Vanguard vs. T. Rowe Price 2035 Target Funds

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Vanguard and T. Rowe Price offer two of the most respected 2035 target date funds around.

But which one is the very best if you have to choose one for your retirement fund?

Target date funds are a good option for all savers because they are diversified accounts with a mix of stocks and bonds, domestic and international, which take into account your age.

When you're young and there's lots of time to ride out the market's ups and downs, target date funds invest more heavily in stocks to boost returns.

As you get closer to retirement, the funds reduce their vulnerability to wild swings in the stock market by investing more heavily in bonds.

Vanguard Target Retirement 2035 and T. Rowe Price Retirement 2035 are aimed at savers who are in their early 40s and planning to retire about 20 years from now.

As a result, more than 80% of both target date funds are invested in stocks through other mutual funds that Vanguard and T. Rowe Price own and manage.

The primary U.S. stock fund used by Vanguard's 2035 target date fund (Vanguard Total Stock Market Index) holds shares in more than 3,000 companies in an attempt to follow broad market trends.

The biggest investment by T. Rowe Price's 2035 fund (T. Rowe Price Growth Stock Fund) holds just over 100 companies that it hopes will generate better-than-average market returns.

Here's how that difference in investing philosophy has created small but significant differences worth considering.

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If you're thinking this is a tough call, you're absolutely right.

When I ran those numbers by a couple of respected money managers, they disagreed on which fund they'd pick for their clients.

Steve Krawick, president of West Chester Capital Advisors in Johnstown, Pa., favors T. Rowe Price, primarily based on the consistently higher rate of return. Even though it charges a higher fee, T. Rowe performed well enough to more than make up the difference.

The fund also just celebrated its 10th birthday, and, he says, has had the same investment manager over the long haul. "If you have someone who's been with the investment since its inception, he gets credit for good results and blame for bad results but overall it's been very good," Krawick says.

Bill DeShurko, portfolio manager at Boston-based Covestor.com and author of The Naked Truth about Your Money, would pick the Vanguard fund.

"It does have the lower return, but also a slightly lower risk profile," he says.

DeShurko also notes that Vanguard's dividend yield is clearly higher, which means its holdings have earned more dividends and interest over the past 12 months.

"While nothing to write home about, the high yield from the Vanguard fund gives me an expectation of that going forward," DeShurko says. "As the fund adjusts its allocation, the yield should increase toward retirement. And while you're in the accumulation mode, the higher the dividend to reinvest, the better."

So who wins this Fund Fight?

My initial reaction would be to go with Vanguard and its lower fees and higher dividend yield.

But T. Rowe Price has posted the better overall return (dividends, interest and share price appreciation) over the past 10 years.

Can it keep that up? You never know.

But the Gen X investors in this target date fund have two critical decades left to build their nest egg, and I think the extra return is worth the modest additional risk.

I'd put the T. Rowe Price Retirement 2035 fund in my retirement plan.