The continuous slump in oil prices and weak Chinese economic data has resulted in a bloodbath in the U.S. stock market so far this year. The Dow and the S&P 500 suffered their biggest monthly losses in January since Aug 2015. Both the indexes had also snapped multi-year winning streaks to end in the red last year.
In the face of this downtrend, a long-term view will help investors to stay calm. Also, one should look for investments that are less expensive. In this regard, Vanguard mutual funds could be a good choice due to their low expense ratios. The cost can be further reduced if one selects Vanguard funds that have no-load.
Why Vanguard Funds?
Vanguard funds witnessed a large inflow last year. This indicates that investors had flocked to passively managed funds, being dissatisfied with the widespread failure of actively managed funds. Investors poured in $236 billion of money in the Vanguard Group in 2015, the largest in the industry, according to Morningstar Inc.
In fact, Vanguard witnessed total net inflows of about $1 trillion in the last five years, which is almost double the entire sum attracted by the hedge fund industry during the same period. Currently, it is one of the world's largest investment management companies. It has crossed the milestone of $3 trillion in assets under management.
The secret of Vanguard's success last year lay in its very low expense ratios. The low cost to operate a mutual fund helped Vanguard to navigate the volatile broader markets, which were beleaguered with global growth worries and a rout in oil prices.
Now, in 2016, these very same factors are continuing to haunt the stock market. The major U.S. indexes are already in correction mode. Hence, in order to navigate the choppy waters, Vanguard funds are the best choice.
Vanguard's Expense Ratio Declines
In January, Vanguard reported expense ratio reductions for 35 individual mutual fund shares. This also includes 12 Vanguard target-date funds. Separately, the Vanguard Target Retirement 2035 Fund trimmed its expense ratio by 3 basis points.
This U.S. mutual fund provider picked up the trend from last year. In 2015, Vanguard announced expense ratio reductions for 102 individual mutual fund shares. Vanguard has a history of lower expenses. In 1975, Vanguard managed $1.8 billion assets with an average expense ratio of 0.89%, while it currently manages about $3.2 trillion of assets and charges an average expense ratio of around 0.18%. If considered on an asset-weighted basis, the average expense ratio is even lower at 0.14%.
Vanguard CEO Bill McNabb had said that "We strongly believe in setting our investors up for success, and one of the best ways to do that is to keep the cost of investing low, enabling them to keep more of what they earn." Additionally, Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ said that "due to strong inflows in Vanguard mutual funds, they are able to bring expense ratios down for many mutual funds on a regular basis."
The Advantage of No-Load Funds
Investing in no-load mutual funds reduces investors' expenditure. Numerable research showed that no-load funds fared better than load funds on many occasions. Last year, out of the 15,129 no-load funds, the top 100 funds showed an average yearly return of 16.74%, beating the top 100 load funds' average return of 11.05%. The average return of these top 100 no-load funds also came in ahead of the top performing mutual fund categories in 2015 such as Japan stock, healthcare and foreign small/mid growth to name a few.
5 No-Load Vanguard Mutual Funds to Consider
As the stock market is subject to a persistently downward trend, mostly due to a continuous drop in oil prices and the crisis in China, it will be prudent to invest in no-load Vanguard Mutual Funds. In addition to the advantages discussed above, Vanguard mutual funds don't charge front-end and back-end loads.
A front-end load is charged while purchasing the shares. This type of fees can be as high as 8.5%. This might curtail a $50,000 investment to $45,750. On the other hand, a back-end load is charged when shares are sold. This type of fees can be as high as 5% to 7%.
Meanwhile, Vanguard mutual funds charge expense ratios that are on an average 82% less than the industry average.
Let us now take a hypothetical low-cost scenario. We assume that the value of a portfolio is $100,000 and it is expected to grow at an average of 6% yearly. Now, if we consider an expense ratio in a low-cost environment to be 0.25%, while the higher-cost scenario has an expense ratio of 0.9%, then in almost 30 years, the low-cost investor will emerge as a winner by gaining about $100,000 more than the high-cost investor.
Additionally, such funds when combined with a Zacks Mutual Fund Rank #1 (Strong Buy) are expected to boost your returns. The following funds also have impressive 3-year and 5-year annualized returns and the minimum initial investment is within $5000.
Vanguard Strategic Equity Fund Investor (MUTF:VSEQX) seeks maximum long-term capital growth by investing in stocks of small and midsize companies.
VSEQX's 3-year and 5-year annualized returns are 10.8% and 11.1%, respectively. VSEQX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. The annual expense ratio of 0.21% is lower than the category average of 1.15%.
Vanguard New Jersey Long-Term Tax-Exempt Fund Investor (MUTF:VNJTX) seeks a high level of income exempt from both federal and New Jersey personal income taxes.
VNJTX invests in high-quality municipal bonds issued by New Jersey State. VNJTX's 3-year and 5-year annualized returns are 3.5% and 5.8%, respectively. VNJTX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. The annual expense ratio of 0.20% is lower than the category average of 0.91%.
Vanguard Ohio Long-Term Tax-Exempt Fund Inv (MUTF:VOHIX) seeks a high level of income exempt from both federal and Ohio personal income taxes. VOHIX invests in high-quality Ohio municipal securities.
VOHIX's 3-year and 5-year annualized returns are 4.2% and 6.4%, respectively. VOHIX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. The annual expense ratio of 0.16% is lower than the category average of 0.97%.
Vanguard Value Index Fund Investor (MUTF:VIVAX) seeks long-term growth of capital and income from dividends. VIVAX holds all the stocks in the Standard and Poor's Value Index and attempts to match the performance of the index.
VIVAX's 3-year and 5-year annualized returns are 9.6% and 9.4%, respectively. VIVAX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. Annual expense ratio of 0.23% is lower than the category average of 1.11%.
Vanguard Balanced Index Fund Investor (MUTF:VBINX) seeks income and long-term growth of capital and income. VBINX's assets are divided between indexed portfolios of stocks and bonds, with 60% of its assets in stocks and 40% in fixed-income securities.
VBINX's 3-year and 5-year annualized returns are 6.8% and 7.4%, respectively. VBINX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. The annual expense ratio of 0.23% is lower than the category average of 0.89%.