top 5.
ETF overview
- 5-year performance (returns): 5.44%
- Dividend yield: 4.20%
- Expense ratio: 0.12%
3. Vanguard Total Bond Market ETF (BND)
Summary
BND is a bond ETF that provides broad exposure to intermediate-term, taxable, and investment-grade USD-denominated bonds.
This ETF excludes inflation-protected and tax-exempt bonds, and it tracks the performance of the Barclays U.S. Aggregate Float Adjusted Index.
The fund’s goal is to provide reliable low-risk investment income and diversify the risks of stocks in a portfolio.
Holdings and diversification
BND currently holds 10,005 bonds with total net assets of over $298 billion.
The ETF is diversified across U.S. government (59.4%) and corporate bonds (40.6%).
The corporate bonds components are also diversified across credit quality, with Baa bonds taking the largest share (12.8%).
ETF overview
- 5-year performance (returns): 4.35%
- Dividend yield: 2.48%
- Expense ratio: 0.035%
4. Vanguard Total International Bond Index Fund ETF (BNDX)
Summary
BNDX is a bond ETF that consists of non-U.S., dollar-denominated, investment-grade bonds.
The fund tracks the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (U.S. Hedged).
This ETF’s goal is to generate low-risk investment income and offer broad geographical diversification.
Holdings and diversification
Currently, there are 6,333 bonds in the fund with total net assets of over $160.9 billion.
BNDX offers diversification by regional market with 58.2% of its holdings in Europe, 24.10% in the Pacific, 9.10% in North America, 4.90% in the Emerging Markets, 3.30% in other markets, and 0.40% in the Middle East.
The holdings are also diversified across credit quality, with Baa topping the charts at 28.5%.
ETF overview
- 5-year performance (returns): 4.34%
- Dividend yield: 2.10%
- Expense ratio: 0.08%
5. Vanguard S&P 500 Index Fund ETF (VOO)
Summary
VOO is an equity ETF that invests in the companies that constitute the S&P 500 index.
The ETF tracks the performance of the S&P 500 Index, an index that consists of the 500 largest companies in the U.S. equity market.
The fund’s goal is to provide high potential for investment growth, especially for long-term investors with long-term goals.
Holdings and diversification
VOO currently has 509 stocks with total net assets of $620.2 billion, diversified by industry.
Approximately 27.6% of its holdings are in the technology industry, 13.70% in healthcare, 10.40% in financials, 11.30% in consumer discretionary, and 11% in communications.
ETF overview
- 5-year performance (returns): 15.18%
- Dividend yield: 1.15%
- Expense ratio: 0.03%
6. Vanguard S&P 500 Growth Index Fund (VOOG)
Summary
VOOG is an equity ETF that invests in the growth companies of the S&P 500. It thus tracks the performance of the S&P 500 Index through a benchmark created by Vanguard.
The fund’s goal is investment growth, which is why it tracks so-called growth companies and places an emphasis on the IT industry, which makes up over 40% of its holdings.
This ETF is most suitable for investors who want to build a more aggressive (growth) portfolio.
Holdings and diversification
There are currently 282 stocks in VOOG, with total net assets of over $4.6 billion.
VOOG achieves diversification by investing across 11 industries. The information technology (40.50%), consumer discretionary (14.90%), communications (13.10%), healthcare (9.80%), and industrials (7.30%) industries constitute the top five holdings.
ETF overview
- 5-year performance (returns): 17.51%
- Dividend yield: 0.68%
- Expense ratio: 0.10%
7. Vanguard Extended Market ETF (VXF)
Summary
VXF invests in U.S. small-cap and mid-cap companies. It aims to provide optimal exposure to US stocks not covered in the S&P 500 index, which it does by tracking the performance of the S&P Completion Index.
The fund’s goal is to achieve high-growth through market-capitalisation diversification.
Holdings and diversification
VXF currently holds 8,789 stocks with total net assets of over $22.7 billion.
VXF diversifies by industry (investing across 11 industries). The top five industries are: information technology (23.30%), consumer discretionary (16.5%), health (15%), industrials (12.5%), and financials (12.10%).
ETF overview
- 5-year performance (returns): 13.52%
- Dividend yield: 1.17%
- Expense ratio: 0.06%
8. Vanguard FTSE Developed Markets ETF (VEA)
Summary
VEA is an equity ETF that consists of global stocks of companies in developed markets, excluding the U.S.
The fund tracks the performance of the FTSE Developed All Cap Ex U.S. Index.
The fund’s goal is to provide investors with better diversification through exposure to a diversified group of stocks in developed markets.
Holdings and diversification
Currently, VEA has 3,972 stocks and total net assets of over $132 billion.
The fund employs diversification by markets with holdings in Europe (52.30%), the Pacific (38.50%), North America (8.50%), the Middle East (0.50%), and other markets (0.20%).
VEA also provides diversification by market cap, with 72.1% of holdings being in large-cap companies, 4.1% in medium/large-cap companies, 12.2% in medium-cap companies, 5.2% in medium/small-cap companies, and 6.1% in small-cap companies.
ETF overview
- 5-year performance (returns): 8.34%
- Dividend yield: 2.16%
- Expense ratio: 0.05%
9. Vanguard FTSE Emerging Markets ETF (VWO)
Summary
VWO, another equity fund from Vanguard, invests in the stocks of companies in emerging markets, and the fund is designed to track the performance of the FTSE Emerging Markets All Cap China A Inclusive Index.
The fund’s goal is to achieve long-term growth through geographical diversification for investors.
Holdings and diversification
VWO currently contains 5,018 stocks with total net assets of over $94.6 billion.
VWO is diversified by emerging markets. About 97% of its holdings are in the emerging markets, with China (43.85%), Taiwan (16.13%), India (10.30%), Brazil (5.56%), and South Africa (3.94%), constituting the top 5 emerging markets. 0.30% of its holdings are in Europe and 1.80% in other markets.
ETF overview
- 5-year performance (returns): 9.90%
- Dividend yield: 2.27%
- Expense ratio: 0.10%
10. Vanguard Total World Stock Index Fund ETF (VT)
Summary
VT invests in both U.S. and foreign stocks. It tracks the performance of the FTSE Global All Cap Index, which consists of companies in developed, emerging, and developing markets.
VT seeks to achieve growth through very broad equities diversification, essentially on a global level.
However, while it aims to be a global fund, the vast majority of its holdings are in North America.
Holdings and diversification
There are currently 8,789 stocks in this fund with total net assets of over $22.7 billion.
VT primarily diversifies its holdings by geographical market. About 60% of the holdings are in North America, 16.70% in Europe, 12.20% in the Pacific, 10.8% in emerging markets, 0.20% in other markets, and 0.10% in the Middle East.
The fund also diversifies by large cap, with 70.5% of its holdings in large-cap companies, 3.2% in medium/large-cap companies, 14% in medium-cap companies, 5.5% in medium/small-cap companies, and 6.5% in small-cap companies.
ETF overview
- 5-year performance (returns): 10.99%
- Dividend yield: 1.43%
- Expense ratio: 0.08%
Putting this list to smart use: What is the best Vanguard ETF for your portfolio?
While each of the 10 vanguard ETFs above provide strong investment building blocks, you will need to understand how to build a formulaic portfolio with them by applying the proper variance-covariance approach.
In the end, what matters is not the value of the individual Vanguard ETFs but how you combine them in a profitable portfolio that reflects your risk tolerance.
The best way to construct a profitable portfolio that interprets these risks is to use a robo advisor like Sarwa. When designing your portfolio, the goal according to the Modern Portfolio Theory should be to minimise your risk and maximise your returns.
Sarwa thus applies the Modern Portfolio Theory to select the best ETFs according to your risk tolerance level. Afterward, a portfolio is constructed utilising ETFs that reflect your unique financial profile and objectives.
Sarwa offers a low-cost, accessible and flexible investing lifestyle that requires minimum upkeep, allowing you to automatically rebalance your portfolio so it always reflects your preferred structure.
Now that you know the best Vanguard ETFs, it’s time to start planning how to put this knowledge to good use.