The Best Vanguard ETFs of 2023Overwhelmed by Vanguard’s menu of index funds? Here’s the small handful you really need to build a well-rounded portfolio
By Chris Taylor
Investing often feels like the old tale of the tortoise and the hare. One kind of investor enjoys the fast results of the Next Big Thing, making the kind of concentrated bet that can make one look like a genius or a buffoon.
Another kind of investor prefers the slower, steadier race of diversified holdings and rock-bottom fees over a long-term time horizon. Count us in this boring camp.
For such investors, there is no better option than the offerings of Valley Forge, Pa.-based Vanguard Group. Founded by the legendary Jack Bogle, Vanguard has grown to become one of the biggest money managers in the world, overseeing more than $7 trillion in assets, with a unique corporate structure that isn’t focused on lining executive pockets.
- Best for breadth
- Best for international
- Best for bonds
- Best for growth
- Best for alternatives
- Best for taxes
- Best for sustainability
“There are a lot of good funds out there, but something that separates Vanguard from the pack is the commitment to shareholders,” says Dan Sotiroff, senior manager research analyst for Chicago-based research shop Morningstar. “Investors are co-owners of the funds, which have remained consistent on low fees. You can scarcely go wrong over the long haul with any of them.”
But which of Vanguard’s many exchange-traded funds are the best for you? We crunched numbers, consulted fund experts, and pored through offerings for the kind of scope, size, low fees and highly rated management that would make them handsome additions to any portfolio. Here is what we found.
Best for breadth
Vanguard Total Stock Market Index (VTI)
Annual fee: 0.03%
Fund size: $1.15 trillion
Top Holdings: Apple, Microsoft, Amazon
A basic building block of any portfolio is a broad-based equity index, and to that end, you can’t do better than this trillion-plus giant which offers a slice of every publicly traded company in America.
“This is a great product for a number of reasons,” says Todd Rosenbluth, head of research for data and analytics company VettaFi (formerly ETF Trends). “It’s broad, it’s extremely cheap, and you can use it as a long-term hold at the core of your portfolio.”
While it’s market cap-weighted toward the largest companies in the nation, VTI also gets you exposure to midcap and small-cap names that are “under the radar” for most investors, he says. The massive size means that this ETF isn’t going anywhere, and that trading in and out of it will be a breeze.
The result is an ownership basket of over 4,000 stocks, while charging a minuscule 0.03% in annual fund fees. Returns are remarkably consistent, with five-year returns of 11.14%, and 10-year of 12%. In short, it’s the most hassle-free and low-cost way to track the entire U.S. stock market.
Best for international
Vanguard Developed Markets Index (VEA)
Annual fee: 0.05%
Fund size: $149 billion
Top holdings: Nestle SA, Samsung Electronics, Roche Holding
As big as the American economy is, it’s only one region in the investible world. So to have true exposure to stocks around the globe—and to hedge your bets in case the U.S. economy falters—investors would be wise to own at least some international equities too.
An easy solution for that is Vanguard’s Developed Markets Index and its roster of global companies that will be very familiar to American investors. Much of its assets are in European firms, as well as other developed markets like Japan.
“These are big brand names with steady dividend payments for investors who are looking for quality,” says Tom Roseen, head of fund analysts Refinitiv Lipper Research.
It offers relatively lower volatility compared to other solid options like Vanguard’s Emerging Markets ETF, and is a better starting point for most investors. In fact it has returned roughly 6% over each of those time frames, notching high “Lipper Leaders” scores for both consistent and total returns. It also yields a very attractive 3.2%—double that of Vanguard’s U.S.-focused Total Stock Market Index, for instance.
A caveat: Foreign-focused ETFs tend to get hobbled in strong-dollar eras such as right now. That’s because when the dollar rises in value, these firms’ earnings, typically in local currencies, are worth less to U.S. investors. But that challenge, with the fact that stock prices have slumped this year around the world, could mean a timely buying opportunity for longer-term investors.
Best for bonds
Vanguard Total Bond Market Index (BND)
Annual fee: 0.03%
Fund size: $279 billion
In any classic portfolio, the portion of stocks gets its counterweight from fixed income. And for one-stop shopping to provide that diversification and ballast, you need look no further than Vanguard’s Total Bond Market offering.
Of course the asset class as a whole has faced stiff challenges in 2022, since in eras of rising interest rates, bond prices tend to decline. But for exposure to investment-grade bonds including U.S. Treasurys, as well as higher-grade corporate bonds, this fund’s breadth is unmatched, and its low cost “should allow it to outperform its category peers over the long run,” according to Morningstar analysts.
“It’s cheap…it’s extremely liquid, and it serves as the perfect core for the fixed-income portion of your portfolio,” says VettaFi’s Rosenbluth.
Vanguard Total Bond Market Index even produces noticeably robust returns for fixed income, such as 7.7% in 2020 and 8.7% in 2019. Meanwhile the payout is increasingly appealing to income-oriented investors—with a yield at 4% and rising, according to Vanguard, compared to a year ago at this time at 1.34%. Investors need not worry about quality, with almost 70% of its holdings rated triple A.
Best for growth
Vanguard S&P 500 Growth Index (VOOG)
Annual fee: 0.1%
Fund size: $7.15 billion
Top Holdings: Apple, Microsoft, Amazon
Investors have long debated the merits of growth vs. value, but in recent years it hasn’t been much of a competition. Growth has far outpaced bargain-oriented value, by around 500% since 1995, according to analysis from brokerage Charles Schwab.
As a result there are multiple growth-oriented Vanguard ETFs that garner the highest ratings from Refinitiv Lipper. But one that stands out is S&P 500 Growth, which has churned out an amazingly consistent 13% average annual returns over the last five and 10 years.
Its brethren like midcap Growth (VOT), Russell 1000 Growth (VONG) and Mega Cap Growth (MGK) have also fared well, but Vanguard S&P 500 Growth Index stands out for sidestepping the worst losses of the recent downturn. Its five-year marks for preservation of capital, awarded by Refinitiv Lipper, place it a notch higher.
“Growth always has a bit of an advantage, [and] people pay a premium for that,” says Roseen. “A growth orientation may not pay out dividends like value does, but those companies plow that money back into their firms—and that can lead to a very handsome return.”
Best for alternatives
Vanguard Real Estate Index (VNQ)
Annual fee: 0.12%
Fund size: $63 billion
Top Holdings: Prologis, American Tower, Equinix
Old-fashioned portfolios tended to follow the so-called 60/40 rule, a simple split of 60% stocks and 40% bonds. These days investors look for a more sophisticated breakdown, including assets uncorrelated to either stock or bond markets that improve diversification and smooth out total returns.
One such type of asset is real estate. While investors may have exposure via their own home or rental properties, they can also achieve it through Vanguard Real Estate Index—while avoiding classic real estate hassles like dealing with plumbing issues at 2 a.m.
“It’s a great way of investing in the real-estate market without buying real estate,” says Lawrence Pon, a financial planner in Redwood City, Calif. “Many times I tell clients to buy VNQ instead of buying a rental property. VNQ paid a dividend of 3.5% in 2021—with no tenant hassles or property repairs.”
While not totally detached from the broader economy, real estate does tend to have its own cycles. But Vanguard Real Estate Index has produced notably steady three-year returns of 7.05%, five-year of 6.1% and 10-year of 8.5%, with a reach that Morningstar calls “difficult to beat.” Since it’s a specialty focus, the expense ratio is higher than other Vanguard ETFs at 0.12%, but still compares favorably to the category average of 0.37%.
“Many investors think of real estate as its own asset class—a defensive sector with dividend characteristics—and want higher exposure to it,” says VettaFi’s Rosenbluth. “This is a great way to be overweight in the sector, with the largest of real estate ETFs around.”
Best for taxes
Vanguard Tax-Exempt Bond Index (VTEB)
Annual fee: 0.05%
Fund size: $27 billion
In an era of modest returns, the last thing any investor wants is taxes eating away your gains. One simple way to keep Uncle Sam at bay: Vanguard’s municipal bond ETF with its ‘gold’ analyst rating from Morningstar, which secures you investment-grade bonds with tax-free yield.
“What’s unique about this is you don’t see a lot of indexes tracking municipal bonds, because it’s such a fragmented market” with state and local issuers scattered around the country, says Morningstar’s Sotiroff. “Historically it’s very difficult to create a fund in that space, but Vanguard has the infrastructure to do this well.”
During 2022, a difficult year for most bond funds, Vanguard Tax-Exempt Bond’s losses were more modest than most, down a shade over 8% for the year. Looking longer term, its multi-year run of positive returns—its best was 2019, growing at a 7.5% clip—along with its supreme diversification and low turnover makes it a useful chess piece for any portfolio.
In particular, the fund makes sense for investors in higher tax brackets, who are looking for capital preservation in their taxable brokerage accounts.
Best for sustainability
Vanguard ESG U.S. Stock (ESGV)
Annual fee: 0.09%
Fund size: $5.7 billion
Top Holdings: Apple, Microsoft, Amazon
If there is one theme that has the potential to dominate the market in coming years, it is investing according to environmental, social and governance, or ESG, principles. As of 2020, one 1 in 3 professionally managed dollars in the U.S. was sustainably invested, according to the Forum for Sustainable and Responsible Investment.
The challenge is how to quantify and harness that tilt, and that is where this ETF comes in. “The fund starts with the entire U.S. stock market, and then removes certain sets like fossil fuels, tobacco, vices like adult entertainment and so on,” says Morningstar’s Sotiroff. “What’s unique about this fund is that it doesn’t take on a lot of added risk. It doesn’t deviate from the broader market, and in fact tracks it very closely.”
In other words you are investing for good, without having to pay a penalty for it, which appeals to Gen Y and Z in particular, who are proving very ESG-focused in their investment choices. While a relatively new offering, Vanguard ESG U.S. Stock boasts three-year average annual returns of 6.9%, and an above-average Morningstar analyst rating of silver.
The fees are higher than other Vanguard offerings—compared to a total-market option like Vanguard Total Stock Market Index, for instance—but compare very favorably to ESG funds from competing money managers. Says Sotiroff: “If you’re an investor into sustainability, and you are looking for a core portfolio holding, this is a great candidate.”
Vanguard Group offers a total of 82 ETFs across different asset classes and domestic, global and international spaces. We started by looking for funds that had a proven track record, above-average returns and below-average fees. Beyond that, we looked for funds that had broad-based portfolios that produced consistently for investors over time. We also consulted with fund experts at Morningstar and Refinitiv Lipper, as well as financial planners and advisors, to come up with highly-ranked options that are appropriate for individual investors. Data such as returns, expense ratios, and Lipper Leader ratings were for the period ending Jan. 25, 2023.
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