5 Active Vanguard Funds To Own For The Long Haul

5 Active Vanguard Funds To Own For The Long Haul

Vanguard funds are top of mind when it comes to index investing. After all, founder John Bogle basically created the idea of passive investing and brought index funds to masses back in the 1970s.

But Vanguard’s actively managed funds should be on equal footing with their passive brethren.

One of the biggest hurdles to actively managed mutual funds and exchange-traded funds (ETFs) is something called a “fee hurdle.” Historically, active funds cost more to run than a passive index-tracking fund. Because of this, an actively managed fund must earn more than its fees in order to bring investors a return. So even if a fund does beat the underlying index or benchmark, the higher fees will often produce lower returns.

But for Vanguard, low-cost investment management is in its blood. As a result, Vanguard’s actively managed funds feature rock-bottom fees just like its passive investment options. This allows many of its active funds to offset the fee hurdles that other firms encounter and gives investors the opportunity to benefit from active management outperformance at lower costs.

With that in mind, here are five of Vanguard’s active funds to own for the long term. The funds featured here cover a variety of strategies, so there’s likely a low-cost option that aligns with your goals, no matter what type of investor you are.

Data is as of March 10. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds. Vanguard Selected Value Fund

Fund category: Mid-cap value

Assets under management: $6.7 billion

Yield: 1.2%

Expense ratio: 0.32% annually, or $32 per $10,000 invested

Minimum investment: $3,000

One area where active management can win over passive is in the world of smaller stocks. Major investment houses, analysts and institutional investors tend to ignore small- and mid-cap stocks . As a result, there can be plenty of pricing inefficacies that smart managers can exploit. This is particularly true when focusing on value stocks in this region.

The top-performing Vanguard Selected Value Fund ( VASVX , $29.66) looks to cash in on this fact.

VASVX focuses on mid-cap stocks, or those with market caps within the $2 billion to $10 billion range. Managers at the fund then use fundamental analysis to find stocks that are undervalued and out of favor, trading at below-average levels for various financial metrics such as earnings or book value. What you get is a one-two punch of success.

Returns for the fund tend to go through periods of significant outperformance and slight underperformance versus its benchmark the Russell Midcap Value Index. However, returns over the past one year and three years have exceeded those of the underlying benchmark (by 2.7 percentage points and 1.9 percentage points, respectively).

The Vanguard Selected Value Fund is concentrated, with only 127 stocks in its portfolio. This compares to nearly 700 for its benchmark. The fund is top-heavy in financials (25.8%), followed by industrials (19.9%) and consumer discretionary (15.4%). Major holdings for VASVX include apparel manufacturer Gildan Activewear ( GIL ) and insurer Unum ( UNM ).

With impressive near-term returns and a low 0.32% expense ratio, the Vanguard Selected Value Fund could be a top choice among actively managed Vanguard funds for your portfolio. Vanguard Short-Term Investment-Grade Fund Investor Shares

Fund category: Short-term bond

Assets under management: $75.6 billion SEC yield: 2.1%* Expense ratio: 0.20% Minimum investment: $3,000 Fixed income is another area where active management can often boost returns versus passive/index funds. The reason? Most bond indexes are constructed via a weighting scheme that prioritizes the total amount of debt issued. Basically, those firms with more debt make up more of the index. That’s counterintuitive.Active managers can focus on credit research, look at underlying cash flows, business trends, etc., in order to make the best selection on undervalued bonds. And that’s what you get with the Vanguard Short-Term Investment-Grade Fund Investor Shares ( VFSTX , $10.41) – a member of the Kiplinger 25, our list of high-quality, low-cost mutual funds .VFSTX focuses its attention on short-term and intermediate-term investment-grade fixed-income securities. These can include Treasury bonds and corporate securities. Where the bond fund wins is that it is overweight corporate bonds relative to Treasuries versus its underlying benchmark, the Bloomberg Barclays US 1-5 Year Credit Index.What does that do? First, it helps the fund produce a higher yield – 2.1% versus just 1.7% for its index-tracking sister, the Vanguard Short-Term Bond Index Fund Admiral Shares ( VBIRX ). Albeit, it is a slightly different tracking index.Secondly, it produces lower overall volatility than the broader short-term bond […]

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