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Powerful Vanguard Mutual Funds for Your Roth IRA

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The Vanguard Group Inc., known as Vanguard, is one of the world’s largest investment management and advisory services companies. It’s primarily a mutual fund and ETF management company with about $8.1 trillion in assets under management (AUM) as of January 31, 2022. Founded in 1975, the company offers a total of 422 funds, 215 of which are available in the U.S. Vanguard is a full-service broker, offering low-cost investing for long-term buy-and-hold investors and retirement savers.

Investors in the U.S. have access to several tax-advantaged saving plans, including 401(k)s, individual retirement accounts (IRAs), and Roth IRAs. The main difference between a Roth IRA and a traditional IRA is that the former is funded with after-tax dollars. That means that contributions to Roth IRAs are not tax-deductible, as they are with traditional IRAs. But unlike a traditional IRA where withdrawn funds are taxed, a Roth IRA allows investors to withdraw funds tax-free. Fund numbers are as of April 11, 2022, unless stated otherwise.

Key Takeaways

Vanguard was founded in 1975 and has about 215 funds available in the U.S., as well as $8 trillion in AUM.When making a retirement account, a broad stock fund and broad bond fund provide a good foundation, either as the entire basis for investing or to build upon with more complex investments.Roth IRAs allow you to avoid paying taxes on investment returns by investing after-tax income.VTI and BND can serve as good starting points when looking for Roth IRA investments from Vanguard.

Vanguard Total Stock Market ETF (VTI)

Expense ratio: 0.03% (as of Apr. 29, 2022)Assets under management: $282.9 billion (as of Apr. 11, 2022) 12-Month Trailing (TTM) yield: 1.33% (as of April 11, 2022)1-year trailing total return: 11.58% (as of March 31, 2022)Inception date: May 24, 2001

The Vanguard Total Stock Market ETF aims to track the performance of the CRSP US Total Market Index. As an exchange-traded fund (ETF), VTI offers investors access to a broad portfolio of equities, and shares of VTI can be traded throughout the day like a stock. VTI is passively managed, utilizing an index-sampling strategy that keeps investor expenses low. Gerard O’Reilly, a principal and portfolio manager, has advised the fund since 2001, and portfolio manager Walter Nejman has advised it since 2016.

VTI’s portfolio consists of 4,070 stocks, with the top 10 accounting for just under a quarter of total invested assets. The fund’s holdings include large-cap, mid-cap, and small-cap equities across growth and value styles. While Vanguard does not provide an exact breakdown of the percentage of the portfolio divided across these market capitalization categories, the fund tends toward large-cap stocks. The median market cap of a VTI holding is $129.6 billion. Virtually all of the holdings are U.S.-based companies; only 0.1% are foreign.

Investors who want to create wealth through price appreciation should consider a broad-based equities fund such as VTI. Although equities have higher volatility than bonds, they have a track record of returning more over a long period of time. If investors have a low-risk tolerance or are nearing retirement, they might consider a more income-oriented portfolio.

Vanguard Total Bond Market ETF (BND)

Expense ratio: 0.04% (as of April 29, 2022)Assets under management: $81.5 billion (as of Apr. 11, 2022)12-Month Trailing (TTM) yield: 2.02% (as of April 11, 2022)1-year trailing total return: -4.11% (as of March 31, 2022)Inception date: April 3, 2007

The Vanguard Total Bond Market ETF tracks the Bloomberg U.S. Aggregate Float Adjusted Index, a broad, market-weighted index. Provides gives investors broad exposure to the taxable investment-grade U.S. dollar-denominated bond market. The fund excludes inflation-protected and tax-exempt bonds. Joshua Barrickman, principal, co-head of Fixed Income Indexing America and a portfolio manager, has advised the fund since 2013. BND holds 10,127 bonds. The average duration of a BND bond is 6.8 years, and the average effective maturity was 8.9 years. Just over two-thirds of bonds are U.S. government bonds. While the remaining third is investment-grade debt, about 15.2% of the total is BBB bonds, which are among the lowest-rated on the investment-grade ladder.

BND is intended to serve as a core bond holding for investors. Bonds generally have low volatility and provide a steady supply of interest payments to the investor. Taxes on the interest payments are deferred in a Roth IRA account, making it an ideal place to hold these kinds of investments. A broad-based bond fund is typically a lower-return, lower-risk investment vehicle than a stock fund. As a result, bonds can be useful both for risk-averse investors and for portfolio diversification.

What Is the Cost To Open a Vanguard Roth IRA?

In a few cases, the minimum investment needed to open a Vanguard Roth IRA may be as low as $1,000. For most Vanguard funds, the minimum investment necessary is $3,000, and that minimum is higher at some funds. There is no fee to actually open the account.

Does Vanguard Offer Roth and Traditional IRAs?

Yes. Vanguard offers both Roth and traditional IRAs.

Is a Vanguard Roth IRA Free?

Vanguard charges annual account service fees of $20 per Roth IRA account if the total Vanguard mutual funds and ETFs assets in the account are less than $10,000. However, this fee can be waived by signing up for the company’s e-delivery service or by maintaining at least $50,000 in qualifying assets. Investors should not overlook that they also pay through expense ratios at individual funds.

The Bottom Line

Roth IRAS can be an effective tool for retirement saving, and broad bond and stock funds provide diverse, inexpensive foundations. Investors may wish to go further depending upon how much time, energy, and risk tolerance they have for investing. For many investors who are short on time, it’s a practical decision to pick a few large, diverse bond and stock funds and continue to invest in those. Some investors will choose another course, by opting to add investments in individual companies, including riskier small-cap stocks, and through targeted sector investing and stock analysis.

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