Do you know how to create the best Vanguard Index Fund performance? We have some tips for you.

Vanguard has great index funds and ETFs.

Here are three tips for finding the best:

Tip #1: Do not just buy the best performers

One of the most popular searches on the Internet is for past performance information. Investors want to find investments that have down well in the past before buying. Unfortunately, this does not work. Past performance is not a good indicator of future results. Numerous studies and all of our past investment experience demonstrates that cost of the investment and not past performance is the best way to predict future performance. Vanguard Index Fund performance as well as Vanguard ETF performance already includes the most important part, low cost.

Vanguard Index Funds and Vanguard ETFs do not have an active manager that needs to be analyzed. They replicate an index and post return information worth examining to see how much the portfolio has drifted from the index. Another useful way to use past performance is to examine how one index fund correlates with another. These correlations may not continue in the future but it can be helpful in creating a portfolio. Good portfolios have multiple asset classes, even those that have done poorly in the past.

Tip #2: Broad over narrow

When we create portfolios, we try to find a balance between extremely broad Vanguard Index Funds or ETFs and ones that are too narrow. Too broad and there is no ability to adjust the portfolio for your personal risk tolerance and too narrow creates an inefficient portfolio. Many of the portfolios we have seen fall into the too narrow category.

For example, a portfolio with the following looks diversified but it divides the market into pieces that are too small:

• Large Cap Growth
• Large Cap Value
• Mid Cap Growth
• Mid Cap Value
• Small Cap Growth
• Small Cap Value

Companies are not static. A small company can become mid-size company. A growth company can become a value company. Every time this happens one index has to sell the stock and another index has to buy the stock. Your overall portfolio still owns the stock but you had to pay the internal trading costs and suffer possible taxable gains for this stock migration.

We might replace the above mixture with:

• Vanguard Total Stock Market ETF (VTI)

• Vanguard S&P 500 ETF (VOO)
• Vanguard Extended Market ETF (VXF)

Tip #3: Beware of overlap

Read the prospectus summary to see what the index covers. If possible, find additional index information by reading the index fact sheets from the index providers. We know this sounds boring but it is the only way to make sure you are not buying indexes that do not have significant coverage in the same area. Sometimes you may want to increase the concentration in an investment area but you should be doing it on purpose. You cannot tell by the name of the fund what is being covered. Do your research. It will be worth the work.

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