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Small stocks and junk bonds
Vanguard is synonymous with indexing, and Vanguard Small Cap Index (NAESX) is another excellent option for retirement investors. Roger Wohlner, an adviser with Asset Strategy Consultants, notes that investment-analysis software from a company called Fiduciary Analytics gave the fund "its best possible score" for the five years ending March 31."Additionally," he says, "unlike many small-cap peers, this fund does not need to make the choice of closing when it gets too big . . . as we have seen with so many successful small-cap funds."
This fund, which tracks an index of small stocks, has an exchange-traded version with the ticker symbol VB.
Small caps have been out of favor for more than a year, so they are relatively cheap. The same is true for another fund recommended by David J. Fernandez, a financial planner who worked for Vanguard before opening his own business, Wealth Engineering in Scottsdale, Ariz.
"This may come as a surprise, but I believe all portfolios should have some exposure to Vanguard High Yield Corporate (VWEHX)," he says. "They have what I like to call high-quality junk in their version of a junk-bond fund."
Fernandez notes the fund has only a 4% exposure to the troubled financial sector and what he calls a "consistent and conservative track record." The fund's yield is 8.32%.
"Current U.S. bond yields are extremely low, and this fund allows you to capture a portion of high-yielding bonds that are still somewhat conservative relative to the pool of its peer funds," Fernandez says.
Others worth a look
Vanguard has so many outstanding funds I could go on forever. Here are a few more for your consideration:- Vanguard Dividend Growth (VDIGX), a conservative large-company value fund also run by Wellington Management. As a group, value managers love financials, which crushed them last year, but this fund underweighted them and gained 7% in 2007, 1.5 percentage points more than the market and better than 86% of similar mutual funds, according to Morningstar.
- Vanguard Selected Value (VASVX), a superb midcap value fund, a Morningstar Analyst Pick that has beaten the market by an average of 3.7 percentage points in each of the past five years.
- Vanguard Global Equity (VHGEX), a world stock fund that's rocketed ahead nearly 14% annually for five years, propelled by a portfolio that's 60% foreign stocks all tilted, as the domestic stocks it owns are, toward the large-value style.
- Vanguard International Explorer (VINEX), a foreign small-to-midcap fund with five-year returns of 16%. It's closed to new buyers outside retirement plans.
- Vanguard Emerging Markets Index (VEIEX), which is really only a bit above average but occupies a niche no investor should ignore. Five-year average returns: 23%%. This is also available as an ETF with the ticker VWO.
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Again, just because they are Vanguard funds doesn't mean your 401(k) plan offers them. Many such plans are too safe for their own good. But you can lobby to get them included or use them to supplement your 401(k) account.
Retirement investors shouldn't avoid risk; they should embrace it. Old age today lasts for decades, not years. The odds are you'll be around for 20 years after you start collecting Social Security. So you're a long-term investor even on your last day at work.
At the time of publication, Tim Middleton owned the following securities mentioned in this article: Vanguard Small Cap ETF, Vanguard Global Equity and Vanguard Emerging Markets ETF.
This is an updated version of a column published in April, 2008.
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