Why Vanguard ETFs Belong In Your Investment Portfolio
As active mutual funds continue to underperform the market, the interest in passive investing has continued to soar.
One passive investment asset that has gained from this popularity is the exchange-traded fund (ETF). In the US alone, investments in ETFs grew from $530 billion in 2008 to over $4 trillion by May 2020.
One of the companies leading the rise of popularity in ETFs is Vanguard. Today, Vanguard ETFs are a mainstay in the investment industry, and many new investors would be wise to start their journey by having a clear understanding of what is the best Vanguard ETF they can invest in.
In this article, we’ll consider the advantages of Vanguard ETFs and highlight some of the best Vanguard ETFs you should consider owning.
The advantages of Vanguard ETFs
John Bogle founded Vanguard in 1975 as an alternative to the active mutual funds that were underperforming the market while charging high fees that further reduced customers’ returns.
Since then, Vanguard has become a well-known and respected brand in the passive investing space. Here are some reasons for their popularity in the ETFs industry.
Lower expense ratio
The expense ratio of an average Vanguard ETF is 83% lower than the industry average.
The expense ratio is a portion of your total investment that the fund manager deducts to cater for administrative expenses.
Lower expense ratios means you get to keep more of your money. And the more of your money you can keep, the more it can work for you.
Because of their low expense ratio, Vanguard ETFs are able to earn returns higher than the industry average.
“In fact, over the last decade 178 out of 199 Vanguard funds — nearly 90% — earned higher returns than their peer-group average during the same time frame,” according to Dayana Yochim, a former Forbes Contributor.
Building-block funds and diversification
Building-block funds are funds that serve as a piece in a whole. They are designed to fit together in a portfolio.
Vanguard ETFs act as potent building-block funds that you can combine together in a broadly diversified portfolio.
This means that you can, in theory, create a broadly diversified portfolio with Vanguard ETFs alone.
Vanguard has ETFs that focus on stocks, bonds and REITs, providing diversification by asset class. They also have ETFs that focus on the US market, developed market ex-US, and emerging markets, providing diversification by market.
Furthermore, they have ETFs that focus on high-cap, middle-cap, and low-cap companies, providing diversification by market-cap.
Finally, Vanguard also provides ETFs that focus on different industries, including consumer supplies, technology, industrials, and energy, etc., providing diversification by industry.
This broad diversification is crucial to the long-term success of every investor.
The best way to use Vanguard ETFs is to include them as building blocks in a broadly diversified portfolio.
Sarwa is a digital financial advisor that helps you create such a diversified portfolio. With Sarwa, you will be able to invest in a diversified portfolio created based on the Modern Portfolio Theory that matches your unique risk tolerance, financial goals and time horizon.