Exchange-traded funds have taken the investing world by storm, with their flexibility in allowing investors to buy and sell during the trading day appealing to traders and long-term investors alike. Vanguard Group made its reputation by offering traditional mutual funds to its customers, but it has also developed into a driving force in the ETF market, quickly climbing to become the No. 3 provider and using its emphasis on low costs to challenge the competition.

Vanguard offers more than 50 ETFs, and it entices would-be brokerage customers by offering those funds on a commission-free basis if you buy them from a Vanguard brokerage account. But with so many ETFs on offer, Vanguard's lineup is intimidating to many investors who aren't sure how to pick from such a wide selection.

Source: Vanguard.

To simplify things, we dug deep into the Vanguard offerings to find the company's best exchange-traded funds. Your specific investment needs might make other funds more appropriate for your personal situation, but from the standpoint of cost, performance, and diversification, these ETFs deserve special notice.

Two smart ways to get into the U.S. market
Vanguard offers a couple dozen ETFs tailored to U.S. stock investors, with a variety of different funds that break the market up by industry, company size, and relative valuation. For broad-based market coverage, it's hard to beat the Vanguard Total Stock Market ETF (NYSEMKT:VTI), which charges just $0.50 in annual fees for every $1,000 you invest in the fund. The ETF has exposure to every part of the domestic stock market, from large to small, value to growth, across every sector of the economy. Gains of more than 8% annually over the past 10 years match up well against the broader market, showing just how successful stocks have been even considering the painful bear market in 2008 and early 2009.

For those who want a bit more income from their ETFs, Vanguard has two different funds focused on dividend-paying stocks. Some investors like the higher current yields from the Vanguard High Dividend Yield ETF (NYSEMKT:VYM), but those with a longer time horizon might prefer the Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) and its focus on stocks that have consistently grown their dividend payouts over time. With a five-year average annual return of 14%, Vanguard Dividend Appreciation doesn't quite match up to the 16% annual gain from its higher-yielding ETF peer. Over longer period of time, though, the stocks in Vanguard Dividend Appreciation have tended to produce amazingly strong returns that should give the ETF an edge. Moreover, with annual costs of just $1 per $1,000 invested, the dividend ETF comes at a nice price.

Source: Vanguard.

Take your investing global
International investing is often more expensive than buying U.S. stocks, but Vanguard's ETF offerings are quite reasonable. Vanguard offers the pan-global Vanguard Total World Stock ETF (NYSEMKT:VT), which includes stocks from across the globe, but its 0.15% annual expense ratio is on the pricey side for the company.

Instead, the Vanguard FTSE Developed Markets ETF (NYSEMKT:VEA) provides exposure to the developed economic powers of Europe and Asia at an annual cost of just $0.90 per $1,000 invested. For emerging-market exposure, you can supplement that holding with Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO), the largest emerging-market ETF in the industry. Neither ETF has given investors particularly strong performance over the past five years, with emerging markets in particular lagging the growth in the U.S. stock market. Still, if the strength in the U.S. dollar eventually gives way to more normal currency-market dynamics, international stocks could ascend again.

Two other ways to get some income into your ETF portfolio

Source: Vanguard.

On the fixed-income side, Vanguard has its Total Bond Market ETF (NASDAQ:BND), which charges just 0.08% in annual fees for a wide range of bonds that includes everything from high-quality Treasury bonds to riskier but higher-yielding investment-grade corporate debt. The ETF's performance can't stand up to the stock market, but an average return of 4.3% over the past five years is not terrible. Still, the fund doesn't include everything, leaving out municipal bonds, high-yield corporate junk bonds, and inflation-protected securities -- omissions that have held back its performance compared to some other bond ETFs.

Investors who like real estate investment trusts can turn to the Vanguard REIT ETF (NYSEMKT:VNQ). With an annual average return of 17% over the past five years, the REIT ETF has been on fire. While those gains likely aren't sustainable, annual expenses of just $1 per $1,000 invested are hard to match elsewhere.

Vanguard has used its low-cost reputation to become a powerhouse in the ETF space. It's not the biggest provider, but Vanguard is gaining ground on its rivals as it demonstrates how low costs can make a big difference in your investing success.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.