The Vanguard Group Review: Quick Look
|Company Name||The Vanguard Group
|Company Type||Investment company
|Key Features||Low-cost index funds, financial advisors
|Downsides||Not well-designed for trading (even individual stocks)
|Best For||Passive investors, especially those with at least $50K to invest
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What Is Vanguard?
|Robo-Advisor||Financial Advisor||Android App Rating||iOS App Rating
|$0 for stocks, ETFs and options||$0||Yes||Yes||2.5||4.7
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Founded in 1975 and headquartered in Malvern, Pennsylvania, Vanguard had $7.1 trillion in assets under management as of January 2021.
Founder Jack Bogle invented index funds, and he championed a low-cost, long-term investing philosophy that continues to define the brokerage firm today.
Vanguard is more limited in scope than some of its competitors. For example, it doesn’t offer banking services. But its no-frills, long-term approach makes it perhaps the best investment company for long-term, passive portfolio management.
Who Should Use The Vanguard Group?
Because of Vanguard's unique structure, let's first discuss who shouldn't use Vanguard.
It's not for you if you can't meet Vanguard's minimum investment requirements.
It’s also not for you if you want to be an active trader, as Vanguard doesn’t cater well to the needs of investors who trade in individual stocks.
However, if you subscribe to a diversified, low-cost, long-term style of investing — as many smart people do — it’s an excellent brokerage choice. Here are some examples of the types of investors that Vanguard serves well:
- Retirement investors. Vanguard caters to most long-term investors. But retirement investing is the guiding star for its entire philosophy. That extends to its fees and costs, its tools, its educational content and the way its Certified Financial Planners operate.
- Investors with plenty of capital. You can invest at Vanguard with as little as $1,000. But $3,000 is the threshold for most of its funds as well as its robo-advisor. If you want unlimited access to a team of Certified Financial Planners, prepare to invest at least $50,000. There are higher investment thresholds that unlock greater benefits.
- Low-cost buy-and-hold investors. That descriptor typically means you're buying index funds (which can be ETFs or mutual funds). Vanguard is synonymous with index funds. It doesn't have any zero expense ratio funds like Fidelity, but its volume of quality, low-cost funds is hard to beat.
- Investors who prefer to keep things simple. There's some overlap here with my previous bullet points. But it's worth pointing out that, if you prefer simplicity (maybe you'd rather spend your time doing other things?), Vanguard is an excellent choice. You can invest in a simple target date fund or get crazy and split your money between a total stock market, an international and a bond index fund.
Where Vanguard Shines
Vanguard reviews must mention the company's low-cost index funds and inexpensive access to financial advisors.
If you aren’t sensing some themes at this point in my Vanguard review, you will within a few paragraphs.
Here are some of the things that Vanguard does well:
- Robust selection of low-cost index funds. According to Morningstar, Vanguard's average expense ratio in 2019 was just 0.09%. As you'd expect for a company defined by its index funds, Vanguard has an impressive variety of low-cost options with strong track records.
- Inexpensive access to Certified Financial Planners. For an annual fee of just 0.30%, you can get a full-fledged fiduciary to assist you with financial planning. Clark is a big fan of Vanguard's Personal Advisor Services.
- Strong long-term planning resources. Vanguard's tools and technology generally lag behind other investment companies. But it more than holds its own when it comes to retirement planning. Vanguard offers a sophisticated, thoughtful approach that includes human advice, tools and calculators. That's on top of its educational focus on retirement.
- Free trades. Vanguard started to offer commission-free trades on stocks, ETFs and options in 2020.
- No Payment for Order Flow (PFOF). Many brokerage firms claw back some of the revenue they've lost on commission-free trading by routing your orders through high-frequency traders. These market makers pay for the right to execute orders because they can profit by doing so. But as a result, customers often don't get the best possible price. Vanguard doesn't engage in this controversial practice for equities.
Where Vanguard Falls Short
Investing with the Vanguard Group requires meeting high investment minimums and wading through an old-school user experience.
Vanguard’s narrow focus means that completing even common tasks like buying and selling individual stocks are, quite frankly, not that easy to do. It also doesn’t offer many of the “side” products that go with investing such as banking services.
When it comes to your investing experience, Vanguard also has a few other shortcomings:
- Not set up for active traders. The company doesn't hang a virtual sign that says "no active traders allowed," but it might as well. Vanguard clearly lacks the tools and platforms necessary to compete in this area. In many ways, active trading runs counter to the investment philosophy that Bogle instilled in his company when he founded Vanguard.
- Limited research and data. Vanguard doesn't offer its clients the depth of research and tools that Fidelity and Schwab do. That makes sense, as Vanguard focuses on index funds. You can invest in individual stocks through Vanguard, but the company doesn't make it easy nor does it appear to encourage it, given the research and data resources it provides.
- Little focus on user experience. If you want a sleek user interface, modern graphics, a top-notch mobile app and seamless trading, you'll have to look elsewhere. But those things probably aren't important to you if you're focused on passive investing.
- High minimum investment requirements. What's considered "high" in terms of investment minimums? That's relative, to an extent. But there are plenty of investment companies with minimums of a few hundred dollars or even less. Most Vanguard funds require an investment of at least $3,000, which isn't ideal for those without much capital.
What Makes Vanguard’s Index Funds So Attractive?
It’s impossible to do a reasonable Vanguard review without putting a spotlight on the company’s index funds.
To be clear, Vanguard isn't the only company that offers low-cost index funds. For example, the Fidelity Zero funds feature zero expense ratios (and no investment minimums). Schwab and others also offer some attractive low-cost index funds.
But Vanguard's average expense ratio of 0.09% across all of its mutual funds and ETFs as of June 2020 was the lowest of any company. The next two on the list were BlackRock/iShares, which held asset-weighted average fees of 0.27%, and Fidelity which came in at 0.38%.
The exact data changes often, but the long-term performance of Vanguard's funds are consistently favorable. Its best-in-class expense ratios have something to do with that. But the strong performance also says something about Vanguard's ability to manage these types of funds.
Vanguard has prioritized ETFs in recent years, designating specific ones as "Select ETFs" based on low costs, liquidity and diversification, according to the company website. ETFs are preferable to mutual funds for individuals with taxable accounts, so customers should welcome the company's improvements in this area.
Vanguard also has target date funds in five-year intervals through 2065 with expense ratios between 0.12% and 0.15% and minimum investments of $1,000. Clark highly recommends target date funds.
Vanguard’s Personal Advisor Services
An industry-standard fee for a full-service financial advisor hovers around 1%.
That number varies widely based on a laundry list of factors. But accessing quality, trustworthy advice from a fiduciary while paying just 0.30% in annual fees at most is nearly unheard of. That's the opportunity that Vanguard's Personal Advisor Services (PAS) offers.
This is the premium version of Vanguard's Digital Advisor, which is the company's entry-level robo-advisor. The Digital Advisor charges 0.15% in annual fees (plus expense ratios). It requires a $3,000 minimum investment.
PAS is more of a hybrid. If you’ve invested a minimum of $50,000 across any Vanguard asset, you’ll get access to a team of Certified Financial Planners. If you give Vanguard at least $500,000 in assets, you’ll get a dedicated advisor rather than the “first available.” There are thresholds at $5 million (0.20% annual fee), $10 million (0.10%) and $25 million (0.05%) that earn you favorable pricing as well.
Perhaps it’s confusing to say that Vanguard will manage your investments through its robo-advisor even with PAS. After all, you’re getting full access to a well-reviewed team of CFPs. But just like a typical robo-advisor, with PAS, you’ll start by filling out a questionnaire about your assets, age and risk tolerance.
Vanguard strongly encourages a phone or video call with a CFP, even if you want to follow the company’s standard recommended allocations.
Customers can attach their PAS account to a traditional IRA, a Roth IRA or a taxable investment account.
Great Alternatives to a Regular Savings Account
You probably know that interest rates are at historically low levels. Even the best high-yield online savings accounts are paying far below 1%.
If you want to put your emergency fund into something that should generate more than 0.5% APY, Vanguard is a wonderful choice.
Clark advocates for Vanguard's short-term bond index funds. Vanguard's money market funds are also a good alternative to stashing your emergency fund in a savings account at an online bank or credit union.
If you’re a high-income earner, look specifically at municipal money market funds. They’re tax free. Depending on your tax bracket, you could have to pay up to 37% on the interest you earn from a savings account. But municipal money market funds are exempt from taxes.
Frequently Asked Questions About Vanguard
Can I Buy Individual Stocks Through Vanguard?
Yes, you can buy individual stocks from Vanguard. You can even short sell a stock. Vanguard does a nice job at securing you the best price on your orders.
However, the way you have to buy stock on Vanguard is clunky, slow and even a little buried on its website.
What’s the Difference Between ETFs and Mutual Funds?
If you’re thinking about investing with Vanguard, you’ll want to understand the differences between ETFs and mutual funds.
Both can be actively managed and both can be index funds, which are passively managed.
Mutual funds and ETFs are professionally managed collections of stocks and/or bonds. You can buy mutual funds only after the trading day is over. ETF shares trade when the stock market opens like ordinary stocks.
You can make automated contributions to mutual funds.
ETFs are preferable from a tax perspective, especially if you have a taxable account (as opposed to a retirement account). That’s because mutual funds are required to distribute capital gains to shareholders, which the government taxes.
Does Vanguard Pay Interest on Uninvested Cash?
Vanguard doesn’t offer a cash management account. So its customers can’t earn interest on uninvested cash. As such, Vanguard also can’t act as a replacement for a traditional bank, unlike some of its biggest competitors.
However, Vanguard offers money market accounts, CDs and short-term bond funds. All of those are designed to preserve your savings and perhaps earn more on your money than a typical savings account.
Can You Explain Vanguard’s Client-Ownership Structure?
Vanguard is client-owned, so it doesn’t have any investors other than its shareholders. That’s unique for an investment management company.
It means the company doesn’t need to appease private owners, doesn’t feel pressure to extract more profit from its customers and doesn’t have to be concerned about its stock price.
Vanguard is like a co-op for investing just as a credit union is a co-op for banking. If you own shares in a Vanguard fund, you are a part-owner of Vanguard.
What Are Admiral Shares?
Admiral Shares are a different class of shares within Vanguard’s funds (as opposed to Investor Shares).
As of the end of 2019, Admiral Shares offered expense ratios that were 41% lower, on average, than Investor Shares.
Vanguard is already known for offering the most inexpensive index funds, on average, in the industry. Admiral Shares represent a chance to lower the price even further. But you’ll need to meet higher minimum investments:
- $3,000 on most index funds
- $50,000 for actively managed funds
- $100,000 for some sector-specific index funds
Vanguard lowered its Admiral Shares minimum for most index funds from $10,000 to $3,000 in 2018.
I’ll always have a soft spot for Vanguard. As a child, the Vanguard Total Stock Market Index was one of the first investments I ever made.
More people than ever are subscribing to Vanguard’s low-cost index fund strategy.
As I’ve discussed in this Vanguard review, if you’re looking for something specific such as a target date fund, Clark’s recommended blend of index funds or a savings account alternative, it’s great. But if you also plan to do anything else (including investing in individual stocks), you’ll probably need to consider a second brokerage firm.
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