American Funds vs. The Vanguard Group: What's the Difference?

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 the research they conduct and their customer-focused approach—all while providing their clients with the best possible returns. Although these two companies serve the same purpose, that's pretty much where the similarities end.

American Funds come with both front-end and back-end loads and the fees are higher compared to Vanguard's, which offers no-load funds. The Vanguard Group's offerings are passively-managed while American Funds has managers who actively manage its funds. This article looks at some of the key differences between these two mutual fund giants. All return comparisons are based on each fund's net asset value (NAV) as of Dec. 31, 2021, unless indicated otherwise.

American Funds

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 $2.7 trillion in assets under management (AUM).

American Funds offers a variety of funds in a number of asset classes, including:

• Equity funds
• Equity income funds
• Asset allocation funds (these are some of the firm's highly-rated specialties)
• Fixed-income classes of funds

The funds are actively managed by portfolio managers who pay attention to value and keep 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.

The Vanguard Group

Vanguard Funds is a division of mutually-owned The Vanguard Group. Founded in 1975, Vanguard is based in Valley Forge, Pennsylvania. It is one of the world's largest asset management firms, with more than $8 trillion in AUM as of Sept. 30, 2021.

The company 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 advertise 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.

The company's unique structure makes its mutual fund shareholders 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.

Special Considerations

The following are just two of the popular funds offered by both companies.. If you're considering any of these funds (or other ones, for that matter), remember to make sure they align with your investment goals before you make a purchase. You can always consult a financial professional for help if you need guidance.

American Funds

• American Funds Fundamental Investors (ANCFX): Launched in August 1978, this fund has $127.9 million in assets under management. It combines growth and income investing with an emphasis on growth by seeking opportunities in undervalued companies. Investors pay annual management fees of 0.24%. ANCFX returned 13.08% to investors in 10 years and 12.40% since inception.
• American Funds SMALLCAP World (SMCWX): This small-cap-focused fund targets growth. Established in April 1990, it had a 10-year return of 11.67% and 9.93% since inception. With almost $5.6 million in AUM, this fund comes with annual management fees of 0.60%.
  

The Vanguard Group

• Vanguard Balanced Index Fund (VBIAX): This mutual fund provides investors with exposure to both stocks (60%) and bonds (40%). It aims to mimic returns of the U.S. equity and taxable bond markets. It has a total of $61 billion in AUM and an expense ratio of 0.07%. It returned 10.11% over a 10-year period and over 7% since it was launched in November 2000.
• Vanguard FTSE Social Index Fund Admiral Shares (VFTAX): This fund was launched in February 2019 and has $16.8 billion in assets. Its expense ratio is 0.14%. It is a market capitalization-weighted fund made up of both mid- and large-cap stocks. Since it has a socially responsible investment (SRI) strategy, it excludes companies involved with tobacco, alcohol, gambling, adult entertainment, and other related industries. VFTAX returned 20.02% to investors within one year and 21.87% since its inception.

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.

The Growth Fund of America (AGTHX), which is offered by American Funds, is a large-cap equity fund that focuses on capital growth. Its portfolio managers practice active stock selection. The fund has an expense ratio of 0.61% and a turnover rate of 24%. The $292.1 billion mutual fund returned 15.2% to investors over the 10-year period ended Feb. 3, 2022.

The Vanguard Growth Index Fund (VIGAX) 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 comprise about 85% of the U.S. stock market’s total capitalization. The fund's expense ratio was 0.05% while its turnover rate was 11%. With more than $147.25 billion in assets, the fund has an annualized total return was 16.27 percent over the ten years ended December 31, 2020.

The Growth Fund of America has a front-end sales charge of 5.75%. 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% annually.