If you’re looking for actively-managed funds with low expense ratios it might be difficult, especially if a parameter is consistent positive returns over the past three years on an annual basis. If you’re familiar with funds and low expense ratios, then you already know that these are Vanguard funds. If you’re seeking low-cost funds, then Vanguard should always be the first place to look. For example, the top five funds over the past three years are all Vanguard funds. This is impressive, but it doesn’t guarantee that these funds will deliver in 2016. Let’s take a look at these funds on a case-by-case basis.
Vanguard Strategic Equity
Vanguard Strategic Equity (VSEQX) has delivered an average annual return of 18.34% over the past three years. However, over the past year, it has depreciated 16.21% and currently offers a dividend yield of 1.62%. The minimum investment is $3,000. The strategy is to seek long-term capital appreciation by owning domestic stocks with strong growth potential that are also offering reasonable value relative to peers. The fund’s top holdings are Electronic Arts Inc. (EA), Tesoro Corp. (TSO) and Best Buy Co., Inc. (BBY). EA is somewhat intriguing thanks to Battlefront, but EA and BBY are still discretionary in a weak consumer environment. As far as TSO goes, owning anything related to energy isn’t going to offer the most upside potential – even if it’s a refiner. (For more, see: Vanguard Mutual Funds Overview.)
VSEQX comes with an expense ratio of 0.21% versus an industry average of 1.15%. This isn’t reason enough to consider an investment. If the prospects for a fund are subpar for the year, then the expense ratio is a non-factor.
Vanguard Capital Opportunity
Vanguard Capital Opportunity (VHCOX) has delivered an average annual return of 19.72% over the past three years. However, it has slid 6.93% over the past year. It currently yields 0.56%. VHCOX comes with an expense ratio of 0.45% versus an industry average of 1.18%. The minimum investment is $3,000. The strategy is to seek long-term capital appreciation via domestic stocks that have demonstrated rapid earnings growth and offer value compared to peers. The objective is to outperform the market over a 3 to 5 year time frame. This one is simple: It’s overexposed to healthcare. (For more, see: The ABCs of Mutual Fund Classes.)
Vanguard Capital Opportunity Adm
For Vanguard Capital Opportunity (VHCAX), see VHCOX, as this is the institutional share class of the fund. It has a 0.38% expense ratio, a yield of 0.64%, and a minimum investment of $50,000.
Vanguard Health Care
Vanguard Health Care (VGHCX) is self-explanatory. It invests in pharmaceutical firms, medical supplies, as well as hospital and healthcare facility operators. It has delivered an annual return of 23.61% over the past three years. However, it has slipped 5.05% over the past year. It currently yields 1.11%. The expense ratio of 0.34% is considerably lower than the industry average of 1.37%. The minimum investment is $3,000. With top holdings of Bristol-Myers Squibb Co. (BMY), Allergan (AGN) and UnitedHealth Group Inc. (UNH), this fund will offer more resiliency in a bear market than the names above, but that doesn’t mean you should expect a positive return for the year. (For more, see: Best 3 Vanguard Funds in the Healthcare Sector.)
Vanguard Health Care
For Vanguard Health Care (VGHAX), see VGHCX as this is the institutional share class for the fund. The differences are a 0.29% expense ratio, a 1.16% yield and a minimum investment of $50,000.
The Bottom Line
You might have an outside chance of appreciation with VGHCX and VGHCX in 2016, but this isn’t likely. Deflationary bear markets tend to bring everything down with them. If you seek capital preservation, look at U.S. Treasuries before all other options. (For more, see: The 3 Best Vanguard Mutual Funds for Your Roth IRA.)
Dan Moskowitz does not have any positions or association with any of the funds listed above.