Last week, I outlined my reasons for using and recommending index funds. Today, I’m going to give you my reasons for using and recommending Vanguard‘s index mutual funds in particular. I don’t have any affiliation with Vanguard. I have just found them to have a great product and great service, so I feel comfortable recommending them to you. There are no affiliate links in this post, and nobody paid me to write this.
On average, Vanguard has the lowest cost index funds available in the market. Yes, there are a few competitors like Schwab and Fidelity who beat Vanguard’s expense ratio on the S&P 500 index fund. But that’s generally the only index fund category where anyone comes close to Vanguard’s low expenses. By and large, Vanguard beats the pants off everyone else who offers index funds.
In addition to their low-cost index funds, Vanguard charges no commissions when you purchase their mutual funds directly through them. They also won’t eat you alive with account fees. They only fee they charge is $20 for each fund where your balance is less than $10,000, but they’ll waive this fee if you sign up for electronic delivery of your statements!
Three of their mutual funds have purchase fees, but these are only international funds and the fees are below 0.75%. These fees are used to offset the costs of purchasing international companies. (However, I don’t recommend using any of the funds with a purchase fee.) Several of their mutual funds have redemption fees, but I only recommend three of these. Within the three I recommend, two of them don’t have a redemption fee after 2 months and the other one doesn’t have a redemption fee after one year. The redemption fees Vanguard charges are all meant to discourage active investors from short-term trading in Vanguard’s funds. This is good for the long-term investor because short-term investors create extra costs for everyone else when they actively trade in mutual funds. (Those extra costs would include trading costs and tax costs.)
It’s hard to beat Vanguard when it comes to low costs, and that’s because of my second reason for using them.
Vanguard is different from the other mutual fund companies because it’s not publicly traded or privately owned. Vanguard is owned by the mutual funds it manages, and those mutual funds are owned by the clients. So Vanguard works like a credit union for mutual funds.
What does this mean for you? It means Vanguard has no conflicting interests. Their main goal is to keep your costs as low as possible – not to give big profits to private owners or dividends to stockholders. Vanguard keeps the interests of it’s mutual fund shareholders in mind and always seeks ways to provide great service while keeping costs low. Those low costs mean you get to keep more of your investment dollars.
Excellent Customer Service
Vanguard has a long history of excellent customer service. When you call, you’ll speak to a human in less than a few minutes. I’ve only had great experiences with their customer service representatives, and they always seek to help you with any problems you might encounter. Even if they didn’t have such low costs, you’d probably consider using them just for their customer service.
Extensive Selection of Index Mutual Funds
Vanguard has the largest selection of index mutual funds available, which means I can easily construct a diversified portfolio with low-cost funds. This factor also plays into the low cost point I explained above. You see, when you go to Schwab or Fidelity for index funds you’ll find one of two things:
- They charge much higher fees than Vanguard on their other index funds.
- They don’t have many other index funds to choose from.
For other mutual fund companies, their low-cost index funds are a loss-leader. They use the promise of a 0.07% expense ratio on their S&P 500 index fund to suck you into buying their 1% expense ratio funds for other asset classes. Think of it like a sale at the grocery store. The hot dogs are half price, but they’ve marked up the buns, ketchup, mustard, and relish.
Vanguard has more index funds than anyone else and they’re consistently low cost. There are no loss leaders here.
Finally, Vanguard doesn’t bombard you with useless financial noise. They don’t come on TV (another reason they have such low costs) telling you that you should meet with an advisor now to buy more because the market’s going up or to sell more because the future is so bleak. If you check out Vanguard’s website, you’ll see that they teach you to focus on the long-term and watch your costs. They’ll tell you to avoid:
- Trying to time the market
- Worrying about day-to-day price changes
- Trading for the short term
- Listening the the market “noise”
That’s the same thing you’ll hear from me, The Oblivious Investor, and others who don’t have a vested interest in selling you something that’s overpriced or making you think they can “beat the market”.
So those are my reasons for using Vanguard. If you want to figure out how to invest in a diversified, low-cost portfolio of index funds at Vanguard, I recommend checking out my free Vanguard portfolio allocator. It provides portfolio advice based on your age and the amount of money you have available to invest. If you’ve used Vanguard in the past, let me know about your experience in the comments!