American Funds vs. The Vanguard Group: Understanding 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 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 March. 10, 2019.
The American Funds are a division of privately owned Capital Group. Capital Group, founded in 1931, is based in Los Angeles and is the nation’s eleventh-largest asset manager with $1.87 trillion in assets under management (AUM) as of March 2019. 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. Class A shares carry a maximum front-end load of 5.75%, which reduces five-year returns by at least 1% per year.
Vanguard Funds is a division of mutually owned The Vanguard Group. Vanguard, founded in 1975, is based in Valley Forge, PA and is the nation’s second-largest asset manager with more than $5.3 trillion in AUM, as of March 2019. The company’s unique structure makes the shareholders of its mutual funds the actual owners of the company. The parent company 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 of Vanguard’s 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. Its portfolio managers take a passive approach to investment management. Many of the funds are designed to track a specific market index directly.
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. The fund has an expense ratio of 0.62% and a turnover rate of 28%. Its annualized total return is 17.46% over three years, 10.62% over five years and 16.16% over 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% of the U.S. stock market’s total capitalization. The fund has an expense ratio of 0.17% and a turnover rate of 11%. It has provided investors with an annualized total return of 16.47% over three years, 11.09% over five years and 17.24% over 10 years.
With front-end sales charge included, this increased return for the Vanguard Growth Index Fund exceeds the 0.45% difference in expense ratios. The comparison is similar in other asset class funds.
- American Funds and The Vanguard Group are two of the largest mutual fund families in the world.
- American Funds charge front-end loads and back-end loads, and have high expense ratios; Vanguard’s funds are no-load and have low expense ratios.
- American Funds are actively managed by portfolio managers; Vanguard Funds are passively managed.