Here's the Worst Vanguard ETF to Buy Right Now for Long-Term Investors

Warren Buffett likes Vanguard. He wrote to Berkshire Hathaway shareholders in 2014 that he suggested much of the cash his family receives when he dies be invested in a low-cost Vanguard S&P 500 index fund. Some of Berkshire's cash is currently invested in one.

I like Vanguard too. A significant portion of my portfolio is invested in two of the company's ETFs. However, I'm not a fan of every Vanguard fund. I think one Vanguard ETF, in particular, is the worst to buy right now for long-term investors.

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Bottom of the pack

Vanguard offers 86 ETFs to investors. In my opinion, many, if not most, are solid choices. But one of them belongs at the bottom of the pack, in my opinion -- the Vanguard Ultra-Short Bond ETF (NYSEMKT: VUSB).

This ETF's name could cause some investors to misunderstand its focus. When you see "ultra-short" in a fund's name, it often means it uses leverage to short-sell a type of asset. For example, the ProShares UltraShort QQQ ETF bets against the Nasdaq-100 index. In this case, though, the Vanguard Ultra-Short Bond ETF doesn't use leverage to short-sell bonds.

Instead, the ETF mainly holds bonds with "ultra-short" durations of no more than two years. It currently owns 669 bonds with an average duration of one year. The fund's holdings include both government and corporate bonds.

Why it's the worst Vanguard ETF for long-term investors

There are some positive attributes to like about VUSB. Vanguard rates it as one of the least-risky ETFs in the company's lineup. VUSB also offers a 30-day SEC yield of 5.07%, which isn't too shabby.

So why am I arguing it's the worst Vanguard ETF for long-term investors? For one thing, the timing isn't great for investing in short-term bonds. The Federal Reserve recently signaled three interest rate cuts are coming this year. Bond prices move inversely with interest rates.

However, if you're seeking to profit from rising bond prices, other Vanguard ETFs holding longer-duration bonds will be a better bet. Short-term bond prices rise less when rates decline than longer-duration bonds.

VUSB has only been around for three years. During that period, its average annual return is a meager 2.01%. Long-term investors can get much higher returns from many other Vanguard ETFs. Also, while VUSB's yield looks great now, lower interest rates will cause the yield to fall.

What about using VUSB to park money temporarily? I think there are better Vanguard ETFs for this purpose too. For example, the Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH) offers a higher yield of 5.14% and a lower annual expense ratio of 0.04% (compared to 0.10% for VUSB). If you're looking for a super-safe bond ETF, you can't beat the Vanguard Short-Term Inflation-Protected Securites ETF (NASDAQ: VTIP).

Better Vanguard picks

If VUSB is the worst Vanguard ETF for long-term investors, which ETFs are better picks? I think Buffett's favorite -- the Vanguard S&P 500 ETF (NYSEMKT: VOO) -- is an excellent choice. You get to own shares of the 500 biggest U.S. companies and pay a low expense ratio of 0.03%.

The Vanguard Small-Cap Value ETF (NYSEMKT: VBR) could deliver even greater returns. Small-cap value stocks have lagged behind large-cap growth stocks in recent years but have historically outperformed all other equities over the long term.

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Keith Speights has positions in Berkshire Hathaway, Vanguard S&P 500 ETF, and Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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