Vanguard Exchange-Traded Funds

What Are Vanguard Exchange-Traded Funds?

Vanguard exchange-traded funds (ETFs) are a class of funds offered by Vanguard. Exchange-traded funds combine the diversification of mutual funds with a lower investment minimum required. Vanguard also offers real-time pricing. ETFs are traded the same way that individual stocks are traded.

Understanding Vanguard Exchange-Traded Funds

There are currently more than 50 Vanguard exchange-traded funds, which are traded, like any other shares, on the U.S. stock exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq. Their underlying indexes cover both individual sectors, such as materials and energy, and domestic and international indexes.

The Vanguard ETFs were previously known as Vanguard Index Participation Receipts (VIPERS). In their current form, Vanguard ETFs aim to track their underlying indexes as closely as possible and offer the flexibility of intraday trading.

By developing this class of low-cost funds, Vanguard sought to bring its longstanding leadership in the passive management market to the ETF space.

ETFs can have thousands of stocks or bonds in a single fund, so they provide more flexibility for portfolios. They include all the benefits of an index fund but provide more control for the individual investor.

Types of Vanguard Exchange-Traded Funds

U.S. Stock ETFs

Vanguard offers a range of ETF products that are focused on U.S. stocks. These ETFs can further be broken down into the size of the companies they target: large-cap, mid-cap, or small-cap. These funds can also be broken down into the performance of the companies that they invest in. Growth ETFs invest in stocks with above-average growth rates. Value ETFs invest in companies with below-average valuations. And finally, blend ETFs invest in a combination of growth and value ETFs.

For example, the Vanguard Dividend Appreciation ETF invests in large-cap companies. This fund is comprised of a blend of value and growth stocks. It has an expense ratio of 0.06% and a dividend yield of 1.77%.

International Stock ETFs

Vanguard has three types of international ETFs: global, international, and emerging market. Global stock ETFs invest in stocks from all around the world, including the U.S. International stock ETFs invest in stocks from all around the world, with the exception of the U.S. Emerging-market ETFs invest only in stocks from developing countries.

For example, the Vanguard International High Dividend Yield ETF invests in the international market. Its expense ratio is 0.27% and its dividend yield is 3.83%.

Vanguard Sector ETFs

Vanguard's sector ETFs are stock-based ETFs that invest in indexes tracking specific sectors of the economy. Some of these sectors include telecommunications, energy, materials, information technology (IT), and healthcare. The advantage of choosing a sector-based ETF is that investors can target a certain part of the market without the risk and research involved in choosing individual companies to invest in.

For example, if you think the banking business as a whole will perform well in the coming months, you might invest in the Vanguard Financials ETF. It has an expense ratio of 0.10% and a dividend yield of 2.23%.

U.S. Bond ETFs

For investors that want to allocate their investment assets to an age appropriate combination of stocks and bonds, Vanguard offers 15 different ETFs focused on U.S. bonds. They can be split into four main categories: government bonds, investment-grade corporate bonds, a blend of these two (government and corporate), and tax-exempt bonds.

Government bonds tend to pay relatively low dividend yields when compared with corporate bonds. However, they also have a significantly lower risk of default. While corporate bonds pay relatively high interest rates, they also have a higher risk of default than government bonds. Finally, Vanguard's tax-exempt ETF bond category is ideal investors who hold their investments in taxable brokerage accounts and are in relatively high tax brackets.

Exchange-Traded Funds (ETFs) vs. Stocks vs. Mutual Funds

Owning an ETF is similar to owning a mutual fund; individual stocks or bonds offer the same built-in diversification and low costs. The funds are also tradable, like individual stocks.

Compared with stocks and bonds, however, ETFs offer less risk and less ongoing maintenance. Vanguard's mix of preselected stocks or bonds means that if one stock or bond in the fund performs poorly, others are likely performing well. Also, investors can leave security selection to professional fund managers. 

Both mutual funds and ETFs are less risky than investing in individual stocks and bonds and they offer a wide variety of options to meet specific investment goals. However, compared with standard mutual funds, ETFs have some unique characteristics that might make them appealing for some investors. For example, Vanguard's ETFs are managed by portfolio professionals and are commission-free.

In addition, ETFs require smaller investment minimums to start with. They also offer real-time, intraday pricing, assessing minute by minute changes, whenever they're bought and sold, whereas mutual funds are only priced at the close of a trading day.