3 Vanguard Funds Rated 5 Stars by Morningstar

Vanguard funds, including exchange-traded funds (ETFs) and mutual funds, allow investors to obtain exposure to equity and bond markets at reasonable costs with highly competitive expense ratios in the fund industry. Vanguard funds typically come with no load fees, and many are available free of transaction fees through numerous investment brokers platforms.

The Morningstar rating system is designed to weigh various factors of a fund, such as past performance, management, fees and the process that a fund uses to select its holdings. Some Vanguard funds have a five-star rating from Morningstar.

The Vanguard Wellesley Income Fund seeks to attain long-term growth of income and a sustainable level of current income. The fund has boasted a five-star rating for the last three-, five- and 10-year periods of its performance. The fund allocates about 60% of its assets to U.S. Treasury bonds, government agency bonds and mortgage-backed securities (MBS). Almost all of the Vanguard Wellesley Income Fund's bond holdings are investment grade. Since the fund has an average maturity of 8.9 years, its bond holdings are subject to interest rate risk. The remainder of the fund's assets are invested in U.S. stocks with 30% allocation and international stocks with 6% allocation. The Vanguard Wellesley Income Fund selects equities that have above-average dividends that are expected to grow in the future.

The Vanguard Wellesley Income Fund has experienced management that has a proven track record of delivering strong returns. From 2005 to 2015, the fund has generated an annual average return of 6.72% and a standard deviation of 6.25%, resulting in a Sharpe ratio of 0.86. Going forward, the fund's significant bond allocation can prove a drag for its future performance, given a looming interest rate hike by the U.S. Federal Reserve. The fund has a very low expense ratio of 0.25% and a 30-day SEC yield of 2.83%. It is most suitable for investors who are interested in income investing at a very low cost.

The Vanguard High-Yield Tax-Exempt Fund invests its assets in municipal bonds with current income that is exempt from federal income taxes. The fund has a very conservative allocation that favors highly rated municipal bonds with credit ratings of A or above. Only less than 26% of all bonds are rated at BBB or below, while the remaining 74% of the fund's holdings are at A or above. The Vanguard High-Yield Tax-Exempt Fund has an average maturity of 6.8 years, making it somewhat sensitive to interest rate risk. As of October 2015, the fund's 30-day SEC yield stands at 2.75%.

From 2005 to 2015, the Vanguard High-Yield Tax-Exempt Fund has generated an average annual rate of return of 4.79% and a standard deviation of 5.31%, resulting in a Sharpe ratio of 0.66. According to Morningstar, the fund has outperformed others in the municipal intermediate bonds category by over 90 basis points. The fund has a very low expense ratio of 0.2%, and it has received a five-star rating from Morningstar over the last three-, five- and 10-year periods. The Vanguard High-Yield Tax-Exempt Fund is most suitable for investors who are in very high tax brackets and would like to gain exposure to high-quality bonds exempted from federal taxes.

The Vanguard Strategic Small-Cap Equity Fund seeks long-term capital gains by investing in small market cap U.S. equities. About 22% of its assets are invested in medium-cap stocks, while it allocates 55% to small-cap stocks. Micro-cap equities have a 23% allocation. The fund carefully selects its holdings based on stocks' relative return potential, which takes into account the balance between a stock's expected growth and its valuation relative to its industry peers. The Vanguard Strategic Small-Cap Equity Fund does a quantitative evaluation of all stocks from the MSCI U.S. Small Cap 1750 Index based on its selection criteria. The fund is well-diversified across various U.S. industries, and no single holding of the fund accounts for more than 1%.

From 2010 to 2015, the fund has demonstrated an average annual return of 14.98% and a standard deviation of 15.62%. According to Morningstar, the fund has outperformed its peers in the small blend category by 400 basis points at a comparable degree of volatility. The fund has an expense ratio of 0.38%, which is significantly less than the small blend funds' average of 1.26%. It has received a five-star rating from Morningstar for the three- and five-year periods. The Vanguard Strategic Small-Cap Equity Fund is most appropriate for investors who are looking for risky and aggressive allocation to small-cap U.S. stocks at a low expense.