Investing

Vanguard Mutual Funds. The Best.

Chances are shopping around for a mutual fund, you’ll come across the low-cost Vanguard funds.

Of all the funds that I’ve seen, Vanguard Index funds are one of the best to build long-term wealth, due to above average returns, coupled with the lowest expense ratios in the industry. Their fees are up to 95% less than everyone else; the average asset-weighted fund expense ratio in 2016 was 0.12%, less than one-fifth that of the 0.62% industry average* (excluding Vanguard). Because of these benefits, of all US fund providers, The Vanguard Group now has one in every five dollars in the $16 trillion mutual fund industry, according to Morningstar.

For the first 9 months of 2017, Investors plowed nearly $300 billion into Vanguard Group funds, mainly due to a ‘passive investing frenzy’. The company now manages $4.7 trillion in assets.

So why is Vanguard the best?

First, let’s look at fees, facts and figures. They dominate the market index fund, specifically passive. Annual fees usually range from 0.01% to 0.4%, with an average of 0.12%. You’ll be hard-pressed to find lower fees anywhere in the market.

Stock fund returns historically have averaged 10.5%, based on the total average annual return of the Standard & Poor’s 500 Index from 1960 through 2005. If you invested $10,000, in 40 years you have $540,000 with these returns.

Vanguard’s biggest selling point it is extremely low-cost funds. But how do they achieve these figures?

Vanguard is one of the only investor-owned mutual fund providers. Most investment companies are owned by a few executives or are publicly traded companies. With both setups, there are potential conflicts of interest.

The company is owned by its funds and its different funds are then owned by the shareholders. Thus, the shareholders are the true owners of Vanguard. However, because of this structure, there is no shareholder board. The company has no outside investors other than its shareholders.

The company applies the principle of economies of scale to its pricing structure. As the company grows and manages more assets, they can lower prices. For the company, they still receive the same amount of revenue, because more people buy their products, but are able to slash costs. As more and more use their funds, the lower they can cut prices.

Vanguard's unique ownership structure, the Vanguard funds own Vanguard
Vanguard Structure. Source, Vanguard Website

For example, from 1975 to 2016, as Vanguard’s assets under management grew from $1.8 billion to $3.6 trillion, Vanguard’s average expense ratio fell from 0.89% to 0.12%.

Another reason to buy into Vanguard’s funds: their mutual funds are the most tax efficient funds in the world – its legally dictated. Vanguard owns a very valuable patent that prevents anyone else from launching ETFs as a share class of a mutual fund. Because of this patent, valid until 2023, both ETFs and mutual funds share capital gains.

Because of this, Vanguard Mutual Funds with a corresponding ETF are just as tax efficient as the ETF itself. Simply stated, Vanguard investors pay less taxes.

I think the fact that Vanguard isn’t out to get your money, paired with the extreme tax benefits and low operating costs of the fund, Vanguard is the best provider hands down. Fidelity maybe my broker of choice, but Vanguard is my go to for index funds. If you’re a young investor looking to get started, or somebody looking to just passively grow their money, Vanguard index funds are for you. Invest 10000 now, and you could get a million dollars back by the time you retire.

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