Let’s say you have a portfolio of investments like stocks, bonds, or mutual funds, so you want to maximize your returns by saving on fund expenses and tax costs.
If you have holdings in Vanguard and are looking for the best funds that have a low-risk rating, you might be overwhelmed with options and are trying to identify the best or worst funds for taxable accounts.
Normally, you would want to save money from any capital gains tax or tax on interest and dividends, so how can you limit this loss and offset gains with losses to lower that tax bill?
In this guide, we will provide some of the best Vanguard funds you can buy while acknowledging different investment strategies and distinguish the difference between index funds and actively managed funds so you can work out which one best fits your strategy and goals.
We’ve also provided a guide on what to look for when choosing your funds and have answered some of those burning questions you might have, so you can be confident in your strategy.
- 1 How Do Vanguard Index Funds Work?
- 2 5 Best Vanguard Funds For Taxable Accounts
- 3 What Should I Consider When Choosing A Fund?
- 4 Frequently Asked Questions
- 5 Conclusion
How Do Vanguard Index Funds Work?
These types of funds use a passively managed sampling strategy by the brokerage to follow a benchmark index, with the type of benchmark that depends on the asset for the fund being followed.
Vanguard can then charge expense ratios for the management of the assets in the fund if the investor decides to invest this way and is primarily known for having the lowest expense ratios in the investment industry.
Vanguard is the largest provider of mutual funds in the industry and the second-largest provider of exchange-traded funds and allows investors to gain exposure to the market in a single and easy-to-trade investment vehicle.
Vanguard also provides options for retirement plans, institutional investors and trading, and those looking for company information and insights.
5 Best Vanguard Funds For Taxable Accounts
When looking for the best funds to hold, you have a lot of options to choose from, but the general rule is to look out for funds that can boost long-term returns like small-cap growth funds, or look for funds that have a low tax-cost ratio, which can save you tax on a funds return.
Below are some funds that offer different options and price entry points to meet the specific investor’s needs.
This fund can expose investors to the medium and large capitalization parts of the U.S. stock market.
The unique index-oriented approach offered attempts to track the benchmark while lowering taxable gains and dividend income by purchasing index securities that pay lower dividends.
The expense ratio for the fund is usually at 0.09%, with a minimum investment is $10,000 to start out.
- The fund has a disciplined sell process that minimizes the realization of net capital gains and can include the realization of losses to offset unavoidable gains.
- As the asset class is domestic, this can be a good way to go because savings or assets can be kept in line with inflation and help with long-term growth.
- One of the risks of this fund is the exposure to the middle-cap segment of the stock market, which tends to be more volatile than the large-cap market, meaning that more significant fluctuations can occur.
- This fund may put off first-time investors as the risk involved may be better complemented by a well-balanced portfolio.
This fund is made to give investors exposure to the U.S equity market, which includes small, medium, and large-cap growth and value stocks.
The fund’s main draws are its low costs, broad diversification, and the potential for tax efficiency.
The expense ratio for this fund is usually 0.04%, and The minimum initial investment is $3,000.
- Great for those looking for capital growth and have this as the main objective in their investment plan.
- The initial investment will benefit those who may want a moderately safe investment option as this fund can be considered a core equity holding or a domestic stock fund, making your funds go further in the long run.
- The level of income produced by funds in this category ranges from moderate to very low.
- This fund would be ideal for those who are looking for a longer-term investment plan, who are looking at 10 years or more, so this might put off those who want to make more returns in the near future.
This fund invests in higher-quality municipal bonds, which are tax-exempt at the federal level, with a combination of quality and tax efficiency that may provide you with both stability and diversification.
The fund also has no limitations on the maturity of securities, but it is expected to maintain a dollar-weighed average maturity of 6 to 12 years.
This fund has an expense ratio of 0.17%, and the minimum investment is $3,000.
- Ideal for those looking at a strategy that emphasizes income rather than growth, with medium-term returns in an investment period of around 4-10 years.
- A good fund if you’re not that tolerant of the risk of short-term price fluctuations, which gives you some flexibility in preparing a longer-term investment strategy.
- Any change in interest rates, both up or down, could affect your fund, which could result in lower bond prices or a decrease in income for the fund.
- With a yield rate of 2.8%, this type of fund might be less lucrative than something like a corporate bond, for instance, and might take longer to recover any losses you may experience.
For this fund, you’ll be looking for a one-fund solution for your taxable account.
The fund portfolio consists of about 50% middle and large-cap U.S stocks, with the other 50% in federally tax-exempt municipal bonds.
The stock component’s identifiable index-oriented approach seeks to follow its benchmark while lowering taxable dividend income, and for this fund, the expense ratio is 0.09%, and the minimum investment is $10,000.
- An ideal fund for those looking to achieve a combination of current income and modest growth potential.
- Even though bonds are known to provide lower long-term rewards, the combination of municipal bonds and stocks makes for a diverse portfolio. It can give you more options when planning your investment strategy.
- A fund may hold longer-term bonds, which are subject to wide swings in value as interest rates rise and fall.
- If you’re not placed in a high tax bracket, you may see little returns if you offset your gains, and there is no guarantee that the fund will meet its objective of being tax-efficient.
This fund could be ideal if you’re looking for a bond index fund that provides broad diversification and tax efficiency.
In most common circumstances, at least 80% of this fund’s assets will be invested in securities, where the income will be exempt from federal income taxes and the federal alternative minimum tax.
It’s usually available as Admiral Shares with an expense ratio of 0.09% and an initial investment of at least $3,000.
- This fund is usually subject to low-to-moderate fluctuations in share prices, so it is ideal for those who are looking at a medium-term investment period of 4-10 years and is generally considered to be at a lower risk.
- This fund has a monthly realized or unrealized capital distribution schedule, so you don’t have to wait in quarters, which can help you and your advisor follow other investments if you decide you want to build that portfolio or create a retirement plan.
- A higher yield rate of 2.8% can attract investors who want to repurchase bonds into the market, which drives prices up and lowers rates and can be seen as a supply and demand asset for investment money. This seesaw effect might not be ideal for those who don’t want to follow trends like this.
- To see a lucrative maturity return, you could be looking at a timeframe of 10 plus years, and if bonds are refunded or called, they could be repaid before they mature.
What Should I Consider When Choosing A Fund?
Now you have some idea of the funds that you can choose from, you might have settled on one of these and still have some doubts over the efficiency of the fund and whether the stocks or bonds the fund goes into are lucrative or worth the investment period.
Or you may already have taken out a fund, but you’re not sure how long to leave it to mature, and anything you read on the subject goes over your head.
Of course, it’s good practice to consult a financial advisor or the advisor assigned to your project if you decide to use a brokerage firm.
They can guide you through the process and can outline what your fund will look like when tax season comes around, and below, we have outlined some factors you may want to consider when choosing a fund that works best for your circumstances.
Of course, any financial process that involves stocks or bonds is going to have a risk-to-reward scale that can give you an indication of what you can realistically expect to gain from your investment.
Be aware, though, that some funds might have a high initial investment amount and relate to markets that could be described as volatile, so you only want to part with an amount that you are comfortable investing.
There can also be changes in the market, interest rates, inflation, currency, and credit that could see your funds decline in value.
What Brokerage Account You Open
This depends on what your goals are when you are looking around traditional and discount brokers, or you may decide to use an online platform that has a trimmed-down interface and could make complex trading strategies much easier to navigate.
You should bear in mind, though, that different brokers offer various levels of service and can charge a range of commissions and fees based on those services.
Your experience in finding a broker or trading service will depend on your circumstances, so a traditional brokerage may be useful for those who want to complement their funds with emergency savings, for example.
You could consider receiving dividends as a steady source of income, but you should be aware that not all funds distribute dividends on the same schedule as some may distribute theirs once a year and some on the first day of each month.
If you’re using Vanguard, for instance, you can go to the page that gives an overview of your fund, and if you check the distributions section, it will tell you the schedule.
If you happen to have a dividend that isn’t very tax-efficient, you could consider index funds offered by a brokerage firm like Vanguard that has low overhead and research expenses, making the fund tax-efficient and easy to track.
Trends And Fluctuations In The Stock Market
This is an essential factor as the stock market and the economic performance are aligned, meaning that research into a particular stock will be helpful to you to get a better idea of what your investment will look like further down the road.
This will include any events or circumstances surrounding a company you might want to consider.
If you want to go further into this research, you can look up an individual stock or bond, and you can track its performance with sliders that can show you up to 10 years of market history so you can better see what the fluctuations look like.
It isn’t easy to predict a fluctuation of the market, so an advisor can guide you on what the right path is for you If you’re looking to reduce your losses and keep track of any taxes on gains, you might have if you’re a fund shareholder.
Frequently Asked Questions
Why Should I Use Vanguard As An Investment Tool?
A Vanguard account has a few advantages over a mutual fund account, but it’s worth noting that both types of funds are taxed in the same way.
It may be worth switching or starting here because you can buy individual stocks, unlike a traditional mutual fund.
A Vanguard account gives you more flexibility to buy stocks or exchange-traded funds, which could appeal to the beginner investor or the portfolio owner.
For those who want to dip their toes into investments like these, as long as they are comfortable with the initial amount, it could be a good place to start, especially with index funds.
What’s The Difference Between Active And Passive Managed Funds?
Knowing the difference between the two can help you understand which one suits your circumstances better.
An actively managed investment fund is one in which a management team makes decisions about how to invest the fund’s money, and a passively managed fund quite simply follows a market index to determine the best stocks to invest in and is usually consistent.
However, with a passively managed fund, you could see the average performance of your fund compared to an actively managed fund can make it possible to beat this market index and has been known to post significant returns.
But the active way of management can underperform or do worse than the index, so it’s important to look into the fund’s history before investing.
What Is Tax-Loss Harvesting?
If you’re paying more tax than you’d like after tax season has passed, you could use the strategy to use losses on certain investments to offset capital gains and resulting taxes on others.
This works by allowing you to sell securities like stocks, bonds, mutual funds, and exchange-traded funds at a loss to offset any taxes owed on capital gains across the contents of your portfolio.
There are some rules you need to follow.
If you want to harvest a tax loss to offset gains, you cannot buy the identical securities within the 30-day period before or after the sale under the wash-sale rule, which prevents you from selling and immediately re-investing to create an unfair advantage.
We’ve shown here the many options that Vanguard offer and who they could appeal to the most, but it’s worth mentioning here that there are such things as bad taxable funds that could see you losing value in the short term.
Investments held in a regular brokerage account can be taxed on capital gains, as well as on interest and dividends.
You can consult with a financial or brokerage advisor to identify where you sit regarding taxes and can assist you in creating a plan that incurs the least amount of taxes and can see you investing in a way that gives you some peace of mind and a significant retirement account that you can look forward to if you decide to go this way.