Jeffrey DeMaso, CFA
Jeffrey DeMaso, CFA, editor of Independent Vanguard Adviser, Brooklyn, New York. He previously was director of research for Adviser Investments, which has since rebranded as RWA Wealth Partners. IndependentVanguardAdviser.com
You probably know the Vanguard Group for its lineup of index funds that passively track major indices like the S&P 500…or its target-date retirement funds, the default investment option in many 401(k) plans. But here’s a not well-known secret: Vanguard offers more than 75 actively managed mutual funds holding more than $1.8 trillion, or about 20% of the firm’s total assets under management.
Vanguard’s overshadowed actively managed funds have two advantages. First, the company doesn’t try to manage every fund in-house. Instead, it taps some of the best outside investment firms in the world including Baillie Gifford, PRIMECAP and Wellington to run its funds. Many of these funds are top performers in their categories. Second, Vanguard leverages its size and scale to keep fees far lower than other actively managed competitors on Wall Street.
Bottom Line Personal asked Jeffrey DeMaso, CFA, who publishes an independent newsletter focused on Vanguard funds, how he selects actively managed funds and which ones he likes best now…
For hands-off investors with plain-vanilla needs, Vanguard’s index funds may be all you need. But you might consider its actively managed funds if you are willing to endure more volatility to try to beat the performance of the broad stock and bond market…and if you seek funds that target particular market sectors or use unique strategies such as dividend-growth investing or junk-bond investing.
Two caveats to using active funds at Vanguard…
Here are my favorite Vanguard mutual funds now…
Vanguard PRIMECAP Fund (VPMCX). Since its 1984 launch, the fund has trounced the performance of the S&P 500 index by an average of two percentage points annually. It is managed by PRIMECAP Management, a top private investment firm in Pasadena, California. The managers hunt for large-cap stocks with high rates of revenue and profit growth, but they are cautious not to overpay for high-fliers. Top holdings include biotech firm Amgen and KLA Corp., an electronics manufacturer for the semiconductor industry. The fund reopened to new investors last year after having been closed since 2004. Expense ratio: 0.38%. Recent yield: 0.87%. Performance: 12.79%, which ranks in the top 20% of its category.*
Alternative: For a higher-octane version of the PRIMECAP Fund, many Vanguard investors have turned to Vanguard Capital Opportunity (VHCOX), which uses the same methodology but includes small-cap stocks.
Since Capital Opportunity is currently closed to new investors, I recommend a very similar fund not affiliated with Vanguard but run by the same management team—PRIMECAP Odyssey Aggressive Growth Fund (POAGX). Expense ratio: 0.66%. Recent yield: 0.02%. Performance: 10.73%.
Vanguard Wellington Investor Fund (VWELX) was originally launched by subadvisor Wellington Management in 1929. It’s a classic balanced fund built to survive any economic and market environment. The fund keeps 65% of assets in stocks to benefit from rising markets and 35% in bonds to provide yield and ballast through market swoons. The managers seek large- and mid-cap stocks with healthy balance sheets and stable cash flows such as Microsoft and United Health Group. The fixed-income allocation is spread over 1,400 intermediate-term, investment-grade corporate and government bonds. Expense ratio: 0.26%. Recent yield: 2.21%. Performance: 8.29% which ranks in the top 14% of its category.
If you want more diversification abroad: Vanguard Global Wellington Fund (VGWLX), a sister fund, was launched in 2017. Global Wellington uses a similar strategy and portfolio allocations but mixes in foreign stocks and bonds, mostly from Japan and Europe. Expense ratio: 0.50%, which reflects the higher costs of international investing. Recent yield: 3%. Five-year performance: 7.23%
Vanguard Dividend Growth Fund (VDIGX) invests in cash-rich companies growing fast enough to keep boosting dividends over time. Rising dividends, which companies pay in cash, are the most dependable measurement of sound operation and overall growth. The appeal here is not high yields as much as stability. The fund, sub-advised by Wellington Management, lags in rising markets but holds up dependably in downturns. The fund holds the stocks of 40 to 50 companies with long-term competitive advantages that help them maintain and grow dividends through tough times. Top picks like McDonalds, Honeywell International and insurance firm Chubb Ltd. all have been in the portfolio for years. Expense ratio: 0.29%. Recent yield: 1.63%. Performance: 10.88%.
Vanguard International Growth Fund (VWIGX) is managed by two world-famous foreign investment firms. Scotland-based Baillie Gifford, which oversees 70% of the fund’s assets, looks for aggressive growth stocks in areas like artificial intelligence, health innovation and Asian consumerism. British firm, Schroder Investment Management, handles the remaining 30% of assets using a more moderate strategy, finding companies with underappreciated growth prospects. The result is a portfolio of about 125 stocks from developed and emerging markets that can be volatile but have strong prospects. Top holdings include Taiwan Semiconductor Manufacturing and Latin American e-commerce giant Mercado Libre. The expense ratio of 0.42% reflects the higher costs of international investing. Recent yield: 0.90%. Performance: 8.49%, which ranks in the top 10% of its category.
Vanguard US Value Factor ETF (VFVA) offers an interesting strategy run by Vanguard’s in-house quantitative equity division. “Quants” are managers who actively pick individual stocks but rely on statistical analysis and strict rule-based models. The model for this ETF selects the cheapest stocks from the large-, mid- and small-cap markets and ranks them on their relative strengths using fundamental data such as price-to-earnings and price-to-book ratios. This all-cap value fund thrives when cheap sectors rally. It overweights financial and energy stocks, so it’s a fine complement for investors who own tech-heavy growth funds. The ultra-cheap expense ratio of just 0.13% is lower than many index funds. Top holdings include AT&T and Altria Group. Recent yield: 2.14%. Five-year performance: 12.98%, which ranks in the top 13% of its category.
Vanguard Core Bond ETF (VCRB) is run by Vanguard’s in-house fixed-income team, which aims to beat the performance of the total bond market without taking much added risk. Its portfolio of more than 2,000 bond holdings sticks to US Treasuries, mortgage-backed securities and high-quality corporate bonds across a variety of different maturities and sectors, but it also strives to add value at the edges by dabbling in undervalued bonds and foreign currencies. Expense ratio: 0.10%. Recent yield: 4.63%. Performance since inception: 6.15%. The fund was only launched in December 2023, but its portfolio is nearly identical to the Vanguard Core Bond mutual fund (VCORX), which annually has averaged a 0.38% return vs -0.19% for the total bond market over the past five years.
Vanguard Core-Plus Bond ETF (VPLS) is managed by the same Vanguard team as the Core Bond ETF, but this offering takes a step up in risk to earn higher returns. The “Plus” in its name refers to the 10% or more of the portfolio devoted to below-investment-grade or “junk” bonds, as well as emerging-market debt. Expense ratio: 0.2%. Recent yield: 4.74%. Performance since inception: 6.68%. The fund was launched in December 2023, but its portfolio is nearly identical to the Vanguard Core-Plus Bond mutual fund (VCPIX) which, over the past three years, has returned –1.38% vs. –1.78% for the total bond market.
Vanguard High-Yield Corporate Bond Fund (VWEHX) invests in junk bonds issued by companies with shaky credit ratings. These bonds have a reputation for stock-like volatility, but the fund—comanaged by Wellington Management and Vanguard’s in-house fixed-income team—takes a relatively conservative approach. They select a portfolio of about 900 junk bonds from issuers less likely to default on payments. Expense ratio: 0.22%. Recent yield: 6.03%. Performance: 4.35%.
*All performance figures, courtesy of Morningstar, Inc., are for 10 years through November 20, 2024, unless otherwise noted.
