Investing doesn't have to be stressful or even time-consuming. Academic studies have shown that one of the best ways to grow your money over time is to use a dollar-cost averaging strategy and buy low-cost, passively managed exchange-traded funds (ETFs) that track broad swaths of the market.
Within the diverse universe of passively managed ETFs, the Vanguard family has consistently been among the best performers, as well as among the most cost-efficient, in the space. The reason is that Vanguard is owned by its shareholders, allowing it to charge industry-low fees.
A full portfolio can be created with Vanguard products that can achieve returns comparable (and probably superior) to the benchmark S&P 500 index. Here's a nuts and bolts overview of three Vanguard funds that should cover the investing needs of most non-professionals looking to grow their money in a hassle-free and tax-efficient manner over the long term.
Image Source: Getty Images.
Vanguard 500 Index Fund
The S&P 500 is a widely used benchmark for the U.S. stock market. The Vanguard 500 Index Fund (VOO 1.00%) is a low-cost indexed ETF that tracks this benchmark.
The fund has a yield of 1.48% and charges only 0.03% in fees, compared to the average of 0.76% for similar funds. Its performance matches the index exactly, with a beta of 1 and an alpha of 0. If you had invested $10,000 in the fund when it started in 2010, you would have $54,220 today (assuming dividends were reinvested and before taxes).
VOO Total Return Level data by YCharts.
Vanguard Growth Index Fund
The CRSP U.S. Large Cap Growth Index tracks the performance of 85% of the largest American companies. The Vanguard Growth Index Fund (VUG 1.82%) tracks this U.S. large-cap benchmark.
It has a rock-bottom expense ratio of 0.04%, compared to the category average of 0.95%, and comes with a yield of 0.56%. However, the VUG isn't a replica of its benchmark index, as shown by its beta of 1.18 and alpha of -2.6.
Relative to the S&P 500, this Vanguard large-cap growth fund has provided substantially superior returns since its inception in 2004. A $10,000 investment in this fund at its debut would be worth $74,690 today. By comparison, the same amount invested in a fund tracking the S&P 500 would be worth $59,540.
Vanguard Total Bond Market Index Fund
While stocks are exceptional growth vehicles, they're also inherently risky, and marketwide downturns are common in the modern market. As a result, it's generally a good idea to have a portion of your capital invested in lower-risk assets, like bonds.
Although there are hundreds of bond funds to choose from, the Vanguard Total Bond Market Index Fund (BND 0.23%) should serve the investing needs of most individuals who aren't obsessing over their portfolios on a daily or weekly basis.
The BND tracks the Bloomberg U.S. Aggregate Float Adjusted Index, which measures the performance of a wide variety of public, investment-grade, taxable, and U.S.-based fixed-income securities. It sports an alpha of 0, a beta of 1, an expense ratio of 0.03%, and a yield of 3.08%.
Over the past 10 years, the BND has delivered positive total returns of 16.3%. It has markedly outperformed short-term treasuries, as well (total 10-year return of 9.13%).
