Best Vanguard Mutual Funds: Index Fund Edition

Vanguard being my favorite mutual fund company, I tend to own Vanguard mutual funds whenever I can. Indeed, if you look at my Roth IRA asset allocation you won’t find a single non-Vanguard fund. Currently, I exclusively hold Vanguard funds everywhere but in my 401k plan at work, where they unfortunately aren’t offered in preference to higher-fee investment options.

In light of my love of Vanguard mutual funds, I’ve decided to put together this list of the Best Vanguard Mutual Funds* in each of a variety of relevant categories. The end goal is that simply building a portfolio out of the following Vanguard index funds should allow you to cover all the major asset classes. Since Vanguard is known primarily for its index funds and since I promote index investing whenever possible, I won’t be including any active funds in this list. I plan on writing about the best active Vanguard funds soon.

The Best Vanguard Mutual Funds

Best Domestic Stock Fund

And The Winner Is: Vanguard Total Stock Market Index Fund (VTSMX) – This fund gets the nod over the perhaps more popular S&P 500 index fund for several reasons, namely the fact that it holds small- and mid-cap stocks in addition to just mega- and large-cap stocks, is likely to be ever-so-slightly more tax-efficient going forward, and isn’t subject to index front-running (since it’s a total market index). Over time, the two funds should track each other very closely, but why take the chance that they won’t? The Total Stock Market Index Fund is guaranteed to track the market closely. The 500 index fund probably will, but perhaps not as closely as you might wish. If you’re only going to own one domestic stock fund, this is the one you should own. Hands down.

Best International Stock Fund

And The Winner Is: Vanguard Total International Stock Market Index Fund (VGTSX) - Even a year ago, this would have been a much more difficult choice. However, since Vanguard’s most recent improvements, the Total International Stock Market Index Fund has become the clear champion of the foreign index fund competition. In fact, I can think of no reason to own the FTSE all-world ex US fund at all anymore, except perhaps to avoid a wash  sale or some other tax complication. The Total International Fund is dirt cheap, diversified, eligible for the foreign tax credit, contains small cap stocks, and owns Canadian shares. What else could you possibly want in a core international fund? Again, if you only own one international stock fund, it should probably be this one.

Best Bond Fund

And The Winner Is: Vanguard Intermediate Term Bond Index Fund (VBIIX) – This was a tough one, coming down to this fund and the more popular Total Bond Market Index Fund (VBMFX). In the end, I may be going against the grain a bit in preferring the intermediate term bond index fund over the total bond market index fund, so let me explain. First off, these two funds have somewhat similar average effective durations, and important measure of bond interest rate sensitivity. Furthermore, they both concentrate on high-grade bonds with a healthy allocation to ultra-safe government issues. So why choose one over the other? Simple: the Total Bond Market Index Fund invests almost 30% of cash into Mortgage-related securities, which it turns out are a bit less safe than previously anticipated (remember 2008?). Is this a big deal? No. Did the total bond market fund perform well in the recent crash? Yes. But since I have to pick one, I give an ever-so-slight edge to the intermediate term bond index fund in this case. In reality, both funds are excellent and you couldn’t go wrong owning either. The Short Term Bond Index Fund (VBISX) also receives honorable mention (and is the one I personally own).

Best Non-Core Fund

First, an explanation. I am defining a “non-core fund” as any fund investing in a non-core asset class. This could be a sub-division of a larger asset class (value stocks, emerging market bonds, etc) or it could invest in an alternative asset class (commodities, real estate, etc).

And The Winner Is: Vanguard Small Cap Value Index Fund (VISVX) - Alas, I could choose only one non-core fund out of a stable of several top-notch options. I chose the small-cap value fund mostly due to personal preference. I am a big believer in the slice n’ dice approach to indexing and believe the small-cap value premium is here to stay. That said, this Vanguard fund isn’t as small or value-y as it could be, so it doesn’t capture nearly as much of the small and value factor premiums as it could. I actually prefer the DFA fund to its Vanguard counterpart. Unfortunately, DFA requires you to work with a financial advisor in order to have access to their funds. Since I don’t work with an advisor and don’t think it’s worth the cost just to gain access to one non-core fund, I think the Vanguard fund is a reasonable alternative. For those of you who already work with an advisor, the DFA alternative is definitely worth a look.

The REIT index fund came in a close second in this category. Speaking of which…

Best Alternative Asset Class Fund

And The Winner Is: Vanguard REIT Index Fund (VGSIX) – Vanguard’s index fund line-up is a bit light on alternative asset classes. In fact, the REIT index fund is the only one I can think of. Sure, there’s the Energy Index ETF (VDE), but that’s about it. And the precious metals fund, being actively-managed, doesn’t qualify. Besides, real estate is one of those alternative asset classes that has become so mainstream it might also be considered a core asset class by some. I allocate 10% of my portfolio to REITs and some experts would argue I should allocate more like double that.

Most of the statistics in this article were collected using Morningstar. Sign up for a free Morningstar account for access to a variety of portfolio tools and a plethora of information on almost any mutual fund or ETF in existence.

* As defined by me and my own subjective judgement/criteria.

All figures and numbers accurate as of the date of publication