Vanguard is the grandfather of low-cost investing: Founder John Boyle invented the index fund in 1975, offering the investing masses a way to track indexes like the S&P 500 and avoid the high costs of actively managed mutual funds (which attempt to beat the market but rarely succeed).
Today, Vanguard is still known primarily for its index funds, and the company’s exchange-traded funds are the foundation of most robo-advisor portfolios because of their low expense ratios. The online broker is geared toward long-term retirement investors rather than frequent stock traders: It doesn’t offer a trading platform, and its trading commissions actually punish those with smaller account balances who trade more than 25 times a year.
NerdWallet's rating: / 5
Quick Facts
- Commission: $7 to $20 per trade; discounts on balances above $500,000
- Account minimum: $0
Vanguard is best for:
- Retirement investors
- Low-cost investments
- Index funds and ETFs
- High account balances
Vanguard at a glance
| Overall |
|
|
| Stock trading costs |  |
Vary by account balance: • Under $50,000: $7 for first 25 trades a year, $20 thereafter • $50,000 and up: $7 • $500,000 and up: $2 • $1 million and up: First 25 trades a year are free, $2 thereafter • $10 million and up: First 500 trades a year are free, $2 thereafter |
| Options trades |  |
Vary by account balance: • Less than $50,000: $20 + $1 per contract • $50,000 and up: $7 + $1 per contract • $500,000 and up: $2 + $1 per contract |
| Account minimum |  |
$0; however, fund minimums start at $1,000 |
| Account fees (annual, transfer, closing, inactivity) |
|
$20 annual account service fee for all brokerage accounts and IRAs with balances below $50,000; waived if you sign up for e-delivery |
| Trading platform | Not rated | None offered |
| Mobile app |  |
No trading app; standard mobile app to view accounts, investment returns and research funds |
| Mutual funds | |
More than 120 no-transaction-fee mutual funds |
| Commission-free ETFs |
|
More than 50 commission-free ETFs |
| Research and data | |
Limited |
| Tradable securities | |
• Stocks • Bonds • Mutual funds • ETFs • Options |
| Customer support/ branches |
|
Phone support Monday-Friday 8 a.m.-10 p.m. Eastern; email support |
Where Vanguard shines
Expense ratios: As noted above, Vanguard is the industry leader in low-cost mutual and index funds. If you’re a client of a robo-advisor, there’s a good chance your portfolio primarily consists of Vanguard ETFs. If your 401(k) plan offers a selection of Vanguard index and target-date retirement funds, you should feel lucky. That’s because expenses can really make or break your long-term savings; on a $100,000 investment over 30 years, the difference between a 0.25% expense ratio and a 1.0% expense ratio is more than $135,000, assuming a 7% annual return.
Vanguard’s mutual funds aren’t just low cost, they’re significantly less expensive than the industry average. Vanguard’s average expense ratio is 0.18%; the typical equity mutual fund carries an expense ratio of 0.70%. (That’s an asset-weighted average from the Investment Company Institute; “asset-weighting” more accurately reflects what investors are paying because it weights larger funds — with more investors — more heavily when calculating the average cost.)
Fund performance: Fees are one thing, but do Vanguard’s mutual funds stack up in performance? You might assume you get what you pay for here, but in fact, the opposite is often true. The company cites a Lipper report showing that 92% of Vanguard’s funds have beaten the returns of their peer-group averages over the 10-year period ended in December 2015.
Morningstar also consistently gives many of Vanguard’s funds strong praise, including a gold rating for its target-date retirement funds. This doesn’t mean all of Vanguard’s funds excel — as always, it’s important to research and benchmark individual funds. But overall, the company gets high marks here.
Admiral Shares: Admiral Shares are a separate share class of Vanguard mutual funds with minimum investments of at least $10,000 (and most actively managed funds have a minimum of $50,000). Expense ratios are 16% lower than the company’s standard fund share class. Essentially, it’s the company’s way of passing along savings to larger accounts.
The company will automatically evaluate fund accounts to see if they’re eligible to save money by converting existing funds to Admiral Shares. (Unfortunately, if a balance in the fund drops below the minimum requirement, the account may also be automatically converted back.)
There’s little question that Vanguard generally caters toward higher-net-worth investors — the company’s robo-advisory arm, Vanguard Personal Advisor Services, has an investment minimum of $50,000, for example — so this is noted with the understanding that some investors may not be able to take advantage.
Investor education: Vanguard offers a wealth of educational resources on its website, geared toward the retirement saver. Investors can learn about how to prioritize their goals; read about their investment options; use high-quality calculators and tools to predict when they’ll be able to retire; estimate their retirement expenses; and weigh the benefits of converting a traditional IRA to a Roth IRA. Investors with $50,000 or more get access to elevated benefits, including investment analysis and recommendations from Financial Engines, an independent investment advisor.
Where Vanguard falls short
Trading: To be fair, Vanguard isn’t exactly targeting active traders. But we want to make this clear, particularly to investors with smaller account balances: The company’s pricing structure actively discourages active trading, increasing prices for investors who trade more than 25 times per year on account balances of less than $50,000. (At many other online brokers, prices are instead discounted based on volume.) Vanguard also doesn’t provide a trading platform or many of the analysis tools typically offered by a broker.
Traders with larger balances who don’t mind the lack of a trading platform and other tools can actually benefit from low costs, though. Once an account balance crosses the $50,000 mark, trades are a mid-range $7; the cost drops to just $2 a trade once balances cross the $500,000 mark. At some very high account balance levels, $1 million or more, a limited number of trades are free.
Fund minimums: Mutual fund minimums are common, don’t get us wrong. But at many competitors, minimums are waived on some funds if investors agree to auto-deposits of a certain amount each month. At Fidelity, investors can bypass many mutual fund minimums with auto-deposits of $200 a month or $600 a quarter. Charles Schwab has a $1,000 account minimum, also waived with auto-deposits of $100 a month, and the company offers a large list of funds with $100 minimums.
At Vanguard, most retirement funds and the Vanguard STAR fund have an investment minimum of $1,000, and other Vanguard funds carry minimums of $3,000.
As always, ETFs trade like a stock and are priced per share. There is no account minimum for ETF and stock trading.
Account service fee: This is easily avoided by signing up for email delivery of account statements and fund prospectuses. Otherwise, if you don’t have a total balance of $50,000 or more, you’ll pay an annual fee of $20 for each fund account with a balance of less than $10,000.
The bottom line
Vanguard is in many ways ideal for its target audience: retirement investors with relatively high account balances. The company offers many of the best mutual funds available, including well-performing but low-cost index funds and ETFs. But frequent traders, particularly those with account balances below $50,000, probably won’t be happy here; Vanguard’s commissions are high at that balance level, and the company also lacks a trading platform, as well as significant research, data and analysis tools.
Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.
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