Vanguard has built a business with the long-term investor in mind. Investors in its funds aren't just clients, but part owners of the company. That's why it has some of the lowest fees in the industry, as it passes profits on to its investors through lower fees on its funds.
You can buy and hold most Vanguard funds forever. A great pairing is the Vanguard Total Market Index (VTI -2.69%) and the Vanguard Total Bond Market ETF (BND 0.40%), as together they cover both major asset classes: stocks and bonds. With these two ETFs, you can build a simple 60/40 portfolio -- $60 into VTI and $40 into BND for every $100 invested. Here's why this is an ideal combination for long-term investors.
Image source: Getty Images.
The 60/40 portfolio
Investing in stocks is a great way to grow your wealth over the long term. However, stocks can be volatile. That's why most financial advisors recommend that investors further diversify their portfolio by adding some bonds into the mix.
We can see how increasing a portfolio's allocation to bonds can steadily lower the risk of having a terrible year:
|
Portfolio Allocation |
Best Annual Return |
Worst Annual Return |
Average Annual Return |
|---|---|---|---|
|
100% stocks/0% bonds |
54.2% |
-43.1% |
10.5% |
|
80% stocks/20% bonds |
45.4% |
-34.9% |
9.7% |
|
60% stocks/40% bonds |
36.7% |
-26.6% |
8.8% |
|
50% stocks/50% bonds |
32.3% |
-22.5% |
8.2% |
|
40% stocks/60% bonds |
27.9% |
-18.4% |
7.7% |
|
20% stocks/80% bonds |
29.8% |
-14.4% |
6.4% |
|
0% stocks/80% bonds |
32.6% |
-13.1% |
5% |
Data source: Vanguard. NOTE: Return calculations from 1926 through 2024.
The sweet spot has historically been the 60/40 mix. It offers an attractive return (8.8% annually) while significantly reducing volatility and risk.
Broad exposure to the U.S. stock market
The Vanguard Total Stock Market ETF is one of the simplest ways to invest in the stock market. It tracks the CRSP US Total Market Index, which measures the performance of all stocks on the major U.S. exchanges. The fund currently holds over 3,500 stocks, providing investors with broad exposure to the entire U.S. market.
It doesn't buy the same amount of every single stock. It holds more of the largest companies by market cap. Its top five holdings currently are:
- Nvidia (6.5% allocation)
- Microsoft (6.1%)
- Apple (5.6%)
- Amazon (3.5%)
- Meta Platforms (2.6%)
That allocation provides greater exposure to the largest and most dominant companies in the country.
This ETF has produced solid returns throughout its history:
|
Fund |
1-Year |
3-Year |
5-Year |
10-Year |
Since Inception (5/24/2001) |
|---|---|---|---|---|---|
|
VTI |
17.4% |
24% |
15.7% |
14.7% |
9.2% |
|
Benchmark |
17.4% |
24.1% |
15.7% |
14.7% |
9.2% |
Data source: Vanguard.
As the chart shows, the fund's returns have closely tracked those of the benchmark index it follows. That's due to its ultra-low ETF expense ratio of 0.03%. At that rate, it would only cost you about $0.02 in management fees each year for every $60 you invest in the fund.
Broad exposure to the U.S. bond market
The Vanguard Total Bond Market Fund provides investors with broad exposure to the taxable investment-grade, U.S. dollar-denominated bond market. The fund holds high-quality bonds issued by the U.S. government, corporations, and foreign entities. It excludes tax-exempt bonds (e.g., municipal bonds), inflation-protected bonds (e.g., I-Bonds and TIPS), and non-investment-grade bonds (e.g., junk bonds).
This fund currently holds nearly 11,400 bonds with varying maturities (averaging over eight years) from numerous issuers, including U.S. Treasury securities, government-backed mortgages, corporations, and foreign entities.
Bonds provide investors with several benefits. They generate fixed income from bond interest payments (BND currently has a yield of more than 4%). They also help diversify a portfolio, thereby lowering its risk profile.
However, bonds do have much lower returns compared to stocks, especially in more recent decades due to lower interest rates:
|
Fund |
1-Year |
3-Year |
5-Year |
10-Year |
Since inception (4/3/2007) |
|---|---|---|---|---|---|
|
BND |
2.9% |
4.9% |
-0.5% |
1.8% |
3.1% |
|
Benchmark |
2.9% |
5% |
-0.4% |
1.9% |
3.2% |
Data source: Vanguard.
This ETF also does an excellent job of mirroring the returns of its benchmark, thanks to its ultra-low fees (0.03% ETF expense ratio). At that rate, you'd only pay $0.01 per year in fees for every $40 invested in the fund. The low fees enable investors to keep more of the interest income generated by the bonds held by the fund.
A great pairing
These two Vanguard ETFs complement each other well, offering a balanced approach between risk and reward. The Vanguard Total Stock Market ETF provides broad exposure to the U.S. stock market, while the Vanguard Total Bond ETF offers access to high-quality U.S. dollar bonds. This combination enables investors to participate in the growth of stocks while receiving income and stability from bonds. Investing $100 in these two Vanguard ETFs is a truly set-and-forget investment strategy.
