The Vanguard Group is the grand daddy of low-cost indexed based mutual fund investing. Started in 1975 by Jack Bogle, he understood over 80% of actively managed funds did not beat the market’s indices. His mantra, is you aren’t best to beat the market, you should become the market, and focus on low cost fees. The review of The Vanguard Group has been updated for 2013.
In the same spirit of shedding further insight on the different investment options available to consumers, today, I wanted to share with you my experiences with Vanguard’s investment services. Personally, I have been a Vanguard account holder since 1999. Overall, I have found Vanguard offers a wide selection of mutual funds and ETFs at a low cost, but their web site to be somewhat outdated and clunky.
Account Options Offered At Vanguard
Currently, Vanguard offers the following account options. Beside each type of account, I’ve included a brief summary of my experiences, where applicable.
- 401(k) rollovers to a Vanguard IRA – This type of account enables you to transfer your 401(k) retirement account at your previous employer and convert it to a traditional IRA with Vanguard. I completed this process in with my wife’s 403(b) with a former, and the process was executed without any failures or delays. And, better yet, there were no additional penalties/fees incurred by the process from Vanguard.
- Annuities – Vanguard offers both fixed income and variable annuities. While I don’t personally have one of these, I understand Vanguard has some of the lowest rates in the industry for annuities. This is mostly because they don’t have full-time sales people selling their product and pass the discount onto you.
- Roth IRAs and Traditional IRAs – Vanguard gives investors the option of opening either a Traditional (pre-tax contributions) or Roth (post-tax contributions) IRA. I have been using a Roth IRA from Vanguard for 3 years now, and I have found it a very effective investment vehicle with their low cost mutual funds.
- Individual (taxable) Accounts – Lastly, Vanguard allows you to save money in taxable accounts in either stocks, bonds, CDs, or mutual funds.
Investment Types Offered
The Vanguard Group offers a very comprehensive array of investment options, regardless of the type of account you choose to open. This review focuses only on Vanguard’s “bread-and-butter” – mutual funds and ETFs.
Vanguard Mutual Funds
- 121 total mutual funds – including money market, international, balanced, bond, REIT, and stock mutual funds.
- Vanguard offers both actively (stock picking) and passively (tracking an index) managed mutual funds.
- Offers lower fee “Admiral Shares” mutual fund options. These shares generally require a balance in the mutual fund of at least $10,000. However, the expense ratio for these Admiral Shares is generally 30-50% lower than that of the normal mutual fund shares.
Vanguard ETFs
- In addition to mutual funds, Vanguard has also become a major player in the ETF markets, currently offering 52 different ETFs in the majority of the same areas that they offer mutual funds.
- Generally, ETFs have expense ratios ~0.1% lower than the same asset class of mutual fund. While this is not a huge difference, it can add up over the years with larger account balances.
In most cases, especially if you have complete control over your investment account, you would want to choose the Vanguard ETFs over their mutual funds. Not only are most cheaper, but typically are more tax efficient.
Trading Fees and Commissions
Vanguard charges no commission for trading their mutual funds and ETFs. Purchasing stocks and non Vanguard ETFs through Vanguard can be expensive. This isn’t surprising since their focus is on low cost mutual funds.
Stock and ETF Fee Schedule
| Amount | Stocks and ETFs |
|---|---|
| Less than $50,000 | $7 for the first 25 trades $20 for subsequent trades |
| $50,000–$500,000 | All trades: $7 |
| $500,000–$ 1 million | All trades: $2 |
| $1 million plus | Free for first 25 trades $2 for subsequent trades |
Unless you have a somewhat large account with them, Vanguard isn’t a great place to trade stocks. You are best to use other discount brokerages. Vanguard’s service is lacking features when comparing to other discount stock brokers. Based upon experience though, if you are wanting to use Vanguard you are only interested in purchasing Vanguard only mutual funds and ETFs.
Minimum Balances and Initial Deposit
Generally, the minimum investment amount for Vanguard mutual funds is $3,000 which is somewhat steep for the first time investor. However, for Vanguard ETFs, the minimum is only 1 share and might be best suited for beginning investors. Vanguard also offers admiral shares which have even lower in annual fees. To qualify:
- Invest $10,000 or more in most Vanguard index funds that offer Admiral Shares.
- Invest $50,000 or more in Vanguard actively managed funds that offer Admiral Shares.
Vanguard recently lowered the dollar requirements and is great news for investors.
Mutual Fund and ETF Screener
Find the best Vanguard fund or ETF
(Click To Enlarge)
Once you find the right Vanguard fund for you, you can invest directly. You can also compare the various funds to find out which performed better. It’s a useful tool since Vanguard has over 100 ETFs and mutual funds.
Customer Service
Overall, the ease of use of the online Vanguard system, and corresponding customer service has always been very effective and straight-forward. Whenever I am unable to figure out something online, it is always easy to get a real, live person on the phone who is knowledgeable and can assist.
Vanguard Portfolio Watch
Recommended asset allocation
(Click To Enlarge)
Unfortunately it’s nowhere near as powerful as Jemstep, and does not support external accounts into asset allocation consideration.This is another example of the Vanguard only centric view their service has. Jemstep presents this information in a much easier understand format, but again that is a paid service while this is included with your Vanguard account.
Summary
Vanguard is great if you use their funds and ETFs. When you venture outside of this realm, their service is ok at best. If you ever decide to buy individual stocks, you are best to find another stock broker for that purpose. Vanguard’s research tools are almost nonexistent. Unless you have a significant amount invested with them, it may not make sense to use their service for the lower trading fees.
It is assumed you go for Vanguard only for their low cost indexed mutual funds and ETFs. Though they are no longer have exclusivity in this area. Most mutual fund houses offer similar, and in some cases lower annual fees when compared to Vanguard. Many of the brokers offer commission free ETFs, further lowering your transaction costs to match Vanguard.
I recommend using Vanguard for your retirement account if possible (there are many poor alternatives unfortunately), or if you prefer to use only Vanguard funds for your investing. Firms like Fidelity, and TD Ameritrade offer much more comprehensive services, if you are looking for a one stop brokerage firm.
Readers: How would you rate your experience with Vanguard?
Rating: 3.5 out of 5
You mentioned the vanguard admiral shares, with a relatively low $10k investment (it used to be limited to 100k).. but you didn’t mention the fees on that, which are greater than 50% less.. For example, the Vanguard 500 Index Fund Admiral Shares has a fee of 0.07% vs 0.18% for normal shares. Fidelity has a similar large investor fund with 0.07% fee, but requires 100k.
They also have an ETF version with a 0.06% fee, but you’ll have to pay broker commission both buying and selling if you trade somewhere else. However, Vanguard has commission free trades for Vanguard ETFs, if you use there brokerage services. I was just looking into that myself… I’m wondering why anyone would buy the regular mutual fund shares when there is the ETF option with lower fees… Or is there some other disadvantage that I’m not considering?
Oh, there is a $20 annual brokerage fee if you have less than $50k total in your Vanguard Accounts.
Hi David,
Thanks for the clarification of fees.
Regarding mutual fund vs ETF (specifically with Vanguard funds at Vanguard since neither has a trading fee with them), it really comes down the the bid/ask spread is the major issue. Even then with ETFs like Vanguard’s S&P 500 that’s traded frequently it’s a very small difference. Right now I show the spread is $0.02 with VOO.
http://finance.yahoo.com/q?s=voo&ql=1
ETFs that aren’t traded as much this can be a bigger factor.
The other I’ve seen discussed is tax advantages, though I’m not sure really what kind of advantage either would have since they are about as efficient as possible.
The biggest issue with any of them is the tracking error. I’ve created a graph on Morningstar’s web site comparing the differences in said mutual funds and ETFs:
http://rij.cc/eQnqNG
- Vanguard 500 Index Admiral $11,347.30
- Vanguard S&P 500 ETF $10,901.96
- Fidelity Spartan 500 Index Inv $11,266.03
- S&P 500 $11,367.16
I showed the past ten years what would $10k be worth today (includes dividends). Granted this graph is somewhat misleading since Vanguard’s ETF just started in 2009. If you do one year Vanguard’s ETF and mutual fund are almost the same.
Though if you compared the three funds compared to what the S&P would be worth, the Vanguard 500 Index Admiral is slightly better.
For most people just starting out it looks like Vanguard’s ETF is a better deal when using Vanguard to make the trade.
Hmm, so now a follow up question. Is it a good idea to move money I have from similar s&p 500 index fund (with 0.3% fee) to this fund with 80% less fees? The challenge is that it’s had about 10% gain since I bought it, so I’ll have some capital gains.. While capital gains taxes may be higher in the future, I could lose by not have as much to invest now.. I guess it depends on how the market performs in the future..
David, you should be able to transfer the shares without selling them. Give the Vanguard brokerage services a call.
Robert, you are correct, but I think David is more referring to getting the lower annual fee with Vanguard’s funds.
Whoops, you’re right. My bad.
Hmm sounds like a lot of variables involved with this one. I see:
- Amount invested
- How long you plan on keeping it invested in the S&P 500
- Is it long term or short term capital gains
The primary question is how long do you plan on keeping it? The longer you own it, the more it will drift from the S&P 500 because of the said fees. The tax rates, while more than likely will be higher than current, is an unknown.
I wouldn’t consider the future market valuation since that’s constant no matter which fund you own.
Well, i disagree. Future market valuation makes a big difference… If the market goes way up, then staying where I am makes the best sense. (the fee is only a tiny percentage.. and what I would be paying in taxes this year is earning returns) If the market is flat, then the fee takes away all the returns.. and it’d have been better to pay gains now, and have less fees. Of course we all hope the market goes way up in the long run…
The amount invested should not make a difference, but it’s enough that I’m worrying about a 0.3% fee. I plan on holding it a long time.
Oh I see what you are getting at, yes from the perspective of paying taxes so you can transfer to another account. Maybe the best way to do it is sell shares when forced to rebalance your S&P 500 allocation?
If you believe in Shiller’s PE10, then in the next 10 years it’s expected we’ll have another round of poor returns. Though that indicator has been show to be far from perfect.
http://www.multpl.com/
@ David – Agree with Inv. Junkie. It’s a fairly difficult question to know whether now is the correct time to transfer from your higher cost fund to one with Vanguard.
Even though I am not a professional money advisor, I would say that I would personally move my fund due to the fact that I would prefer to have all of my funds in one place. And, since Vanguard offers so many low cost mutual funds, I would know that there would be other funds that I could find useful in the future.
$7 a trade is pretty low. Yes, you can find brokerages with lower trading fees, you have to wonder if they’re not making hidden money on the bid/ask etc. and there’s a lot to say for consolidating everything with Vanguard; especially for those companies that you want to buy and hold for a long time.
If you’re self employed, Vanguard makes it very easy to set up a Simple or SEP as well. I haven’t looked into an individual 401k account, but they probably do that too.
Vanguard does offer an individual 401k account.
https://personal.vanguard.com/us/whatweoffer/smallbusiness/individual401k
I don’t have a Simple, SEP or individual 401k account with them but more than likely this year or next. I like their fee structure.
With regards to Vanguard and stock trading, I would say that they are really best suited to only own their funds and ETFs. IMHO, other mutual funds and stocks you are best opening an account somewhere else (since it really isn’t their focus). If you have less than $50k, it’s possible you’ll pay $20 a trade. Ouch!
At least for me, consolidating into one vendor doesn’t do anything for me. Using products like Quicken and a spreadsheet it’s not that hard to determine things like proper asset allocation.
One could argue that if you have less than $50k in diversified funds, that you shouldn’t be buying individual stocks.
That said, if you are going to be buying and selling frequently, or doing complex trades such as options or shorts, then yes, Scottrade, Tradeking, or other would probably be better.
@ Robert – That’s actually a very intriguing question about the bid-ask spread and how it varies between “well-established” investment houses and deep-discount brokerages. I think I’ll put that on my list of things to research and post on!
I have been a Vanguard customer since the eighties! I am a big fan, however there are instances I wish they had a little more variety. I wish some of my prior employers used Vanguard as well. It would have been a little easier when I left.
@ Krantcents – I have wished the same thing as well about my previous employers using Vanguard. Every past employer of mine has used Fidelity for their 401k plans, though. I think they must do a lot more in marketing their product to companies than Vanguard (maybe this is why they have slightly higher fees???? haha).
I am curious – as far as more variety goes – what types of products do you wish they had?
When I compare Vanguard to Fidelity, there are more funds in many more sectors. Do you need all these choices? Do you need to take sectors and slice them still thinner? I don’t know. I think it goes against Bogle’s philosophy, that is why there aren’t more. He is probably right!
In the books I have read from which I base my investment strategy (Stocks for the Long Run, Random Walk Down Wall Street and books by Larry Swedroe), they all mention that it isn’t necessary to invest in sectors. By simply investing in the total market or in large and small cap value funds, you capture that while maintaining diversification.
I’m a huge fan; I have my IRA, 529 with Vanguard and always recommend them as an ethical, low-cost solution. Since fees and diversification are pretty much key to long-term investing, Vanguard’s got it all.
I agree with Darwin that Vanguard have an excellent 529 program for college accounts, also known as the Vanguard Nevada 529 Plan as its sponsored by Nevada – well worth checking out.
That’s great to hear that Vanguard has good 529 options! Since I don’t have any kids yet, I haven’t looked in to it, but it’s good to know that the option is there when the time arises!
Vanguard is a great company; my work used to invest our 401(k)s through them and the fees were pretty low. Since then, we’ve moved to Fidelity Investments, and they seem pretty solid as well. No complaints here!
Great to hear LifeAndMyFinances! While I do personally prefer Vanguard slightly over Fidelity, I always tell people that if you are investing with either company, you are on the right track!
I have both fidelity and vanguard. The Vanguard funds are more transparent, e.g., they provide detail of all reinvestment within the fund. The fidelity funds don’t do this at least the ones that I have in my retirement plan.
Mike
Thanks for reading our review Mike! I have experienced the same thing. Vanguard seems to make it easier to find what you are looking for.
I’m pretty new to Vanguard (been with them for less than a year) and mutual fund investing altogether. But I love my experience with my Roth IRA with them so far and intend to hopefully stay with them for a very long time. I currently just have my money in their STAR (VGSTX) fund but once it hits $3000 I plan to roll it into a different fund.
@ Ian – Nice! that’s actually exactly how I started off as well (with the STAR fund because I didn’t have the 3k needed for the regular funds). I just checked Vanguard’s website, and it is an actively managed fund in that the funds that it owns are actively managed. This can lead to higher fees. However, it’s a good place to start!
Amount Stocks and ETFs
Less than $50,000 $7 for the first 25 trades
$20 for subsequent trades
$50,000–$500,000 All trades: $7
$500,000–$ 1 million All trades: $2
$1 million plus Free for first 25 trades
$2 for subsequent trades
Regarding the sliding Vanguard brokerage fees tied to value of the account…it’s my understanding that the amounts listed must represent holdings in VANGUARD PRODUCTS in order to move trading fees. Non-Vanguard holdings don’t count. Am I wrong?
Hi Don – Yep, that’s correct. It has to be Vanguard’s proprietary products. Honestly, unless you are investing in Vanguard products, having a Vanguard account isn’t the cheapest way to trade stocks, bonds, etc in general
Agreed that if you intend trading in and out of your positions often then a Vanguard brokerage account may not be the cheapest. For investors who look to buy low-cost index funds or other investments for the longer term, perhaps rebalancing once or twice a year, its a great option to consider.
Well said Kevin. I evaluate my asset allocation levels once per month (with Vanguard), but typically only end up actually rebalancing maybe twice per year.
Just read this year-old+ thread and will add one point: Vanguard generally gets high marks as a fiduciary because it is a not-for-profit company. It’s neither privately owned (as Fidelity is) nor publicly traded on the stock market (as many mutual fund companies are). So Vanguard has to answer only to its customers–they own the funds–and not to people/shareholders who own shares of the company. That’s one reason the fees are low. The only other mutual fund company like this is TIAA-CREF. See David Swenson’s book Unconventional Success for further details.
Hi Aquinas. Thanks for your comment. We do keep these reviews updated and will be updating it in the near future to reflect updates to their service.
There are two more issues with Vanguard -
The speed and success of trading stocks or options, as they are not “market maker”, they probably have to go thro’ third party. This is even bad when spread is large!
No choice for trailing stops etc, so you have to monitor prices and due to delay in execution in falling market you tend loose capital.
Your comments please.
Jogesh,
I recommend two brokers if you want Vanguard indexes, and trading stocks and options.
from Vgd website: For mutual fund accounts – $20 fee waived for shareholders who have elected to receive statements and other important information electronically.
Brokerage accounts have a $20 fee for accts under $50K.
So if you have several Mutual Fund, ROTH, IRA accounts you will not pay a annual fee with e-statements, the only acct you will pay a fee on is the Brokerage account (if you have one).
My wife and I are looking to roll over moneys into Vanguard – but my wife read discouraging reviews by investors who complained it was hard to get their money out of vanguard in a timely matter. Wondering if anyone can offer insights into this aspect.
We are in it for the long haul – but there will come a time when we will need to remove money from vanguard.
Thanks!
Hi there,
My husband and I are in our early 30s, and trying to figure out the best option for a retirement account. My husband is a teacher, and unfortunately, the companies offered to manage his 403B through his school district are all poor options I associate with high hidden fees and poor returns. Because of this he hasn’t opened his 403B yet. Vanguard is not offered. A friend of ours who works in finance suggested we open an account with Ameritrade and invest in low cost index funds. He also suggested we open a roth IRA, rather than an IRA. I feel very naive about what the right path is to take in terms of investments, and just want a safe, non-risky option. Any suggestions?
Thank you!
Hi Liza,
Under SEC law, since we are not registered advisers, cannot give you specific investment advice. What I will say is there are differences between the two. Fidelity’s site is a good summary:
https://www.fidelity.com/retirement-ira/ira/ira-comparison
Regarding your husband’s 403b. If they do offer matching it’s an instant return on that money (ie say 3%). Even with high fees you come out ahead. Also depending upon your tax bracket can reduce your AGI decreasing the taxes you pay now. If the 403b does offer high annual maintenance fees, and high annual expenses funds with no matching it might not be as good an offer.
We have a post that lists the order of investing to be the most tax efficient.
http://investorjunkie.com/2898/tax-efficient-investing/
Do not use Vanguard! They may be cheap, but they hold your money hostage. When you look at their site and want to invest, see if you can find a link for taking your money out. If you do happen to find it, try to use it. The link does not take you to distribution form. What I’m saying is you can easily put your money in with a few clicks, but it could take weeks to get your money out. However, I got my money out of Fidelity in a few minutes with a simple phone call. I am still waiting to hear rom Vanguard.