Many investors turn to Vanguard mutual funds as a vehicle for retirement or other conservative types of investing. With a high degree of diversification, low expense ratios and many holding A+ ratings, Vanguard has become a natural choice for large groups of investors.
The S&P 500 has seen a long-term average return of about 9.8% over the last 90 years. Despite the high profile and expertise of some fund managers, most funds fail to beat this average over the long term. However, many Vanguard funds have beaten this return, and this track record has survived through booms and busts as many of its funds have existed for decades. Vanguard expense ratios also come in below industry averages — most are below 0.5% per year and a few are even below 0.1%.
So where should you get started? The following 5 Vanguard funds each represent a different type of investment, have a record of beating the S&P and charge low management fees:
Vanguard Funds to Beat the S&P 500: Large-Cap Stocks
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Vanguard U.S Growth (VWUSX)
Investors who prefer a diversified array of large-cap stocks often turn to the Vanguard U.S. Growth Fund Investor Shares (MUTF:VWUSX) fund. This mutual fund invests in domestic, mostly large-cap stocks who hold strong positions in their industry. Since its inception in 1959, VWUSX has yielded a year average return of about 10.55%.
Returns have come in even stronger over the last ten years — even accounting for the 2008 financial crisis. The ten-year average return of 11.4% beats its long-term return by almost one percentage point. Over the last year returns are up to 25.64%. And investors pay only a 0.43% management fee.
Over time, the fund’s focus has shifted heavily in favor of information technology (IT). The sector makes up 49% of holdings. Consumer discretionary makes up about 16%, while just under 12% of the fund is healthcare stocks. The share of industrial stocks has fallen to just over 7%. Financials, once a small part of the fund, now make up over 8%. All other sectors make up less than 5% of the fund’s assets.
Microsoft (NASDAQ:MSFT) has become this fund’s top holding. Except for United Health (NYSE:UNH), all of the top ten stocks are either tech or financial equities. This fund’s heavy focus on IT does make it vulnerable in the case of another tech bust. However, if investors can stomach the risk of the tech focus, VWUSX should bring long-term returns without worry.
Vanguard Funds to Beat the S&P 500: Mid-Cap Stocks
Vanguard Strategic Equity (VSEQX)
Investors looking for a focus on mid-cap stocks should look at the Vanguard Strategic Equity (MUTF:VSEQX) fund. This fund invests in both mid-cap and small-cap stocks believed to have above-average growth potential. It mitigates risk by using a computer-based process to find growth stocks that fit the risk profile of the fund. But as with most small- and mid-cap funds, VSEQX may still see a higher-than-average level of volatility.
Since its creation in 1995, VSEQX has returned an average of about 10.9% per year. Despite the volatility, returns over shorter periods of time remain close to this figure. Over ten years, average annual returns came in at about 10.45%. It earned about 13.1% over the last 12 months. These returns come at a low cost — just a 0.18% expense ratio, more than 80% below mutual fund averages.
Despite the risk profile, managers have heavily diversified this fund by sector. IT stocks make up the largest share of the fund. However, that share stands at just under 18%. Financials, industrials, consumer discretionary, and healthcare stocks also make up a substantial share of this fund. HollyFrontier (NYSE:HFC) has become its largest holding. However, more familiar names such as E*TRADE (NASDAQ:ETFC), Square (NYSE:SQ), and Best Buy (NYSE:BBY) also make the top ten list.
Vanguard lists VSEQX as a “high risk, high reward” play. While it can see huge levels of volatility in the short term, this mutual fund has produced steady, higher returns over a long-term time horizon. Investors wanting a safe way to invest in up-and-coming equities should look at this fund.
Vanguard Funds to Beat the S&P 500: Small-Cap Stocks
Vanguard Tax-Managed Small-Cap Admiral (VTMSX)
As the name suggests, the Vanguard Tax-Managed Small-Cap Admiral (MUTF:VTMSX) fund attempts to track the benchmarks for small-cap stocks while keeping tax consequences to a minimum. Vanguard recommends this fund for those in a higher income tax bracket with a long-term time horizon. However, the low expense ratio and the returns make this lucrative for all small-cap investors.
Investors pay only a 0.09% expense ratio, which stands among the lowest for any mutual fund or ETF. Despite the volatility that can come with small-caps, the fund has returned an average of almost 11.4% per year since its inception in 1999. Over the last ten years, that average annual return has reached nearly 12.2%. Much of that return came over the previous 12 months as the fund returned over 20.3%.
Because the fund only invests in small caps, the typical investor has heard of few of its holdings. Ligand Pharmaceuticals (NASDAQ:LGND) currently stands as its largest holding. About 19% of the fund is invested in industrial stocks. However, healthcare, financials, consumer discretionary, and IT each comprise over 10% of the fund’s assets.
In the small-cap space, it can be hard for investors to make invest decisions due to lack of familiarity with these companies. However, with almost 20 years of high returns, Vanguard has built a fund and a track record that should maintain both the trust and the capital of its investors.
Vanguard Funds to Beat the S&P 500: International Stocks
Vanguard International Growth Fund (VWIGX)
Mutual funds recommended to American investors tend to focus on U.S. companies. While many domestic funds perform well, most ignore the growth happening overseas. The Vanguard International Growth Fund (MUTF:VWIGX) tracks mostly non-U.S. companies with high growth potential. Since its inception in 1981, this fund has taken an aggressive approach in seeking out fast-growing companies in foreign growth markets.
VWIGX has enjoyed an average annual growth rate of just over 10.75% since its inception 37 years ago. The 2008 financial crisis took its ten-year average growth rate to about 6.2%. However, since the crisis, VWIGX has rebounded nicle. The five-year return stands at 11.6% per year. Over the last 12 months, the fund’s value increased by 19.8%. This performance comes with a management fee of just 0.45%.
Vanguard invests about 46% of this fund in European equities. However, it also invests around 22% in emerging markets. Its two largest holdings, Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY) fall into the emerging market category. Amazon (NASDAQ:AMZN) is the only American company listed among the fund’s top ten.
Investors who invest abroad should expect more volatility. This remains especially true for stocks from emerging markets. However, with the high-growth companies and countries represented in the fund and its long-term track record, long-term investors in VWIGX should continue to enjoy high returns.
Vanguard Funds to Beat the S&P 500: Sector Investing
Vanguard Healthcare Fund (VGHCX)
Investors tend to focus on tech when looking at high-performance sectors. However, of all sector-based Vanguard funds, none beat the Vanguard Healthcare Fund (MUTF:VGHCX) on long-term performance. VGHCX invests in both domestic and foreign health-care stocks.
Since the fund’s inception in 1984, the average return has come in at 16.2% per year. Ten-year growth stands at 12.9% per year. Growth has struggled recently as the fund has only returned about 2.3% over the last 12 months. An increasing focus on healthcare costs as well as pressure for drug stocks to cut prices could explain the slower growth. Still, healthcare spending remains in a growth mode.
Companies involved with biotech, medical supplies and managed care companies are among the fund’s holdings. However, the largest share of the fund — about 46% — consists of drug stocks. United Health, Bristol-Myers Squibb (NYSE:BMY), and AstraZeneca (NYSE:AZN) have become the fund’s three largest holdings.
The sector has enjoyed steady growth for decades. The share of the economy has moved higher since the beginning of Medicare in 1965. Today, it makes up almost 18% of the economy, up from 6% in 1970. And the growth will continue as baby boomers age however. Since the baby boom peaked in 1957, a large amount of this generation has not even yet hit retirement age, so look for growth in the healthcare sector for years to come.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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