Top 3 Vanguard Funds for Retirement

Founded by index fund pioneer Jack Bogle, Vanguard is nearly synonymous in the investment world with passive investing. While the company offers over 400 worldwide funds to suit different investment goals and strategies, one of the most common uses of its diversified index funds is to provide stable income in retirement. So which are the best Vanguard funds to buy?

VOO

Unsurprisingly, one of the best index funds for both income and long-term growth is the Vanguard S&P 500 ETF (VOO). This large-cap fund tracks the popular S&P 500 index and offers an attractively low expense ratio of just 0.03%. Since the fund’s inception in 2010, VOO has earned a compounded annual return of 13.6 percent.

The S&P 500 index is among the most historically stable and profitable investments to make over the long run. Since 1957 when the index expanded to its current size of 500 stocks, the S&P has averaged an annual return of 10.1 percent.

This long history of respectable growth has made the S&P 500 the benchmark investment of the American stock market. For reference, $100 invested in the S&P 500 in 1970 would be worth just over $22,000 in 2023.

In addition to its ability to produce reliable growth over long periods of time, VOO also has the advantage of a healthy 1.5 percent dividend yield.

As the S&P tracks large, well-established companies, many of the stocks that make up the index pass along excess cash flows to their shareholders in the form of dividends. Some of the most notable dividend-paying stocks in the S&P 500 include Coca-Cola, Exxon Mobil and Johnson & Johnson.

The blue-chip makeup of the S&P 500 can also be an advantage for VOO investors during down markets. Dividends can offset losses during bear markets, and dividend-paying stocks tend to fare better than growth stocks when prices contract. Because many of the stocks in the S&P 500 have paid dividends for years or even decades, the index offers decent protection from market volatility.

A final advantage of investing in the S&P 500 is the fact that the index offers broad diversification. With companies in industries ranging from tech and medicine to energy and raw materials, the S&P 500 provides investors with at least some protection from shocks in any one market or industry. This diversification, however, is less pronounced today than it has been historically. Thanks to the rise of mega-cap technology companies, the S&P 500 of today has an unusually high concentration of tech stocks.

VUG

The Vanguard Growth ETF (VUG) is a fund made up of 221 stocks that tracks the CRSP large-cap growth index.

Unlike the S&P 500, which indexes publicly traded companies based on their market capitalization, the CRSP index relies on earnings growth to weight a smaller selection of stocks.

The practical upshot of this approach is that the CRSP index can rise much faster than the S&P 500 in bull markets. Year-to-date, for example, VUG is up 45.1 percent, compared to the more modest 24.7 percent increase in VOO.

While VUG can significantly outperform during bull markets, its performance tends to average out a bit over longer time periods.

Over the last 10 years, for instance, VUG has returned an average of 13.9 percent, compared to 11.8 percent for VOO. Nevertheless, the high-growth approach of VUG can allow investors to beat the broader market by a fairly handy margin under certain circumstances.

One of the disadvantages of VUG is its relatively modest dividend yield of 0.5 percent. Despite not providing much yield, VUG can still be a good income-generating investment for investors who are willing to sell shares as they appreciate. This low dividend yield does, however, close much of the performance gap between VUG and VOO.

It’s worth noting that some of the high-growth tech stocks that make up VUG will likely continue to raise their dividends at healthy rates as they mature.

At the moment, Apple and Microsoft make up more than 25 percent of VUG’s total holdings. Over the past three years, these two companies have raised their dividends at compounded annual rates of 6.2 percent and 10.1 percent, respectively.

If this trend continues, investors who own VUG could see decent dividend growth in addition to potentially market-beating share price returns.

BND

Arguably the most income-focused of Vanguard’s index funds is the Vanguard Total Bond Market ETF (BND).

With over 10,000 individual bonds, this fund tracks a broad group of debt instruments that includes US government debt, mortgage-backed securities and corporate bonds. Government debt accounts for by far the largest share of the fund’s holdings at 66.9 percent.

The current yield of BND is 4.5 percent, about triple the dividend yield investors in VOO can expect. This fact, paired with BND’s heavy use of extremely secure US government bonds, provides investors with the opportunity to receive a steady and relatively predictable stream of income at fairly low levels of risk.

BND is also one of relatively few ETFs that offer monthly dividends. While funds like VOO and VUG make quarterly payments, BND distributes income to its owners on or near the first of each calendar month. This fact may make BND convenient for those in or nearing retirement, as the fund provides a stream of monthly recurring cash flow that can be used to cover expenses.

What BND offers in stable income potential, however, it lacks in the ability to produce significant returns. BND’s compounded annual return rate since its inception in 2007 has been just 2.8 percent. As such, BND is likely a fund better suited to older investors seeking to preserve their capital than younger investors focused on continuing to build wealth.

Top Vanguard Funds For Retirement

The top Vanguard funds for retirement are the Vanguard S&P 500 ETF, Vanguard Growth ETF and Vanguard Total Bond Market ETF.

Due to its combination of steady growth, solid yields and overall diversification, VOO is likely the best single choice for investors among these three Vanguard funds.

Given that the S&P 500 is arguably among the best long-term investments that have ever existed, a low-cost fund that tracks it on a weighted basis has a great deal to offer most passive investors.

However, it can also be useful to invest in multiple funds to provide balance and additional diversification. Buying both VOO and VUG, for example, may provide higher returns during bull markets while retaining the protection of higher dividend yields in bear markets.

Adding BND may offer a safer and more regular income stream, especially for older investors. As such, it’s important to carefully consider the indexing approach of each fund and determine its suitability for your personal goals and investment strategy.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.