It may not be obvious to retail investors, but creating an index fund involves far more than simply licensing a benchmark and buying the underlying securities.
Fund managers constantly balance trade-offs between low fees, tracking precision, liquidity and tax efficiency. “Index investing is often described as simple, but delivering it well at scale requires constant discipline behind the scenes,” says Michelle Louie, principal, U.S. head of trading and portfolio management, global equity index management at Vanguard Capital Management.
For example, some index funds use a strategy called sampling instead of full replication. Rather than purchasing every security in an index, the fund buys a representative subset.
This can reduce transaction costs and operational complexity, particularly for indexes with thousands of securities, but it can also increase tracking error, or the degree to which the fund’s returns diverge from the benchmark. This is typically calculated as the standard deviation of return differences between the fund’s total return and the index benchmark.
Tracking error itself is an important but often overlooked concept in index investing. Even perfectly managed index funds will usually lag slightly because of expense ratios, trading costs, cash flows and the practical challenges involved in rebalancing portfolios when indexes change constituents or weightings. Managers also need to account for dividend reinvestment timing, liquidity constraints and flows.
One firm that has historically excelled at managing these trade-offs is Vanguard, which built its reputation on low-cost indexing and continues to offer some of the industry’s lowest expense ratios. “Vanguard’s continued fee reductions reflect both our client-owned structure and the efficiencies gained from decades of experience and scale, with savings passed back to investors,” Louie says.
The firm has also historically benefited from a patent where many of its mutual funds shared an exchange-traded fund, or ETF, class. That allowed the mutual funds to indirectly benefit from the ETF share class’s in-kind creation and redemption mechanism, which can reduce taxable capital gains distributions and improve tax efficiency over time.
For buy-and-hold investors seeking diversified, long-term and affordable core holdings, Vanguard remains one of the most influential players in index fund investing.
Here are some of the best Vanguard index funds to buy today:
| Fund | Expense Ratio |
| Vanguard 500 Index Fund Admiral Shares (ticker: VFIAX) | 0.04% |
| Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) | 0.04% |
| Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) | 0.09% |
| Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) | 0.09% |
| Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) | 0.04% |
| Vanguard Total International Bond Index Fund Admiral Shares (VTABX) | 0.10% |
| Vanguard Balanced Index Fund Admiral Shares (VBIAX) | 0.07% |
Vanguard 500 Index Fund Admiral Shares (VFIAX)
“Vanguard’s index funds aim to track their benchmarks closely through disciplined management of trading, cash flows and index changes, with a focus on minimizing unnecessary costs and managing implementation in ways that help reduce frictions around index changes and cash flows,” Louie explains. “That precision matters because small inefficiencies can add up over time.”
VFIAX has historically excelled at tracking its benchmark, the S&P 500. Over the trailing 10-year period, the fund’s annualized total return lagged by just four basis points, or 0.04%. It also charges a low 0.04% expense ratio, which is lowered to 0.03% if investors opt for the Vanguard S&P 500 ETF (VOO) share class. Choosing VOO over VFIAX also eliminates the $3,000 minimum investment requirement.
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
“Individual retail investors typically achieve better results through Vanguard’s low-expense-ratio, broad stock market index funds compared to higher-cost actively managed funds,” says Henry Yoshida, senior vice president at Retired.com. Over the trailing 10-year period, VTSAX’s net asset value has compounded at 14.7% annualized before taxes, outperforming a large number of active funds.
This fund is broader in scope compared to VFIAX. It tracks a benchmark of about 3,500 small-, mid- and large-cap stocks as opposed to a narrower subset of 500 blue-chips. However, VTSAX’s top holdings are virtually identical to VFIAX’s because both funds are market-cap weighted. This ensures a high degree of overlap when it comes to company and sector exposure, but VTSAX is slightly less concentrated.
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
“Beyond their industry-leading low costs, Vanguard’s index funds benefit investors through reduced portfolio turnover, which minimizes tax implications in taxable accounts,” Yoshida explains. Portfolio turnover measures how frequently securities inside a fund are bought and sold over a given year. In general, a higher turnover percentage indicates more trading activity, which can impact tax efficiency.
VTIAX is a good example of a low-turnover strategy. The fund tracks about 8,800 developed- and emerging-market stocks represented by the FTSE Global All Cap ex US Index. Despite that enormous scope, VTIAX maintains a very low 4.4% portfolio turnover rate, meaning only a small portion of holdings typically change in a given year. The fund also remains fairly affordable with a 0.09% expense ratio.
Vanguard Total World Stock Index Fund Admiral Shares (VTWAX)
Investors can build a globally diversified equity portfolio using just two Vanguard index funds. On the U.S. side, VTSAX provides exposure to the broad domestic stock market, while VTIAX adds developed- and emerging-market exposure abroad. The exact split can vary depending on investor preferences, but a neutral starting point could be a 50-50 allocation between U.S. and international equities.
Investors preferring a more hands-off approach can instead consider VTWAX. The fund tracks the FTSE Global All Cap Index, spanning about 10,000 stocks across both U.S. and international markets weighted by market capitalization. Currently, the portfolio is 62% U.S. equities and 38% international equities, though those weights naturally shift over time as relative market leadership changes.
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
Not all investors are comfortable with a 100% equity portfolio, particularly those with a lower risk tolerance or a shorter investment horizon. Adding bonds through VBTLX can help. The fund charges a 0.04% expense ratio and pays a 4.5% 30-day SEC yield. Its portfolio is diversified across about 11,000 investment-grade corporate bonds, Treasurys and mortgage-backed securities.
“VBTLX is a well-diversified, low-cost bond fund designed to offer investors a comprehensive representation of the total U.S. investment-grade bond market,” says Perryne Desai, head of index fixed-income product at Vanguard. “VBTLX can serve as an anchor position in a client’s fixed-income portfolio, ensuring their investment strategy benefits from the ballast against equity risk.”
Vanguard Total International Bond Index Fund Admiral Shares (VTABX)
VBTLX is essentially the fixed-income counterpart to VTSAX. Both funds are broadly diversified and focus on replicating their benchmarks as efficiently as possible rather than attempting to outperform through active security selection. On the international side, the bond equivalent to VTIAX is VTABX, which charges a 0.1% expense ratio and currently pays a 3.5% 30-day SEC yield.
To reduce the impact of foreign exchange fluctuations, VTABX’s portfolio of about 6,700 investment-grade bonds also employs currency hedging. “Investing in hedged international bonds can provide diversification benefits to an investor’s portfolio, helping to spread risk and potentially improve overall performance,” says Tara Talone, co-head of bond indexing, Americas, at Vanguard.
Vanguard Balanced Index Fund Admiral Shares (VBIAX)
Investors can combine Vanguard index funds in a wide variety of portfolio allocations. One of the most popular approaches is the classic 60-40 portfolio, where roughly 60% is allocated to stocks and 40% to bonds. Within those sleeves, investors still have flexibility. Some may prefer to remain entirely U.S. focused with domestic stocks and bonds, while others may opt for broader international exposure.
For investors wanting a more hands-off, U.S.-centric solution, VBIAX can simplify the process compared to pairing VTSAX and VBTLX. The fund maintains a 60-40 allocation while providing exposure to about 3,100 stocks and 10,000 bonds. Historically, performance has been competitive, with a 10-year annualized return of 9.6%. VBIAX charges a 0.07% expense ratio and pays a 2.3% 30-day SEC yield.
