Vanguard Index Funds

There are several good reasons why Vanguard index funds are commonly preferred by investors. Of course they were the premier company that set the standard for index funds but that isn’t what has kept them on the top of the list. Most investors find that low cost index funds outperform higher cost funds year after year and Vanguard has traditionally offered low cost, passive index funds. This leads to one of the important premises that Vanguard holds to and that is that passive index funds are far superior to active funds.

Active vs. Passive Index Funds
According to Vanguard the Vanguard blog, active funds are not investments. In short, you are simply hiring a fund manager that purportedly has a good track record of picking underlying assets that show a profit. Their supposition is that there is no way to determine which manager will be better than those in the lower 50th percentile. In other words, if you invest in an actively managed fund you are virtually investing in the manager, not the fund. Vanguard’s passive cap-weighted funds, on the other hand, are low cost funds that provide long term results. A fund that is able to document long term profits at the lower cost inherent in a passive fund is far preferable than placing investment capital in the hands of a manager to do with as he/she sees fit. The lower cost of passive funds when added to profit is the number one reason why passive funds outperform active funds.

Why Investors Choose Vanguard Index Funds
Within the past decade other companies such as Schwab and Fidelity have seen the benefits associated with low cost index funds and have, as a result, entered into direct competition with Vanguard. In fact, some of Fidelity’s funds have even lowered their costs so that they are even cheaper than Vanguard’s index funds. Schwab entered the foray a bit later but neither company has been able to garner significant support from staunch Vanguard investors. The consensus among market analysts is that the small difference in cost between Fidelity, Schwab and Vanguard is not enough to make the switch. While a number of investors have kept their investments within their 401k or IRA accounts, others would be subject to significant tax liability when transferring their investments to another company.

Top Performing Vanguard Index Funds
Before making a decision to invest in Vanguard index funds take a look at their top performing funds such as the Vanguard 500 Index Fund or their Vanguard Small Cap Index. With a net worth of at least $75 billion the Vanguard 500 (VFINX) has an excellent track record of success. It invests in some of the market’s largest cap industries such as Microsoft, Johnson & Johnson and AT&T. On the other hand, if you prefer an index fund with smaller cap investments then the Small Cap Index that holds assets in companies like Netflix and Seagate would be an option. In either case, Vanguard is a not for profit company which means that profits are paid back to investors who are the company’s shareholders. Sometimes this is in the form of lowering the costs associated with the funds.

Even though Vanguard is the leader of the pack they will be the first ones to tell you that you should only invest what you can afford to live without. Just as there is the potential for long term profit there is always the chance that your fund may decrease in value as well. With that being said, Vanguard index funds have shown that they are sound investments that have continued to grow over a long period of time.

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