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

Picking the best of the best Vanguard ETFs

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By Paul A. Merriman

About Paul

Paul Merriman is committed to educating people of all ages to get the most from their retirement investments. Founder of Merriman Wealth Management, a Seattle-based investment advisory firm, he is the author of numerous books on investing: "Financial Fitness Forever," "Live It Up Without Outliving Your Money," and the new "How To Invest" series, free at his website:  "How To Invest" series: "First Time Investor," "Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor" and "101 Investment Decisions Guaranteed to Change Your Financial Future." In his retirement, Paul writes a weekly column at MarketWatch and continues his weekly podcast, Sound Investing, which was recognized by Money magazine as "the best Money Podcast in 2008". He is president of The Merriman Financial Education Foundation and all profits from the sale of his books are used to advance financial literacy. His recommendations for portfolios of Vanguard funds, Fidelity funds and ETFs, podcasts, articles and books are available at paulmerriman.com. Follow Paul on Twitter @SavvyInvestorPM.

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Small-cap blend

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

  • Vanguard Small-Cap ETF /zigman2/quotes/201669247/composite VB -2.63%  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 /zigman2/quotes/204924513/composite VTWO -2.71% , 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 /zigman2/quotes/208323004/composite VIOO -2.78% , 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 /zigman2/quotes/203042913/composite VBR -2.67% , 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 /zigman2/quotes/203494355/composite VTWV -2.87%  has less turnover and almost three times as many holdings as Vanguard S&P Small-Cap 600 Value Index /zigman2/quotes/201476524/composite VIOV -2.86%  .

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.

/zigman2/quotes/201669247/composite
US : U.S.: NYSE Arca
$ 191.40
-5.17 -2.63%
Volume: 540,756
Dec. 5, 2022 4:10p
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/zigman2/quotes/204924513/composite
US : U.S.: Nasdaq
$ 73.92
-2.06 -2.71%
Volume: 1.04M
Dec. 5, 2022 4:15p
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/zigman2/quotes/208323004/composite
US : U.S.: NYSE Arca
$ 183.79
-5.25 -2.78%
Volume: 36,190
Dec. 5, 2022 4:10p
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/zigman2/quotes/203042913/composite
US : U.S.: NYSE Arca
$ 164.85
-4.52 -2.67%
Volume: 644,712
Dec. 5, 2022 4:00p
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/zigman2/quotes/203494355/composite
US : U.S.: Nasdaq
$ 127.79
-3.78 -2.87%
Volume: 32,310
Dec. 5, 2022 4:15p
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/zigman2/quotes/201476524/composite
US : U.S.: NYSE Arca
$ 165.03
-4.86 -2.86%
Volume: 39,793
Dec. 5, 2022 3:59p
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