Have you heard of the Vanguard Wellington Fund? VWELX (investors shares) or VWENX (admiral shares) is my #1 fund for retirees.
This guide explains what type of fund is the Vanguard Wellington, who should buy VWELX or VWENX, and its performance in detail.
You’ll learn the exact secrets that make the Vanguard Wellington Fund the miracle to retiring wealthy. And when it may not be ideal for you.
- What is the Vanguard Wellington Fund?
- Vanguard Wellington Fund Returns
- Stocks and Bonds Inside the Vanguard Wellington Fund
- Taxes and Fees on the Vanguard Wellington Fund
- Who Are the Ideal Customers of the Vanguard Wellington Fund?
- History, Culture, People and the Future of Wellington Management
- Should You Invest in VWENX and VWELX?
- When to NOT Invest in the Vanguard Wellington Fund?
- What’s Next?
What is the Vanguard Wellington Fund?
In my first guide about the Best Vanguard Funds for Every Stage of Your Life, I covered a little bit about the Vanguard Wellington as my favorite Vanguard fund for retirees.
Today, I am going to go into detail on what it is and why I love it so much.
The Wellington Fund™ is Vanguard’s oldest mutual fund. Founded in 1929, VWELX belongs to the category of balanced funds.
In fact, VWELX is the oldest balanced fund in the world.
The objective of the Wellington Fund is to provide both (1) long-term capital appreciation and (2) reasonable current income. And to do so with (3) consistency and low volatility.
This is a tall order. Wellington attempts to achieve their goals by:
- Setting an asset allocation of 60% to 70% stocks and 30% to 40% bonds
- Investing in mostly large, some mid-cap value stocks
- Buying government and investment-grade corporate bonds.
Vanguard Wellington Fund Returns
In the past ten years (2009 to 2021), the Vanguard Wellington Fund delivered a 9.61% annualized return.
That is your money growing at 9.95% per year, every year, for 10 years. Not too shabby, right?
It’s even more impressive if you consider that Vanguard Wellington only invests 65% of the assets in stocks.
Comparatively, the S&P 500 grew by 13.85% during the same 10-year period, but 100% of the assets there are stocks.
The chart above suggests that through multiple recessions, wars, and the changing of guards within the company itself, the Wellington Fund has delivered an average return of 8.09% since 1929… an insane statistic!
This sort of performance over this long period of time is unheard of.
Even the best hedge funds do not survive through multiple recessions and multiple portfolio managers!
Fund Performance During Past Recessions and the 2008 Housing Crisis
Wonder what was the performance of vanguard wellington fund during the 2008 housing crisis? Below, I’ll share how this fund has fared during the worst-performing years of the stock market.
During the housing crisis of 2008, the S&P declined by -38% while Wellington declined by nearly half as much, only 22%.
The two charts below show how the S&P 500 and VWELX performed during the 2008 recession and housing crisis, and afterward.
- The first chart showed that during the last recession, S&P 500 stocks nearly erased all the gains it had achieved over the past 15 years, whereas VWELX also dipped, but not nearly as badly.
- The second chart showed what happened since the last recession: the S&P 500 clearly outpaced VWELX by many folds. You might look at the second chart and exclaim, “I should definitely invest in the S&P 500 instead!” But hold that thought…
What will happen during the next recession, which I predict happens soon? Will the gains of the S&P over the past decade be erased yet again? We know it’s going to happen sooner or later.
It might be easy to say I will wait it out if you are under the age of 40. But when you are approaching 60 or already over 60, the S&P 500 can be a big gamble considering a single recession might wipe you out for a decade.
During the worst year of the dot com bubble, the market decreased by 23% while Wellington only dropped by 7%.
Fund Performance During Boom and Growth
During the best years ever, while the S&P grew by double digits between 30% to 40%, Vanguard Wellington was also able to grow at double-digit rates, though lower at 20% to 30%.
This suggests that the Vanguard Wellington Fund is capable of steady, even impressive growth during economic expansions.
While the Vanguard Wellington Fund is never the best performing fund of the year, its steadiness and consistency wins the race over the long run.
Stocks and Bonds Inside the Vanguard Wellington Fund
The Vanguard Wellington fund invests in stocks that are large and value, which means they have staying power and benefit from the test of time. Vanguard also tends to pick stocks that pay some dividends.
On the bond side, the Vanguard Wellington invests in quality stuff as well. The approach, on both stocks and bonds, is to participate in up markets and outperform and preserve when markets decline.
About 65% of the fund’s assets are in stocks, 33% in bonds, and 2% in short-term reserves. Let’s have a closer look at what each consists of.
Equity: Blue Chip Stocks with Staying Power
Wellington invests in 93 stocks in the fund’s portfolio, and their 10 largest stocks account for 20% of total assets (or 31% of total equity portion)
Nearly all of its stocks are large value, value, and US-based. Though there are some exceptions.
Compare to the S&P 500, the Vanguard Wellington Fund over-invests in the financials sector and under-invests in technology and consumer discretionary.
About 10% of Vanguard Wellington is invested in foreign stocks mostly in stable, western democracies like Switzerland or Germany. But the actual international exposure is a lot higher because on average 40% of the U.S. based company revenue comes from the internal market.
Bond: Medium Maturity and High Rating
While the bond portion of the portfolio is only 35%, it plays a crucial role in balancing risks.
As of 2021, Vanguard Wellington invests in 1,032 bonds with an average maturity of 10 years. The longer the maturity, the more a fund’s share price will move up or down in response to changes in interest rates.
10 years maturity shows that Wellington is taking on a moderate amount of risk, not as low as 2 years, but not as high as 20.
What kinds of bonds are in Vanguard Wellington? 65% of the bonds are issued by financial, industrial and utility companies, or stable, boring companies that’s going to be around for a long time.
Another 15% of the bonds are issued by the Treasury, which is backed up by the United States government.
Together, we see 80% of the bonds are high quality, stable and safe from defaults. The rest 20% of the bonds are spread across foreign economies and commercial and other asset-backed securities.
With 80% of the bonds in grade A or US-backed securities and 20% in grade B and the wide distribution of issuers, the bond team is working hard to create the kind of hedge that ultimately saves us on a rainy day.
How safe is the vanguard wellington fund? ,With short-term government bonds, high quality corporate bonds, and large, value cap stocks, I’d call it sufficiently cautious.
Is It an Income Generating Fund?
The Vanguard Wellington fund’s dividend rate is 1.73% as of EOY 2021, much lower than its usual 2.56% dividend yield in the past due to unusual circumstances from the pandemic.
But this means if you put your money into the Vanguard Wellington Fund, you’ll earn today 1.73% in interests per year. That’s higher than all the savings accounts can offer today.
You might wonder, when should I buy the Vanguard Wellington Fund to Get dividends on time? The answer is whenever you want.
Vanguard Wellington pays dividends quarterly on the last day of each quarter (3/31, 6/30, 9/31, and 12/30). You qualify for each quarter’s dividend payout as long as you buy 2 to 4 days before the end of that quarter.
So if you want to get a dividends payout in December, you need to own Vanguard Wellington Fund Admiral or Investor shares by roughly December 26th.
Taxes and Fees on the Vanguard Wellington Fund
If you personally sell stocks and bonds regularly to rebalance, you will face capital gains tax.
But cash inflows to balanced funds like Wellington minimize security sales, thus allowing you to rebalance more tax-efficiently and lower transaction costs.
But you still get taxed on capital gains. Remember the following about capital gains:
- Capital gains are “realized” (and subject to tax) when you sell investments that have increased in value. As long as you keep capital gains or reinvest them, you do not get taxed.
- Capital gains are subject to different tax rates depending on how long you owned the investment.
If you buy Wellington inside a Roth, then you do not get capital gains taxed.
The same also goes for dividend tax.
Fees (Expense Ratios) for VWELX and VWENX
With any mutual fund, you need to look at the expense ratios.
Luckily, the Vanguard Wellington fees have always been reasonable.
The Vanguard Wellington Fund has two tiers, Investor Shares, and Admiral Shares. The Vanguard Wellington fund investor shares mean you need a minimum of $3,000 to invest at an expense ratio of 0.25%.
The same fund but for Admiral shares requires a minimum investment of $50,000 and charges a lower expense ratio of 0.17%.
At this level of sophistication, both the 0.25% and 0.17% are low, considering many hedge funds charge north of 1% for their fees.
If you bought Investor shares but eventually your money grew to meet the limits of Admiral shares, Vanguard will automatically convert your investor shares to admiral.
So if you ever wonder if your Vanguard Wellington Fund is now admiral, it is means your money has grown above $50,000.
Who Are the Ideal Customers of the Vanguard Wellington Fund?
The perfect persona of a Vanguard Wellington Fund holder is an affluent elderly widow.
She has outlived her husband and is now careful and wants to be super savvy with her wealth. She wants to craft a portfolio that safeguards her wealth for generations to enjoy and stable.
In fact, many investors have shared that these women are confident enough to put all of their money into the Vanguard Wellington Fund.
I may not necessarily go that far, but I think that says something about track record, quality, consistency, and faith.
History, Culture, People and the Future of Wellington Management
To understand why the rich widows had so much faith, we have to understand the story behind this fund and the tight relationship between the Wellington Management Company and Vanguard.
History of Wellington and Vanguard
Vanguard’s founder, John Bogle, started his career at Wellington.
To this day, Wellington and Vanguard maintain a close relationship. Wellington manages all or portions of 12 Vanguard funds, including Vanguard’s top-performing Health Care Fund, Wellesley Income Fund, and of course, Vanguard Wellington Fund.
The Culture at Wellington Management
Wellington Management, based out of Boston, oversees some $1.1 trillion in assets for Vanguard and 600 other clients in over 60 countries.
We live in a world where mutual funds die every recession and close with the passing of every portfolio manager. How could Vanguard Wellington stand nearly 100 years of tests?
I think the answer lies at the core of its company culture.
If you’ve seen Wolf of Wall Street, you’d assume that all stock pickers are temperamental, aggressive, and somewhat unstable. Well, at Wellington, it could not have been more of the opposite.
Here’s what Wellington Management says about its own culture:
At Wellington Management, we believe our collegial, collaborative culture is our sustainable competitive advantage.
Wellington makes it core tenents to be:
It sounds like a self-help discovery rather than an investment fund. But in reality, Wellington’s culture values match its goals, which is to not be the best in any one year, but to win through consistency and longevity.
Ideas have no hierarchy. Wellington wants to create a transparent culture that values learning, feedback, so it can get more ideas.
It wants to focus on mastering the trade and focus on the work, but it also wants to make sure its ego doesn’t get too big. This is why many people have never heard of the company – they are so low key!
Wellington’s company culture is also humane because the fund wants to succeed over the course of 100 years, not quarters and months. It agrees that bursts of success are not worthwhile if it is harmful to longevity.
Wellington wants to balance career and life because accepting that ebb and flow is what creates consistent, sustainable growth.
The People Behind the Wellington Miracle
In a world where portfolio managers retire after making millions in a short few years, people at Wellington work for decades at a minimum.
The Vanguard Wellington Fund’s portfolio managers have been Edward Bousa since 2002 and John Keogh since 2006. Edward Bousa manages equity while Keogh manages bond.
Together, they’ve had a great run for well over a decade, surviving the 2008 housing crisis and thriving after.
In 2019, John Keogh retired after 36 years at Wellington for 36 years. Soon after, Edward Bousa retired, too.
What’s going to happen to the 90-year-old fund now? Luckily, Wellington has planned the succession starting in 2014, when it hired Lorena Moran and Daniel Pozen to work on bonds and equity for the Wellington fund respectively, shadowing Bousa and Keogh to replace them.
The Future and Succession Plan
The investment thesis of the Vanguard Wellington Fund has remained consistent for over 40 years, well before Bousa and Keogh took place, and I believe the core thesis will remain the same with Moran and Pozen.
We should continue to expect a 65% allocation in large-cap blue-chip requirements, with the remainder in bond tilted toward high-quality, high-rating securities and notes.
Should You Invest in VWENX and VWELX?
I love the Vanguard Wellington Fund and while I am nowhere near retirement, I have a good chunk of my money saved there.
But Vanguard Wellington is not for everyone, and there are some key scenarios under which I do not recommend you invest in it.
The biggest reason is allocation: a 65% stock and 35% bond split is not appropriate for most investors under the age of 50, and certainly not under the age of 40. You will lose out on a lot of returns if you keep 35% of all of your assets in bonds.
For someone 40 years old, a 20% to 25% bond weighting is more appropriate.
Some people also criticize Vanguard Wellington for mostly avoiding international stocks and bonds, high-yield bonds, small-cap stocks, and midcap stocks. I don’t agree with this criticism because there is no empirical evidence that we need to invest in these categories, but they could be valid.
We live in. a time when the U.S. corporate and Treasury yields are low and domestic stock valuations are high. When a recession hits under this scenario, you might have both stocks and bonds dropping off the cliff. But I see this as an overall risk for the United States economy, but it might be particularly bad for Vanguard Wellington because of its lack of exposure to alternative assets.
Are you now worried about an upcoming recession? Read my guide on the stock market crash.
When to NOT Invest in the Vanguard Wellington Fund?
First, having said all the amazing things about the Vanguard Wellington fund, let’s now do a reality check.
S&P 500 Outperforms Vanguard Wellington
The chart below compares the Vanguard Wellington Fund against the S&P 500 Index for the past ~20 years.
the S&P 500 (100% stocks) outperformed the Vanguard Wellington by a bit more than 3x
Notice that Vanguard Wellington (the red line) has been beating the S&P 500 index (the blue line) starting in 2001 until around 2013.
Since 2013, the S&P 500 surpassed the Vanguard Wellington due to the stock market boom.
As a result, the S&P 500 index is now 3x the amount of the Vanguard Wellington based on performance in the past 20 years.
We don’t know what will happen in the next recession – how much will the S&P 500 (BLUE) fall? Will the Vanguard Wellington catch up?
Here is my advice:
If you are below 40s, you should not invest everything in the Vanguard Wellington. Instead, go for the highs and lows of an all-stock stock fund such as the S&P 500 index fund.
Vanguard Wellington is for retirees who appreciate the moderate amount of gains the Vanguard Wellington provides, but more importantly, retirees love the stability of the Wellington fund for never crashing.
Buy Vanguard Wellington in Your Retirement Fund Only
I do not recommend that you buy the Vanguard Wellington fund outside of your retirement fund such as a 401K or IRA.
The Vanguard Wellington fund pays a healthy dose of dividends. If you invest outside of a retirement account, you will need to pay ordinary income tax on these dividends every year.
Whereas if you buy the Vanguard Wellington fund within a retirement fund, you don’t need to pay dividends tax every year until the year you withdraw the money.
Further, the Wellington fund also has a high turnover rate. Because it is an active find rather than an index fund, stocks are traded more often. This tends to trigger capital gains tax, which also needs to be paid every year if you invest outside of a retirement fund.
In fact, Vanguard knows this already. The Vanguard Wellington Fund is closed for personal investors outside of its brokerage account for retirement funds.
This means you can only buy the Vanguard Wellington fund for your retirement account, where money isn’t taxed again until withdrawal.
All in all – retirement accounts are great precisely because you don’t need to worry about paying taxes until you tax them out, and this especially applies to the Wellington fund.
So ready to buy the Wellington for your retirement?
The Vanguard Wellington Fund Summary
If there is one word to describe this fund, it would be the word quality.
It’s got the highest quality bonds and highest quality stocks in the world. And the fact that the fund has a proven track record of 8% return over the course of 91 years is a testament to quality.
Quality stocks and bonds bring consistency in returns and become stronger as time goes on.
Quality stocks and bonds also have lower volatility, able to withstand crises and recessions and survive through.
If you are a retiree or near retirement, or know a family or loved one who does, bring the Vanguard Wellington Fund to their attention. It might just save their life.
Looking for index funds to invest your money? Read Best Vanguard Funds for Every Stage of Your Life.
Scared for your stock investments and wondering when you should pull out? Read Will the Stock Market Crash? Complete Analysis
Know how I write posts quickly without grammatical errors? Read Grammarly Review: How to Avoid Epic Typos Every Time