So you’ve decided that you want to invest in a Vanguard fund – that’s awesome, well done!
You know you want use Vanguard as your platform – now you need to decide on which fund.
But with over 80 potential Vanguard funds to choose from – which type of fund is the best?
Life Strategy Funds are blended index funds you can invest in that match your level of risk.
Target Retirement Funds are blended funds to invest in based on when you want to retire.
Index and Active Funds are funds that passively track the market or managed by a manager.
Exchange Traded Funds are similar to Index Funds except they are ‘floated’ on the market.
In this post, I’ll be talking about these 4 types of funds available on the Vanguard UK platform.
I will explain what these terms mean, their positives, as well as their negatives for investors.
Finally I discuss which is the best Vanguard fund type and where to find out more information.
Life Strategy Funds
Life Strategy Funds are the first type of funds that will show up on the Vanguard UK website.
It was the first type of Vanguard fund that I invested in before I did my research and changed.
This type of fund is a mixture of bonds and shares, depending on the level of risk you want.
The higher bond percentage, the risk is lower. The higher stock percentage, the risk is higher.
The benefit of these funds is that they auto rebalance to keep your split of bonds and shares.
This is particularly helpful in times of market crashes – they help to smooth out the volatility.
The negative of this type of fund is that they are heavily biased based on your home country.
So if you’re in the UK, you will find that a large portion of your bonds/shares will be UK based.
This is not what we want in our fund(s) – we want a fund that is heavily diversified and global.
Although there are some advantages to this type of fund, home bias puts it at a disadvantage.
Target Retirement Funds
Target Retirement Funds are the second fund type you will find on the Vanguard UK platform.
The idea is that you pick the fund that is the closest date to your retirement and invest in it.
It comprises of a mix of bonds and shares. Rather than basing it on risk it’s based on your age.
The younger you are, the more shares allocated. The older you are the more bonds allocated.
The benefit of this fund type is that it changes your allocation as you get closer to retirement.
As you get closer to retirement, it chooses a higher bond percentage as it deemed more safe.
The problem with this fund type is that there are no options to have a 100% shares allocation.
The younger you are the more you want your investments in shares due to the better returns.
In theory this fund is a good idea but by choosing it you are just limiting your growth potential.
Although it has its benefits, I don’t think it’s good to choose your portfolio based on your age.
Index and Active Funds
The third category of funds you will find on the Vanguard website is Index and Active Funds.
In my opinion, stay away from active funds. I’m not sure why they’re there in the first place.
Active Funds are actively managed funds run by fund managers who try and beat the market.
This means that their fees higher and the performance is lower – you can’t beat the market.
As for the advantages of this fund type, I can’t think of any; not sure why anyone invest in it.
Index Funds on the other hand are passive managed funds whose goal isto track the market.
Not only are their fees lower, but their performance is better – the market always goes up.
As for disadvantages, I can’t think of any – index investing in my opinion is the best strategy.
So whenever you see a yellow ‘active’ box next to a fund in Vanguard – stay away from it.
This indicates it is an Active Fund – nothing else will give it away, unless you look at its fees.
Exchange Traded Funds
The last category of funds you’ll come across in Vanguard are Exchange Traded Funds or ETFs.
They are similar to index funds but the difference is that they are ‘floated’ on the stock market.
This means that you can trade instantly – buy in and out of each fund easily and very quickly.
With index funds, there is only one price a day – it is much slower to move money in and out.
The main advantage with ETFs is that they seem to be much more available than index funds.
For some reason in other countries, you tend to find ETFs more accessible than index funds.
The disadvantage with ETFs is actually its benefit; the ability to move money in or out quickly.
Investors may be tempted to wait for the lowest price to buy, or sell when things are volatile.
With investing, you want to deposit your money and leave it in there for as long as possible.
So long as you use ETFs correctly, they are a great option when index funds are not available.
Conclusion
Well, these are the four types of funds that you can invest in with your Vanguard UK platform.
So the question is – which type of fund do I think is best? I think that the winner is obvious.
In my opinion, index funds are the best type of funds to invest in using the Vanguard platform.
They have low fees as they’re passive, and perform the best because they track the market.
While the other fund types do have their advantages, they do not outperform the index funds.
Which is the best index fund to invest in? Check out my blog on the best Vanguard Index Fund.
To find out more on index funds, check out the book The Simple Path to Wealth by JL Collins.
In the book, the author talks about how he used index funds that allowed him to retire early.
Are you investing in index funds? Which ones are you using? Please share in the comments.
If you want to find out more on index investing, please let me know in the comments below!
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