Exchange Traded Funds, or (ETFs) are a great way for investors to diversify their money from their regular brokerage account. Today I thought I’d discuss a great move that Vanguard made a year or two ago when they created ETFs that mimic almost all of their popular index mutual funds. This allows you to buy into these great index funds from a brokerage account and also pay lower fees most of the time.
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Vanguard has always been the place to get low-cost funds. Because the vast majority of their funds are index funds, which invest to mimic an index instead of having a professional manager choose stocks to buy, the costs and taxes are typically lower than those of managed mutual funds. Costs are one of the primary determining factors in total return over long periods of time, so index funds are a great way to invest in mutual funds. Vanguard made the fees even lower and created a tool that allowed investors to buy their index funds through their individual brokerage accounts, rather than needing to send money directly to the mutual fund company, by creating ETF versions for each of their major index mutual funds. A final advantage of ETFs is that trading of the ETFs does not force the fund manager to sell the stocks in the ETF to pay for redemptions or buy stocks to invest new cash. The ETFs are just traded among investors with the holdings of the fund unaffected.
Let me first say that I have no vested interest in Vanguard. I do not get paid to endorse them and while I am invested in their funds, I seriously doubt that my dozens of readers are going to cause the value of their funds to go up by very much if they all invest in the funds.
The reasons that I like Vanguard ETFs are that they are really, really low in fees and expenses and have a wide variety of available areas in which to invest. One could easily create a diversified portfolio just using their ETFs. The entire list of ETFs is here. Here are some specific ETFs from the list to investigate:
Vanguard Total Stock Market ETF (VTI): This is just an ETF that invests in the whole stock market. This is a great, one stop way to buy stocks. If you’re lazy but have many years to invest and want to build wealth for your future, buy this ETF.
Vanguard Total Bond Market ETF (BND): This is the same thing as the total stock market index, except it buys bonds. In one strategy, you would invest a percentage equal to your age in bonds and the rest in stocks. You could do this by purchasing this ETF and the Total Stock Market ETF.
Vanguard Total International Stock ETF (VXUS): Adding international exposure is a good way to reduce the risk that a downturn in the US economy will scuttle your portfolio. This ETF buys a wide array of international stocks in a variety of markets.
Vanguard REIT ETF(VNQ): Real Estate Investment Trusts (REITs) are like mutual funds of properties. They pay large interest rates because they earn rents from the properties they own. This ETF buys a wide variety of REITs. This is a good way to generate current income and provides an asset that is roughly uncorrelated from stocks or bonds.
Vanguard S&P 500 ETF (VOO): If you want to go beyond just buying everything in the stock market and start to target specific portions of the market, a good way to start is to buy stocks in sectors of the market by size. The S&P500 is an index consisting of the largest 500 US stocks. This is a good, large-cap stock fund.
Vanguard Small-Cap Growth ETF (VBK): This is a small cap fund that invests in stocks that are growing rapidly (as opposed to the value fund, which buys stocks considered to be under-priced). This is a good counter-balance to the S&P500 fund. Over long periods of time, this fund should outperform the other funds in this list, but it will be a bumpy ride.
This is just a partial list of funds. There are numerous other ETFs in the Vanguard portfolio worth considering, including the midcap funds and ETFs that invest in specific sectors of the economy.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
