Investor Alert
Paul A. Merriman

Jan. 27, 2016, 12:33 p.m. EST

Picking the best of the best Vanguard ETFs

By Paul A. Merriman


It's no secret among savvy investors that Vanguard has many of the best mutual funds to be found anywhere. Vanguard also has many good exchange-traded funds (ETFs), but identifying the very best ones isn't always obvious.

I'm going to let you in on how I go about finding the hidden gems on Vanguard's ETF menu, and why I recommend the ones that I do.

Once a year, I update my Vanguard recommendations — more often if there are significant changes in the menu of choices. You'll find my Vanguard ETF recommendations at the end of this article.

My starting point, naturally, is getting access to the important equity asset classes that in my opinion should be in any retirement portfolio. The secret is in fine-tuning a portfolio so you get the most of what you want with the least performance "drag" from expenses and other factors.

(By the way, I take a similar approach to finding the best ETFs at other brokerages. In a subsequent column, I'll guide you through my choices at Fidelity, Schwab and TD Ameritrade.)

Selecting the very best ETFs at Vanguard can be especially challenging because, in several very important asset classes, there are multiple choices. The sleuthing is worthwhile, however.

As I wrote last year, even a seemingly small advantage in the range of half of a percentage point can make a huge difference over a lifetime of investing.

Large caps

My recommendations start with the familiar large-cap-blend asset class accessed through the S&P 500 Index. At Vanguard, that index is well represented by the Vanguard S&P500 ETF (PSE:VOO) .

It's a bit more difficult finding the best ETF to represent large-cap value stocks because Vanguard has four of them. Let's walk through the six variables that I look for and see how these four ETFs stack up.

I'm seeking low expenses, smaller average company size, deeply discounted value (measured by a portfolio's price-to-book ratio, low portfolio turnover and broad diversification (a large number of companies in the portfolio) as well as concentration in the target asset class.

One by one, here's how Vanguard's large-cap value ETFs measure up.

  • Mega Cap Value ETF (PSE:MGV)  holds 160 companies, most of them household names. Expenses are low, and turnover is very low. This fund's weakness? The average company size (more than $100 billion in market capitalization) is so large that other choices are likely to do better.

  • Vanguard Value ETF (PSE:VTV)  holds companies with market capitalizations averaging $73 billion, giving it what I believe is a long-term size advantage over MGV. But that comes from having 15% of its portfolio in mid-cap stocks. This ETF has the same level of expenses and about the same price-to-book ratio as MGV, so I would give VTV a small advantage. But I think investors can do better.

  • Vanguard S&P Value Index (PSE:VOOV)  has higher expenses (.15% vs. .09 for MGV and VTV), but a smaller average market capitalization ($65 billion). VOOV has a lower price-to-book ratio. The combination of smaller companies and a portfolio that's more deeply discounted to value should give VOOV an advantage over MGV and VTV.

  • Vanguard Russell 1000 Value Index (NAS:VONV) . This is the on that gets my vote in this asset class. Its average company size is about $51 billion, it charges slightly lower expenses than VOOV and has a slightly lower price-to-book ratio.

Small-cap blend

Now we get to small-cap blend. Vanguard has three ETFs in this important asset class.

  • Vanguard Small-Cap ETF (PSE:VB)  has the lowest expense ratio of the three, but 40% of its portfolio is in mid-cap stocks, giving it an average market capitalization of $2.8 billion, thus diluting the small-cap advantage I'm seeking. And even though this fund is a blend of growth and value, I'm always looking for more value; VB has less of that than the other two choices.

  • Considerably better is Vanguard Russell 2000 ETF (NAS:VTWO) , which has a 93% position in small-cap companies, with an average market capitalization of only $1.5 billion.

  • My choice is the Vanguard S&P Small-Cap 600 Index (PSE:VIOO) , which has 98% of its portfolio in small-cap companies, with an average market capitalization of $1.4 billion and lower portfolio turnover than VTWO.

Small-cap value

Vanguard has three ETFs in the small-cap value asset class. I can fairly easily rule out the Vanguard Small-Cap Value Index (PSE:VBR) , as it has only 65% of its holdings in small-cap stocks and only 34% in small-cap-value stocks. Its average market capitalization is $2.7 billion.

The choice between the other two is tougher, as their expense ratios and price-to-book ratios are virtually identical.

The Vanguard Russell 2000 Value Index (NAS:VTWV)  has less turnover and almost three times as many holdings as Vanguard S&P Small-Cap 600 Value Index (PSE:VIOV)  .

Still, VIOV has 7% more of its portfolio in small-cap stocks and an average market capitalization that's 20% smaller.

These are both very good choices. However, it's my job to identify the one with the greatest potential. Although the differences are small, my choice is VIOV because of its smaller company size. (This represents a change in my recommendation from last year.)

In other asset classes, it's easy to choose the best ETFs, and you'll find them in my recommendations for U.S. and international real estate stocks as well as international large-cap blend, international large-cap value, international small-cap blend and emerging markets.

However, Vanguard's ETF lineup is missing entries in two very important asset classes: international large-cap value and international small-cap value.

Despite that, Vanguard is a great choice for putting together an ETF portfolio. For more of my thoughts on this, I've recorded a podcast, " 10 ways to get higher Vanguard returns ."

If you want all the asset classes that I recommend in the form of ETFs, you may wish to consider what's on offer at Fidelity, Schwab and TD Ameritrade. In my next column, I'll highlight my choices at those three brokerages.

ETF Symbol Aggressive Moderate Conservative
Vanguard S&P 500 VOO  11% 6% 4%
Vanguard Russell 1000 Value Index VONV 11% 7% 5%
Vanguard S&P Small–Cap 600 Index VIOO 11% 7% 4%
Vanguard S&P Small-Cap 600 Value VIOV 12% 7% 5%
Vanguard REIT Index VNQ 5% 3% 2%
Vanguard FTSE Developed Markets VEA 15% 9% 6%
Vanguard FTSE All-Wld ex-US SmCp Index VSS 20% 12% 8%
Vanguard Global ex-US Real Estate VNQI 5% 3% 2%
Vanguard FTSE Emerging Markets VWO 10% 6% 4%
Vanguard Short-Term Government Bond VGSH 0% 12% 18%
Vanguard Intermediate-Term Govt Bond VGIT 0% 20% 30%
Vanguard Short-Term Infl. Prot. Securities VTIP 0% 8% 12%

Richard Buck contributed to this article.

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