How To Invest In Vanguard Index Funds

Investing in index funds is a great way to diversify your portfolio and reduce fees to a minimum. Vanguard index funds are a popular option: There are more than 60 Vanguard index mutual funds that track a wide variety of domestic and international stock and bond indexes. Here’s what you need to know about Vanguard index funds and how to choose the right fund for your portfolio.

What Are Vanguard Index Funds?

When you buy shares of a Vanguard index fund, your money is invested in a diversified portfolio of assets that track an underlying market index. Vanguard founder Jack Bogle invented the index fund when it launched the Vanguard 500 (VFINX) in 1976.

With over 40 years of experience, Vanguard’s funds have delivered consistent long-term returns—according to the company, 84% of its index funds have performed better than their peer-group averages over the past decade.

An index fund is a type of mutual fund that aims to match the performance of a specific market benchmark or index as closely as possible, such as the S&P 500, an equity index tracks 500 of the leading publicly held U.S. companies. Other major indexes include the Dow Jones Industrial Average (DJIA), the NASDAQ Composite Index and the Wilshire 5000 Total Market Full Cap Index.

There are indexes for nearly every market and every asset class. Vanguard index funds buy all of the stocks or bonds—or a representative sample—that are included in the index it aims to track.

There is always a level of risk involved with Vanguard index funds: Risk corresponds to the stock or bond market the index fund tracks. For example, a Vanguard index fund that tracks stocks will generally be riskier than one that tracks investment-grade bonds.

How Do Vanguard Index Funds Work?

When you invest in a Vanguard index fund, you’re investing in hundreds or even thousands of securities at once. If some securities perform poorly, the other investments held by the Vanguard index fund can help mitigate the risk, protecting your investment. Index funds provide instant diversification and low costs, without having to put in a ton of work yourself.

Vanguard index funds are professionally managed; you can buy or sell mutual funds over the phone, and you can set up automatic investments or withdrawals.

As of May 31, 2020, Vanguard offers 62 index mutual funds, including funds in the following categories:

• U.S. bond funds: Adding bonds funds to your portfolio can help balance the risks associated with any stock funds you may hold. Vanguard U.S. bond funds invest in U.S. corporate bonds, U.S. Treasurys and Treasury-backed securities.
• U.S stock funds: Vanguard U.S. stock funds invest in domestic companies, including large-cap, mid-cap and small-cap companies.
• Balanced funds: Balanced funds invest in a mix of stocks and bonds to provide a balance of income and growth. Target-date funds, a popular choice for retirement investors, are included in this group.
• International stock funds: Vanguard international stock funds invest in companies based outside of the U.S.
• International bond funds: International bond funds add diversification and invest in both government and corporate bonds issued outside the U.S.
• Sector and specialty funds: If you have a particular interest in a certain industry and are comfortable with additional volatility, you may be interested in sector and specialty funds. You can invest in specific industries, such as energy, health care and real estate.

Vanguard Index Fund Costs and Fees

Vanguard index funds can be very cost-effective investments: As of Dec. 31, 2019, Vanguard’s average mutual fund expense ratio was 0.10%. With a no-load mutual fund—meaning there are no sales fees when you buy fund shares or when you sell fund shares—you don’t have to worry about paying commissions, either.

However, you do need to have some money saved before you can start investing. According to the company, 43 of Vanguard’s index funds are available at the Admiral Shares level, meaning there is a $3,000 minimum investment requirement.

How to Choose a Vanguard Index Fund

When deciding which Vanguard index fund you’d like to buy, first consider the type of index you’d prefer your choice of fund to track. Then check out the fees and costs associated with different funds that track the same index. For more insight, check out our guide to asset allocations and model portfolios.

Pick an index

When it comes to index mutual funds, it’s important to pick the right index for your needs. There are literally hundreds to choose from. You can pick an index based on industry, company size, location or asset type.

If you’re overwhelmed by the options, consider choosing a target-date fund, balanced-fund or a broad-market index that tracks the performance of a large segment of the stock market to get started.

Check costs

Index mutual funds tend to have lower costs than other investment options, making them the right choice for long-term investing. However, there are still costs you should consider, including expense ratios and fees.

The expense ratio is how much of the fund’s assets go toward administrative and operational expenses, cutting into your returns. According to Vanguard, the average expense ratio across its index mutual funds is 73% less than industry average.

Vanguard may charge purchase and redemption fees to buy or sell shares of its funds. Many of the company’s funds are free of such fees, but a select few charge 0.25% to 1.00% for purchases and redemptions.

5 Top Vanguard Index Funds

Vanguard has over 60 index mutual funds to choose from. Which fund is best for your portfolio is dependent upon your investment strategy, comfort level with risk and your financial goals.

Let’s look at five leading Vanguard index mutual funds, all of which offer very low expense ratios and have delivered good 10-year average annual returns. All five funds can be purchased via Vanguard Admiral Shares, requiring a minimum investment of $3,000.

Vanguard 500 Index Fund (VFIAX)

• Asset Class: Domestic Stock
• Expense Ratio: 0.04%
• 10-Year Average Annual Return: 10.49%
• Purchase Fee: None

The Vanguard 500 Index Fund fund invests in 500 of the largest public companies in the United States, including Microsoft, Apple, Amazon and Facebook. It tracks the performance of the S&P 500 and invests in different industries like communication services, energy, and health care.

Vanguard Intermediate-Term Corporate Bond Index Fund (VICSX)

• Asset Class: Intermediate-term bond
• Expense Ratio: 0.07%
• 10-Year Average Annual Return: 5.09%
• Purchase Fee: 0.25%

The Vanguard Intermediate-Term Corporate Bond Index Fund invests in bonds issued by industrial, utility and financial companies with maturities between five and 10 years. It tracks the performance of the Barclays Capital U.S. 5-10 Year Corporate Bond Index.

Vanguard Growth Index Fund (VIGAX)

• Asset Class: Domestic Stock-General
• Expense Ratio: 0.05%
• 10-Year Average Annual Return: 12.37%
• Purchase Fee: None

The Vanguard Growth Index Fund invests in large U.S. companies in industries that tend to grow at a faster rate than the rest of the market, such as consumer goods and services. The fund aims to match the performance of the MSCI US Prime Market Growth Index.

Vanguard Large-Cap Index Fund (VLCAX)

• Asset Class: Domestic Stock-General
• Expense Ratio: 0.05%
• 10-Year Average Annual Return: 10.48%
• Purchase Fee: None

The Vanguard Large-Cap Index Fund gives you exposure to U.S. stocks in the top 85% of market capitalization, investing in large companies in the financial, health care, industrial, and oil and gas industries. Major companies in this fund include Johnson & Johnson, Berkshire Hathaway, Visa and Procter & Gamble. It tracks the performance of the CRSP U.S. Large Cap Index.

Vanguard Developed Markets Index Fund (VTMGX)

• Asset Class: International/Global Stock
• Expense Ratio: 0.07%
• 10-Year Average Annual Return: 2.74%
• Purchase Fee: None

The Vanguard Developed Markets Index Fund invests in a range of large, mid and small companies in markets outside of the United States, particularly in the health care and technology sectors. Major businesses within the fund include Toyota, Astrazeneca and Samsung Electronics. The fund tracks the performance of the FTSE Developed All Cap ex US Index.

How to Invest in a Vanguard Index Fund

Once you’ve decided which index mutual funds are best for you, you can open up an account in under 10 minutes.

• Decide which kind of account you will use. If you’d like to use Vanguard index funds to save for retirement, you can open a traditional IRA, Roth IRA or self-employed IRA. If you’d like to invest your money for other goals, you can also open a taxable brokerage account.
• Link your banking information. Next, link your bank information, including your checking account number and routing number. Before you can make any transactions, Vanguard will ask you to verify your account information by confirming a small deposit to the linked account. This process can take a few days to complete.
• Buy shares. Once your bank account has been verified, your account is ready and you can begin buying and trading shares. Just click on the link that says “Buy and Sell,” and enter the fund name to buy the index mutual fund you want.