EACH WEEK, WHEN

we write the recipe for our fund screen, we include an expense ratio ingredient to remove those funds that charge more than they should. That filter almost never catches Vanguard funds.

Of the 197 Vanguard funds in our database, none have expense ratios above the median in their respective classifications. A mere two stray from the bottom quarter and only a dozen rank outside the lowest 10%.

And so, when you ask what makes Vanguard Vanguard, the answer is likely fees.

"It's absolutely low fees," says Jeff Tjornehoj, a Lipper senior research analyst. "That's their bread and butter."

"That's their strength. Quite often, that's what sets them apart from the competition," echoes Sonya Morris, a Morningstar analyst who just finished a one-year turn as editor of the firm's Vanguard Fund Family Report.

The data don't lie. The average expense ratio for Vanguard equity funds (excluding ETFs) is 0.245%, more than a percentage point better than the average equity fund. On the fixed income side, the gap is similarly yawning: Vanguard checks in at 0.142%, compared with 0.967% for the field.

Those low fees give Vanguard an edge when it comes to returns. And it shows. The firm's equity funds have returned 14.48% annualized over the last three years, besting the average equity fund (12.43%) as well those of its two closest rivals, American Funds (14.02%) and Fidelity (13.87%).

The result is a fund family flush with cash. Though American is now the largest fund group with $843.7 billion under management (net of proprietary funds of funds), Vanguard is a close second with $841.6 billion, according to Financial Research Corp. (Fidelity is third with $774.3 billion.) Through May of this year, Vanguard's net flows of $21.2 billion trailed only American's $34.3 billion.

The company also maintains a roster of impressive talent, both inside, and perhaps as importantly, outside the company's Pennsylvania headquarters. Seven of the 16 funds on our Vanguard Fund Screen this week are managed by sub-advisors. In fact, with the exception of a couple of quantitative funds, all of Vanguard's actively managed funds are run by sub-advisors.

"They're quite good at singling out good outside managers," says Morris. "They've got a whole team that's constantly looking."

By essentially outsourcing management to other firms, Vanguard saves on overhead and other related costs associated with in-house fund management. The savings usually end up in investors' pockets. Take, for example, Vanguard PrimeCap, a multicap core fund managed by a five-man team at PrimeCap Management Company. The fund, which is now closed to new investors, carries an expense ratio of 0.45%. Meanwhile, PrimeCap Odyssey, a nearly identical fund offered directly by PrimeCap, goes for 1.25%.

That discrepancy in fees is also due in part to the tremendous leverage Vanguard has had in attracting new managers. But as the number of funds in need of managers grows, and other firms catch on to the merits of Vanguard's streamlined business strategy, Morris thinks the firm may lose a little of its hiring edge.

"They're facing more competition from other firms looking for talented sub-advisors who may be willing to pay more," says Morris.

That's a minor bullet point, however, on Morris's short list of Vanguard's shortcomings. Other minor beefs include the dearth of international fixed income offerings and the weakness of long-term bond plays, including those on our list this week. The last issue is more of market concern, though.

"There's nothing broken about them. It's not that they're managed poorly or anything," says Morris. "It's just that the current environment doesn't encourage going out too long with maturities."

On the other hand, Morris does like each of the three international funds that headline our screen, noting the flexibility afforded to Vanguard's international managers to invest wherever they see the best opportunities.

She's also bullish on Vanguard GNMA, a fairly risk-conscious fund with a couple of new managers from Wellington Management Company, the original Vanguard sub-advisor. Naturally, she's also attracted to GNMA's 0.21% expense ratio.

"Particularly in a lull environment like we're in now, expenses are front and center in selecting funds," says Morris. After all, you can't be too careful with your money these days.

The Criteria
This week, we used our Fund Screener to search for top-performing, low-fee funds in the Vanguard fund family. We demanded three- and five-year returns in the top 25% of each fund's respective classification and expense ratios in the bottom 25%. Each fund on our list below is no-load, open to new investors, and accepts minimum initial investments of $5,000 or less. In addition, they all hold at least $50 million in total net assets. Finally, we limited our search to equity and taxable bond funds. In the end, eight equity, one mixed-asset, and seven fixed-income funds made the cut.