American Funds vs. The Vanguard Group: An Overview
American Funds and The Vanguard Group are two of the largest mutual fund managers in the world. Both companies pride themselves on research and being customer-focused, though they have opposite ways of marketing funds while providing good returns. All return comparisons are based on each fund's net asset value (NAV) as of December 31, 2019.
- American Funds and The Vanguard Group are two of the largest mutual fund families in the world.
- American Funds charges front-end loads and back-end loads, and has high expense ratios; Vanguard's Funds are no-load and have low expense ratios.
- American Funds products are actively managed by portfolio managers; Vanguard Funds are passively managed.
The American Funds is a division of privately-owned Capital Group, which was founded in 1931. Based in Los Angeles, Capital Group is among the largest asset management firms in the U.S., with over $1.8 trillion in assets under management (AUM). American Funds offers choices in the equity, equity income, asset allocation, and fixed-income classes of funds. Asset allocation funds targeted to specific retirement years are one of the firm's highly rated specialties. The funds are actively managed by portfolio managers who pay attention to value and keeping turnover rates low.
American Funds does not advertise. It markets its funds by compensating traditional brokers and financial advisors with commissions. To pay these commissions, its funds charge a combination of front-end loads, back-end loads, and higher expense ratios.
Vanguard Funds is a division of mutually-owned The Vanguard Group. Vanguard, founded in 1975, is based in Valley Forge, PA, and is the one of the world's largest asset management firms, with more than $5.6 trillion in AUM. The company's unique structure makes the shareholders of its mutual funds the actual owners of the company.
The Vanguard Group passes all potential profits back to the funds in the form of lower asset management fees, giving them the lowest expense ratios in the mutual fund industry.
Vanguard offers funds across the same range of asset classes as American Funds. All Vanguard mutual funds are no-load and have no 12b-1 fees. The firm does some advertising but does not pay commissions to brokers or financial advisors who recommend its funds. Vanguard is best known as a leader in passively-managed index funds, an approach to investment management invented and championed by its late founder, Jack Bogle. Nonetheless, Vanguard also offers a wide array of actively-managed funds.
American Funds vs. The Vanguard Group Example
To understand the difference in execution and returns, here's a comparison of growth funds offered by both American Funds and The Vanguard Group.
American Funds' Growth Fund of America (AGTHX) is a large cap equity fund that focuses on capital growth. Portfolio managers practice active stock selection. As of February 10, 2020, the fund has an expense ratio of 0.65 percent and a turnover rate of 36 percent. Based on calculations by Investopedia using data from Morningstar Inc., for the 10 years ending December 31, 2019, its annualized total return was 16.21 percent over the last three years, 12.39 percent over the last five years, and 12.94 percent over the last 10 years.
The Vanguard Growth Index Investor Fund (VIGRX) also seeks capital growth through investments in large-cap equities. The fund tracks the CRSP U.S. Large-Cap Growth Index, which includes stocks that make up about 85 percent of the U.S. stock market’s total capitalization. As of February 10, 2020, the fund has an expense ratio of 0.17 percent and a turnover rate of 11 percent. Based on calculations by Investopedia using data from Morningstar Inc., for the 10 years ending December 31, 2019, its annualized total return was 19.10 percent over the last three years, 13.06 percent over the last five years, and 14.44 percent over the last 10 years.
The Growth Fund of America has a front-end sales charge of 5.75 percent, while the Vanguard Growth Index Fund has none. This is an added cost advantage for the Vanguard fund, in addition to an expense ratio that is lower by 0.48 percent annually.