If you are interested in investing in index funds or ETFs, then there’s a good chance you may have heard of Vanguard before. Vanguard is one of the best-known investment platforms in the world.
If you are just starting out when it comes to investing, it’s first important to understand what your goals and risk tolerances are. Simply buying the best performing fund would not be the right approach, just as investing all your money in the stock market may not be the right approach.
Please take the time to determine what your goals and risk tolerances are and craft the right asset allocation strategy. Once you have done that, you can go about picking the best fund for your needs. So what are the best Vanguard funds available for you to buy into right now?
Well, if you are curious which Vanguard funds have simply done the best, let’s dive right in to it! I have reviewed both Vanguard Index Funds and Vanguard ETFs below.
Best Performing Vanguard Equity Index Funds
Index funds replicate the holdings of an underlying index (hence the name) and therefore their performance will mirror that of the index. When looking at the performance of index funds, you are really just looking at the performance of index, so it doesn’t really matter whether you pick Vanguard or someone else.
Your goal is to find the best index and find a fund that replicates that index. Sure, you could split hairs about things like management fees, but with the fees on index funds being minimal these days so it’s not a big differentiator.
When it comes to figuring out which is the best index fund from Vanguard UK, you’re going to need to ideally look across at least the past three to five years of data. For the purposes of my ranking here, I have focused on the cumulative returns over five years. You could just as easily focus on the 10 year returns. Here are the top three index funds, based on past performance, available via Vanguard UK as of December 2023:
1. U.S. Equity Index Fund
As the US market has been a global outperformer over the last decade, it’s not surprising to see Vanguard’s US focused fund being #1 in the list. Note that this fund track’s S&P’s Total Market Index, which comprises of large, mid, small, and micro-cap companies.
This is different from the S&P 500 index which is comprised of the 500 largest companies in the US. This fund holds shares in 3,918 companies.
Overseeing a cumulative growth of 269.4% over the last 10 years, this index fund has seen growth of 98.2% over the last five years and 35.5% over the last 3 years. The ongoing charge (OCF) for the fund is 0.1%.
The chart below shows the annualized rate of return over 1, 3, 5 and 10-years. The fund’s return closely tracks the benchmark return (not shown here), which is what you want from an index fund.
There are two versions of this fund, the Accumulation share class and the Income share class. The former reinvests its dividends within the fund so it continues to grow.
The Income share class pays out the dividends and currently the dividend yield is a nominal 1.18%.
Looking Ahead: While the US market has performed well in the recent past, its outperformance relative to global markets is nearly unprecedented. I therefore feel that it does not make sense to allocate your entire portfolio to the US market. This fund can be one of the constituents of your portfolio.
2. FTSE Developed World ex-UK Equity Index Fund
A bit of a mouthful to say, but this index fund is the second-most successful index equity fund on Vanguard regardless. It’s seen a cumulative return of 84.3% over 5 years and 209% over 10 years. The OCF is 0.14%.
The high returns of this fund makes sense as over 70% of the fund is allocated to US equities, with the balance split between Japan (7.2%), followed by France, Canada, and Switzerland with each around the 3% range. The fund holds shares of 2,019 companies. The fund tracks the FTSE Developed ex-UK Index.
This fund also has two versions – an Accumulation share class and the Income share class. The Income class currently has a dividend yield of 1.56%.
Looking Ahead: I am generally more comfortable with globally and sectorally diversified funds as they balance long-term risk and reward appropriately. If your livelihood and other large assets (like homes) are tied to the UK economy, then this fund’s non-UK exposure can help bring important diversification to your portfolio.
3. ESG Developed World All Cap Equity Index Fund
Closely following the above is this developed world fund with cumulative growth of 75.8% over five years and 179.2% growth over three years. The OCF is 0.20%.
The fund tracks the FTSE Developed All Cap Choice Index, which is the ESG version of the FTSE Developed All Cap Index. By applying ESG screening and exclusion criteria to the broader index, the fund ends up owning stocks in only those companies which FTSE feels meet an ESG standard. Examples of excluded activities include companies engaged in production or development of products that promote vices, non-renewable energy, or weapons.
The fund holds a 4,409 stocks which means its very well diversified. Like the previous two fund discussed here, this fund too has a very heavy US-equity exposure of around 70%.
ESG funds have taken a beating in the past couple of year as many of the funds ended up being concentrated in the same stocks – mainly tech. They also ended up excluding many companies that produce necessary goods, whether we like it or not. It’s therefore no surprise that ESG funds have fallen somewhat out of favour.
As with the other two funds, there are two share classes here as well. The Income share class has a dividend yield of 1.27%.
Looking Ahead: The ESG branded funds can be quite tricky to understand. While we all want to do good in this world, my analysis has so far been that ESG funds end up being marketing products and are rife with controversial decisions.
Most people focus on the “Environment” aspect of ESG, while minimizing the rest. Plenty of companies that pass the ESG screeners have major problems. For example, Facebook/Meta is a major holding in most ESG funds yet they were knowingly targeting pre-teen girls through Instagram – a major red flag in my books.
Having said that, if you feel that ESG funds are appropriate for you, then this would be a good fund to own. Just note that this fund has a high technology sector exposure, so the funds performance will be highly correlated with that sector’s returns.
4. Global Small Cap Index Fund
This fund is included as an honourable mention in this category. Typically small cap companies outperform large cap companies over the longer term. This has been well proven for the US market through academic studies. In this specific fund’s case though, that has not been the case as it has underperformed the other funds listed here.
Nevertheless I include it here as it does help diversify your exposure away from the highly concentrated large cap companies that are typically already well owned in most portfolios. The fund has returned a cumulative 58.3% over the last 5 years and 146.4% over the last 10 years.
The fund owns stocks in 4,207 companies which makes it very well diversified. The median market cap for the holdings is $2.8 billion (£2.3 billion), so the companies aren’t micro cap either. The underlying benchmark is the very well followed MSCI World Small Cap Index.
Around 59% of the fund’s holdings are in the US with the rest being allocated globally. One of the reason for the fund’s relative lower performance against the funds listed above is directly connected to its lower US exposure.
This fund also has two versions – an Accumulation share class and the Income share class. The Income class currently has a dividend yield of 1.67%. The OCF is slightly higher than the other funds at 0.29%
Looking Ahead: I like the global scope and the small-cap focus of this fund. As a long-term holding, this fund could be one important constituent in your portfolio
Best Performing Vanguard Equity ETFs
As the ETFs and Index funds are similar, it would be natural to expect that the best performing Vanguard ETFs in the UK would be very similar to the best performing Vanguard index funds in the UK. No surprises there! Again, as with the funds listed above, I considered a five-year cumulative growth performance window for ETFs.
It’s worth noting that these ETFs are also available to invest in via other platforms such as Hargreaves Lansdown and InvestEngine which offer a low barrier to entry for those looking to get started with investing.
Here are the top three performers in terms of Vanguard ETFs as of Jan 2024:
1. S&P 500 UCITS ETF (VUSA)
Much like its index fund counterpart, this US focused ETF is the best performing in Vanguard UK’s ETF stable. However the big difference between the index fund and this ETF is that this ETF tracks the S&P500, whereas the index fund tracks the S&P Total Market Index.
The index fund has outperformed the ETF over the last decade. If you do not have a big need to pick an ETF, I recommend picking the US index fund over the ETF as it brings in greater diversification and over several year or longer you may end up with better returns.
VUSA has delivered 5-year cumulative returns of 104.1%, which is slightly higher than the index fund’s 98.2%.
In large part, the difference is magnified due to the underperformance of the high flying technology stocks in the 2021 and 2023. For comparison, the index fund was down -9.66% in 2022 compared to -18.35% for the VUSA. That’s a huge gap!
As we discussed, blindly extrapolating past performance to the future is not the right thing to do. It is important to look at factors that would allow the index fund to continue outperforming in the future.
Traditionally, smaller cap companies outperform their larger brethren, and I believe that the inclusion of these mid, small, and micro-cap companies in the index fund allows it to deliver that boost to returns over and above the S&P500. As this factor should continue to work in the future, it is likely that the index fund will continue to outperform over a multi-year period.
Looking Ahead: As discussed earlier, the US-only focus of this fund has served it well so far. Going forward, it can continue to be an important part of your portfolio but I feel it’s also important to have direct exposure to non-US stocks.
2. FTSE North America UCITS ETF (VNRT)
This ETF tracks the FTSE North America Index, which is comprised of 95.5% allocation to the US and a 4.5% allocation to Canada. The Canadian market brings with it a higher exposure to the Canadian financial sector and the natural resources sectors – Oil & Gas and Materials. The fund holds a total of 637 stocks.
The ETF has delivered a cumulative return of 102.3% over 5 years and 29% over 3 years.
Looking Ahead: This fund’s high-US exposure brings with it the same caveats I discussed earlier. It’s a decent fund, and this increases exposure a little to Canadian equities.
3. FTSE Developed World UCITS ETF (VEVE)
The third-place option goes to this developed world ETF which tracks the FTSE Developed Index.
The fund’s 2,200 holdings are allocated primarily to the US markets (67.5% of the fund), followed by Japan (6.9%), the UK (4.2%), France (3.10%), and Canada (2.8%).
I like this fund because it provides a diversified exposure to the developed global markets. Although the US markets have done well historically, from a forward looking-perspective, the stocks in other countries are quite cheap! This means having exposure to non-US stocks may allow you to have higher returns in the future. European stocks should outperform dramatically if/when there is a cessation in hostilities between Russia and Ukraine and an accompanying reduction in the energy prices.
There’s been cumulative growth of 81.9% over the last 5 years and 22.8% over 3 years.
Looking Ahead: This fund has exposure to developed markets and brings in greater diversification than being in the US alone. I think this could be a decent fund, but it does lack exposure to emerging markets. EM-focused funds didn’t make the cut here, but going ahead they will continue to develop and hence generate good returns. This fund could be paired with some supporting holdings in an EM-focused fund such as the FTSE Emerging Markets UCITS ETF (VFEM).
Best Performing Vanguard Equity Active Funds
I looked at all the active equity funds offered by Vanguard UK and unfortunately, I feel none of them are good enough to qualify as reasonable investments. The key reason is that all of them have underperformed their respective benchmarks by an appreciable amount, i.e. they all have negative alphas.
If you are interested in learning more about which methodology I used to reach my decision, please read the section further below on how to analyze the performance of active fund managers.
LifeStrategy vs Target Retirement Funds
Vanguard also offers blended funds which are essentially a ‘fund of funds’, where you can invest money in bundled equities which can also include bonds. The two blended types of fund you can buy into at Vanguard are LifeStrategy and Target Retirement.
- LifeStrategy actually gives you a pick of five different mixtures of equities vs bonds split. This starts at 20% equity and 80% bonds up to the 100% equity option. This is a passive option compared to actively choosing funds and ETFs on your own, meaning if you are relatively new to the world of investing, or if you simply want a completely passive approach, this is likely to be an excellent choice.
- Target Retirement fund options are also completely managed on your behalf, built with your own attitude to risk and retirement date in mind. These funds also vary in terms of equity vs bonds split and are automatically adjusted towards a higher bond allocation as you near your target retirement date.
What is Vanguard LifeStrategy?
Vanguard LifeStrategy is designed to help you work out a passive investment plan based on your attitude to financial risk.
Vanguard provides a choice of five different funds, each of them split different ways depending on your attitude to risk and or expected time horizon. Let’s take a look at the ones on offer.
|Total UK Allocation
|GBP Hedged Holdings
|20% Equity Fund
|40% Equity Fund
|60% Equity Fund
|80% Equity Fund
|100% Equity Fund
Starting from the lowest equity tier levels, the theoretical risk exposure of each portfolio is incremented by shifting the allocation in favour of equities in 20 percentage point steps. Similarly we see allocation to UK securities going down in favour of global securities – particularly the US.
Long-term investors or those with a high tolerance for portfolio volatility can choose a 100% equity fund.
For those nearing or in retirement, or if you simply cannot tolerate much portfolio volatility, you can go conservative with the Lifestrategy 60% equity fund, which hits the sweet spot for the so-called “Balanced portfolio”: 60% equity and 40% bonds.
There are funds with a lower equity weight, but I would only choose those if your aim is capital preservation.
What’s interesting here is the difference in approach to the UK-exposure. At the lower risk/equity tiers, Vanguard has a lower direct allocation the UK securities but offsets that with a higher proportion of currency-hedged holdings.
The currency hedging helps address the problem of currency volatility when looking at shorter-periods of time, but of course does come with a slight cost as hedging is not free.
The net impact though is at the 20% equity level, Vanguard’s UK and GBP-hedged holdings add up to 85%. If we skip to the 60% equity/risk level, then we see that the combined holdings (UK + hedged) are at 55%. Once we get to the 100% equity level, the weight drops to 20% combined.
As you step up the risk levels, the allocation is shifted in favour of equities in 20 percentage point steps. Similarly we see allocation to UK securities going down in favour of global securities – particularly the US.
Overall, the LifeStrategy funds are a great option for those who want the “set it and forget it” approach to investing at a low fee level.
What are Vanguard Target Retirement Funds?
Target Retirement funds are different beasts altogether. Right now, there are eleven active target Retirement funds available through Vanguard, starting with 2015 and 2020 before moving all the way ahead to 2065. As you may have guessed, these are so named based on the dates where you’re likely to want to retire.
Therefore, anyone born in 2000 may likely be looking at the 2060 or 2065 funds based on state retirement age. Due to how the funds are structured, if you’re keen to retire early (aren’t we all!), putting your money in the 2050 fund would actually be the wrong approach – as these funds increase progressively increase the allocation towards bonds as the target date gets closer.
Those who want to retire early, would likely want to maximize returns, so you want to put your money in the fund with the highest equity allocation, such as the 2065 fund. Alternatively the better, but more volatile strategy, is to go for 100% equity funds like the ones discussed above. But before you do that, please consider your circumstances and evaluate whether putting all your money in stocks is the right thing to do.
On the other hand, if you’re only a few years away from retirement, it’s important to get the fund pick correct. Check out my detailed article on picking the right Vanguard Target Retirement fund for 60 year olds.
The Target Retirement fund series are good for those investors who want a low-cost approach to structuring their investments, but do not want to get in to the weeds of doing the asset allocation and fund selection.
There is quite a bit of data to crunch if you are looking at performance stats across all of the retirement funds available, so let’s take a brief look at the five year facts at either end of the scale for representative purposes.
The 2020 fund, as of the end of December 2022, has seen five-year cumulative growth of 15.1%, which is 2.86% annualized. Going further up the scale, the five-year performance for the 2035 fund sits at a reasonable 26.41% (4.08% annualized). Right now, the latest fund choice offering five-year stats is the 2065 fund, with growth over five years sitting at 27.45% (4.97% annualized).
Looking at that data alone, we can see that the later the retirement date, the higher the five-year growth. This is generally expected as the way Target Retirement funds are structured is that the closer the retirement date, the higher the allocation of ‘safer’ investments – namely bonds.
The OCF on all of these funds is 0.24%.
Index Funds vs ETFs
Vanguard offers funds and ETFs, all available through their online platform. Let’s take a quick look at the difference between these fund types.
- Mutual funds – this is the collective name for various funds which fall within this category such as index funds and active funds, blended funds (such as Vanguards LifeStrategy funds) and fixed income funds aka bonds.
- ETFs (Exchange Traded Funds) – ETFs, like index funds, track an underlying index. These work like stocks in the sense that you can trade them at any time on an exchange throughout the trading hours.
The main difference between an ETF and an index fund is that an ETF can be traded actively on the market like any other stock. The other point to note is that the price on index funds is calculated only at the end of each trading day. An index fund is basically a mutual fund which means that it can only be traded based on end-of-day pricing. For long-term investors either investment vehicle is fine as they both provide the same exposure.
People may choose ETFs over mutual funds for the fact that generally you can invest with smaller amounts as they usually have lower minimum investment demands. They are also generally cheaper to run so can have lower ongoing fees. They can be an easy first option for beginner investors, making the range of ETFs on Vanguard particularly appealing.
Past Performance vs Future Performance
As you think about which funds to buy, it’s important topic to remember the dangers of taking past returns and extrapolating future returns from that. We have all seen the standard disclaimer on investment products: Past performance does not guarantee future results. And I’m sure everyone just yawns and moves on from that line as the assumption is that there’s not much we can do with it.
However it’s important to understand that is truly a very important concept and what you can actually do about it.
Most people have a tendency to extrapolate the recent past in to the future. While in many cases that is perfectly fine, in the financial markets, it can easily get us into trouble. It’s the reason why many investors pile into stocks at exactly the wrong time – when the market is making new highs; and then sell at exactly the wrong time, when the market is going down.
In a very simplified format, the two images below show how people expect the market to perform – both to the up and down side – versus what the reality is.
It is therefore important to not assume that the funds that did the best in the past will be the best performers in the future; or vice versa – that the worst performers will continue to remain the worst performers. So what can you do about it?
Ask the question – Why? Why did the fund perform well in the past? Will the same conditions exist in the future? Are underlying factors that drove the results replicable for the future or not? What is the track record over a longer period of time – say 5 to 10 years? If an actively managed fund has performed consistently, has the person running the fund (the fund or portfolio manager) been the same?
How to Analyze Performance of Active Fund Managers
As we get in to the world of active investing, there are two very important aspects to consider when judging a fund’s performance: Alpha and Beta. No, I’m not making this up. Let’s take a quick look:
- Beta: In finance lingo, beta is a simple way of saying how well a fund is correlated to its benchmark. A Beta of 1 implies that the fund basically moves in line with the benchmark, less than 1 implies the fund is less volatile than the benchmark, and greater than 1 means its more volatile.
- Alpha: This is the measure of how much a fund outperforms its benchmark. For an investor, one should look at alpha after all fees and expenses have been considered. An alpha, net of fees, that is positive (greater than 0) over multi-year periods implies that fund manager is outperforming the benchmark.
Therefore when analyzing active funds, one has to look at both metrics. Consider the funds as an example below:
|5-year Annualized Return (net of fees)
Here are my observations from this table:
- Funds A and B have delivered the same total return, however Fund A has outperformed its benchmark by 2% annualized (a huge beat!) whereas Fund B has underperformed its benchmark by 2%. This means:
- Fund Manager A has displayed greater skill (or luck) in outperforming his/her benchmark
- Fund Manager B delivered same return as A, but has actually detracted from performance. You’re better off investing in an ETF that tracks Benchmark B.
- Fund C has clearly delivered the highest absolute performance, which is comprised of solid returns from the benchmark + consistent outperformance. This means:
- Fund Manager C has displayed skill in outperforming their benchmark which delivered a 9% return.
- Who is the better manager: A or C? It’s not possible to say. As both manage their funds to different benchmarks. Depending on what the benchmarks are comprised of, it could take two very different skill sets to run the funds.
If I had to allocate a portfolio based on this information, I would do the following:
- Buy Fund C: If the manager will continue to run the fund and I expect that Benchmark C will continue to do well, then this would be a great allocation.
- Buy Fund A: If the manager will continue to run this fund, and I expect that Benchmark A will deliver a higher return in the future. If I believe that Benchmark A will continue to perform poorly, then I would skip this fund, despite the manager’s outperformance.
- Buy ETF that tracks Benchmark B: Manager B has no skill, and is taking away from my performance. As long as Benchmark B will continue to perform well in the future, I’m better off with an ETF or index fund that tracks that benchmark.
As you can see, Vanguard does strive to cover as many bases as possible, and on the whole, they have a series of very healthy funds and ETFs for you to invest in. However, there’s no one or two options that are likely to be the ‘best performers’ across the board. You absolutely need to think carefully about how you want to invest, how much you’d like to put forward, and even when you’d like to retire.
The best Vanguard funds aren’t necessarily those which are likely to have firm past performance – you’re going to need to look at a wider range of parameters.
Passive investors will likely want to take consider the LifeStrategy blended funds if they don’t want to have to muddle around with picking individual funds and wider market strategies on their own.
You could also consider a completely passive investment option elsewhere, i.e. through a popular UK platform such as Nutmeg. Whatever you decide, be sure to consider the key aspects such as how involved you want to be, fund and account options available, and of course the all important fees.
Before You Go…
Please do let us know in the comments whether you found this article useful or not. If there’s something we missed or anything that needs to change, please do let us know. Your feedback and constructive comments help us make this content more valuable for everyone. Thanks!
by Brianna Johnson
Brianna Johnson, a Miami-based finance veteran, is a wealth advisor for high net-worth families. She loves to write and to share her knowledge. For PFF, she writes in-depth articles on finance and investments that help readers get unique insights. See more.