7 Best Vanguard Funds for Retirement

Vanguard offers both actively and passively managed funds.

As one of the largest mutual fund providers in the U.S., Vanguard offers an array of funds that tend to be low-cost index products. The firm also offers many actively managed funds. Other brokers offer similar funds, but few can claim the track record Vanguard has earned. “Vanguard, a premier mutual fund company known for their low cost, actually has some very fine funds,” says Steve Azoury, financial advisor and founder of Azoury Financial in Troy, Michigan. Vanguard’s low-cost approach has led to significant inflows of assets into its funds in recent years. Choosing the right mix of Vanguard funds to include in a retirement portfolio is no easy task given the wide variety. If you’re wondering which options are superior, here are seven of the best Vanguard funds for retirement, according to investment professionals.

Vanguard Developed Markets Index Fund (ticker: VTMGX)

“A 401(k) plan, or an IRA, needs diversification in its investment selection,” says Jeff Powell, chief investment officer at Polaris Wealth Advisory Group. That includes exposure to large-, mid- and small-cap growth and value companies as well as government and corporate bond offerings, he says, and retirement portfolios should also contain international holdings. “These should be developed nations as well as emerging markets,” Powell says. For developed markets exposure, he recommends VTMGX. The fund is a low-cost, tax-efficient option that invests primarily in Europe, Asia and Australia. Given its international nature, the fund is exposed to currency risk and offers a hedge against declines in the value of the U.S. dollar.

Vanguard Core Bond Fund (VCOBX)

For fixed-income exposure, Jeff DeMaso, director of research with Adviser Investments and editor of The Independent Adviser for Vanguard Investors newsletter, points to this intermediate-term bond fund. This actively managed fund invests at least 80% of its assets in bonds, which include fixed-income securities such as corporate bonds, U.S. Treasury obligations and asset-backed, mortgage-backed and mortgage-related securities. One thing to note: You should keep interest rate risk in mind. “Like other bond funds, the fund is subject to interest rate risk; increases in interest rates may cause the price of the bonds in the portfolio to decrease, reducing the fund’s (net asset value),” according to Vanguard.

Vanguard Dividend Growth Fund (VDIGX)

Another actively managed fund that DeMaso likes is the Vanguard Dividend Growth Fund, designed to provide income through investments in dividend-focused companies across all industries. The fund concentrates on high-quality companies that can grow dividends over time, such as Johnson & Johnson (JNJ) and McDonald’s Corp. (MCD). Its portfolio consists primarily of large-cap, dividend-paying U.S. stocks, with a small number of foreign stocks also in the mix. VDIGX, which has a value tilt, favors large, defensive stocks that tend to hold up during equity market downturns but may lag during uptrends. The fund “has delivered market-like returns with less risk since Donald Kilbride started managing the fund,” DeMaso says. “That might appeal to retirees who don’t want to (or) can’t handle the full brunt of a bear market but need to maintain some stock exposure.”

Vanguard 500 Index Fund (VFINX)

This fund seeks to replicate the performance of the S&P 500, which covers about 80% of the investable market capitalization in the U.S. equity market. Unsurprisingly, top holdings include tech giants Apple (AAPL) and Microsoft Corp. (MSFT). “VFINX is likely their signature fund known for index investing,” Azoury says. “It’s a nice addition to any portfolio as it has very low fees, which means more money for the consumer.” Of course, a key risk of the fund is that it’s tied to the fortunes of the U.S. stock market, which can gyrate for any number of reasons. That risk is one thing when you have years until retirement, but it’s another if the retirement date is right around the corner.

Vanguard U.S. Growth Fund (VWUSX)

This growth fund is Azoury’s favorite of Vanguard’s offerings. “It has performed well consistently,” he says. “As (with) all Vanguard funds, the fees are low, and this growth fund has been terrific.” The fund invests mainly in large-cap stocks of U.S. companies considered to have above-average earnings growth potential and reasonable stock prices in comparison with expected earnings. At least 80% of its assets are invested in securities issued by U.S. companies., such as Amazon.com (AMZN) and Tesla (TSLA). One word of caution for growth stocks is that they tend to underperform in times of rising inflation, or even when inflation expectations are high. Inflation expectations weigh on growth stocks’ valuations because if inflation manifests, it eats into future earnings. That being said, with the long time horizons associated with retirement investing, volatility tends to smooth out in the long run.

Vanguard Explorer Fund (VEXPX)

This is another fund Azoury says is “good for long-term growth during your accumulation stage and into retirement.” The fund, which was established in 1967, looks for small and midsize companies with growth potential. “It is well managed and it sticks to its objective of investing in companies considered to have superior growth potential,” Azoury says. “The results have been great.” The fund has hundreds of holdings spread over all 11 sectors, which reduces risk of too much exposure from any one stock or sector. Vanguard notes that because of VEXPX’s focus on smaller companies, “the fund tends to be more unpredictable than stock funds that focus on larger companies.”

Vanguard Extended Market Index Fund (VEXMX)

This last Vanguard fund can act as a complement to large-cap stocks in the S&P 500. Its portfolio consists primarily of mid-cap and small-cap companies not captured in the index and accounts for about one-fourth of the market cap of the entire U.S. stock market. Its top holdings include tech-savvy companies such as Square (SQ), Uber Technologies (UBER), Zoom Video Communications (ZM), Snap (SNAP) and Twilio (TWLO). This growth fund “pushes the envelope and invests in the new economy,” Azoury says. Keep in mind that the small- to mid-cap companies the fund tracks tend to be more volatile than the large-cap companies that make up the S&P 500.

Seven of the best Vanguard funds for retirement:

— Vanguard Developed Markets Index Fund (VTMGX)

— Vanguard Core Bond Fund (VCOBX)

— Vanguard Dividend Growth Fund (VDIGX)

— Vanguard 500 Index Fund (VFINX)

— Vanguard U.S. Growth Fund (VWUSX)

— Vanguard Explorer Fund (VEXPX)

— Vanguard Extended Market Index Fund (VEXMX)

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