You could throw darts, blindfolded, at a wall of Vanguard mutual funds and you’d still end up with a crop of some of the best funds you can buy today. But if you’re looking for the best among Vanguard’s best, hitting the bull’s-eye is a bit more challenging.
It takes a lot more than a good idea for a mutual fund to receive the highest grades from mutual fund ranking services. They generally need to have above-average returns, below-average risk and low expenses compared to funds in their respective categories.
It also helps for the returns to remain consistently ahead of category peers across all time periods measured, especially for three years and longer. Tax-efficiency is another plus when it comes to high ratings.
So to come up with a truly useful list of the highest rated Vanguard funds, I started with those that received the best marks in the top mutual fund rating services (Morningstar and Lipper), then eliminated funds that had required minimums higher than $3,000.
To further qualify my selection process, each fund had to earn at least four out of five stars at Morningstar and receive a 5 (out of 5) in at least threeof the five Lipper Leader scores. For those not familiar with these ratings, it takes a truly exceptional fund to get such high marksfrom both services.
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With that as a backdrop, and in no particular order, here are the seven highest-rated Vanguard mutual funds.
Highest-Rated Vanguard Mutual Funds: Balanced Index (VBINX)
Source: Shutterstock
Expenses:0.19%, or $19 annually per every $10,000 invested
Minimum Initial Investment:$3,000
Morningstar Ranking: 5 Stars
Lipper Leader Scores: 5-5-4-5-5*
It’s not often that you see an index fund get such consistently high ratings, but Vanguard Balanced Index (MUTF:VBINX) is an exceptional exception.
The primary reason why index funds are rarely seen infund rating services’ top spots? Risk-adjusted returns are a big factor in getting those ratings. While passive funds tend to be lower-risk in relation to their active peers, their returns are typically average, especially in the short-term.
But VBINX beats at least 75% to 90% of its moderate allocation category peers in three-, five-and 10-year returns. It does this with a simple, low-cost blend of about 60% stocks — including top holdings Apple Inc.(NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT) — and 40% in bonds.
*Note: Lipper Leader scores go in the following order: Total Returns, Consistent Return, Preservation, Tax Efficiency and Expense.
Highest-Rated Vanguard Mutual Funds:Global Minimum Volatility(VMVFX)
Source: Shutterstock
Expenses:0.25%
Minimum Initial Investment:$3,000
Morningstar Ranking:5 Stars
Lipper Leader Scores:5-4-5-2-5
Top-rated funds aren’t always the top performerstheir respective categories, and Vanguard Global Minimum Volatility (MUTF:VMVFX) isa prime example of how that happens.
VMVFX — the highest-rated Vanguard international fund — is a blend of U.S. and foreign stocks that has managed to keep risk low relative to theglobal stockindices. This means that performance will tend to lag in strong up markets … but will usually beat the global market indices in down markets.
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Shareholders of VMVFX gain exposure to high-quality stocks across the spectrum of capitalization, mostly in Europe and North America. Top holdings include HDFC Bank Limited (ADR) (NYSE:HDB), Jack Henry & Associates, Inc. (NASDAQ:JHY) and Starwood Property Trust, Inc. (NYSE:STWD).
Highest-Rated Vanguard Mutual Funds:Wellesley Income(VWINX)
Source: StockSnap.io
Expenses:0.22%
Minimum Initial Investment:$3,000
Morningstar Ranking:5 Stars
Lipper Leader Scores:5-5-5-2-5
Every smart investor wants high returns relative to risk, and they can find that quality in Vanguard Wellesley Income (MUTF:VWINX).
With an asset allocation of roughly one-third stocks and two-thirds bonds, you’d think that VWINX would put up average long-term annual returns of about 5% or a perhaps a bit more. But Wellesleyhas averaged a mind-boggling 9.8% annualized return since inception in 1970.
The stock allocation consists primarily of quality dividend stocks like MSFT, JPMorgan Chase & Co.(NYSE:JPM), and Philip Morris International Inc. (NYSE:PM) — good for a yield of 3% at currnet prices. Meanwhile, the bond allocation has an average credit quality of investment-grade with an average effective maturity of just under 10 years.
Highest-Rated Vanguard Mutual Funds:High-Yield Tax Exempt (VWAHX)
Source: Shutterstock
Expenses:0.19%
Minimum Initial Investment:$3,000
Morningstar Ranking:5 Stars
Lipper Leader Scores:5-5-3-5-5
High yields, above-average returns, low expenses and tax-efficiency combine to make Vanguard High-Yield Tax Exempt (MUTF:VWAHX) one of the highest-rated Vanguard mutual funds on the market today.
VWAHX achieves its tax-efficiency by holding municipal bonds, which are tax-free at the federal level. This appeals primarily to investors in high tax brackets looking for yield in their taxable brokerage accounts.
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The portfolio consists of a broad mix of nearly 2,000 high-yield municipal bonds with the majority being just above or just below investment grade. This means shareholders can get above-average yields — the headline yield of 2.93% comes out to a tax-equivalent yield of 4.85% for the highest tax bracket — but exposure to the junkiest bonds is below category average.
Highest-Rated Vanguard Mutual Funds:HighDividend Yield Index (VHDYX)
Source: Shutterstock
Expenses:0.15%
Minimum Initial Investment:$3,000
Morningstar Ranking:4 Stars
Lipper Leader Scores:5-5-5-5-5
Vanguard High Dividend Yield Index (MUTF:VHDYX) has earned top Lipper Leader rankings for all five categories, putting it in rare company among Vanguard mutual funds.
VHDYX tracks theFTSE High Dividend Yield Index, which covers about 400 stocks of U.S. companies that have a record of consistently paying above-average dividends. This means the portfolio is full of quality stocks like Microsoft, Johnson & Johnson (NYSE:JNJ) and Exxon Mobil Corporation (NYSE:XOM).
The fund is also well-diversified across several sectors, including consumer goods, industrials, financials, technology and healthcare.
VHDYX throws off a yield just above 3%.
Highest-Rated Vanguard Mutual Funds:GNMA(VFIIX)
Source: Shutterstock
Expenses:0.21%
Minimum Initial Investment:$3,000
Morningstar Ranking:5 Stars
Lipper Leader Scores:5-5-5-3-5
Investors looking for a conservative bond allocation while scoring higher yields than U.S. Treasury bonds will want to take a look at Vanguard GNMA (MUTF:VFIIX).
The VFIIX portfolio consists primarily of Government National Mortgage Association (GNMA) securities, which are government-backed. GNMA — better known as Ginnie Mae — mortgages mostly come from first-time homebuyers through the Federal Housing Administration.
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What this means toshareholders of VFIIX is that they get a basket of mostly AAA-rated bonds but consistently better yields than government issues. As of right now, VFIIX yields 2.6%.
Highest-Rated Vanguard Mutual Funds:Wellington (VWELX)
Source: Pixabay
Expenses:0.25%
Minimum Initial Investment:$3,000
Morningstar Ranking:5 Stars
Lipper Leader Scores:5-5-4-2-5
Investors wanting a moderate allocation balanced fund with solid active managers at the helm need look no further thanVanguard Wellington (MUTF:VWELX).
VWELX, the oldest balanced fund on the market, is also one of the best mutual funds on the market. In fact, its popularity has caused it to close to new investors at various points, though at the moment, Vanguard’s website indicates it’s open. The portfolio consists of a diversified blend of about 60% stocks and 40% bonds. As for performance, Wellington beats more than 90% of moderate allocation funds for three-, five- and 10-year annualized returns.
The stocks are mostly high-quality large caps like Microsoft, JPMorganand Bank of America Corp (NYSE:BAC), while the bonds sport an average duration of six years and A-rated credit quality. Income is a bit more modest on this one at 2.3%.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although some of his client accounts hold VBINX, VWINX, and VWAHX. Under no circ*mstances does this information represent a recommendation to buy or sell securities.
