[Founder's Note: Today's post originally published as one of my regular columns at MD Magazine and discusses the debate between mutual funds vs. ETFs. I run into this question all the time. As a heavy user of both types of funds, it's easy for me to take a look at these from an unbiased viewpoint.]
By Dr. James M. Dahle, WCI Founder
Gold Level Scholarship Sponsor
Many beginning investors wonder if they should be investing in traditional mutual funds (TMF) or exchange-traded funds (ETF). Once they learn a little more, they discover it matters far more that they are investing in the right kind of mutual funds (low-cost index funds) and doing it the right way (buying and holding a diversified collection), rather than whether the fund is traded on an exchange or not. Nevertheless, there are some subtle differences between the two that may help you to decide which one to use in your circumstances.
Pros and Cons of ETFs
ETF proponents claim better tax-efficiency, higher transparency, lower average fees, intraday liquidity, and insulation from forced buying and selling as strengths of ETFs. Their detractors point out spreads, premiums and discounts, tracking errors, and difficulties with dividend reinvestment. This, of course, ignores the primary argument against ETFs—that speculators are far more likely than long term investors to use ETFs.
As John Bogle, founder of Vanguard has said,
I freely concede that the ETF is the greatest marketing innovation of the 21st century. But is the ETF a great innovation that serves investors? I strongly doubt it. For better or for worse, ETFs have opened indexing to a new market of stock traders. The only sure winners are the brokers and dealers of Wall Street.
However, in this article, I’m talking about using ETFs as a long-term investing tool, not a speculating tool. One can speculate using either type of fund, even if it is more easily done using ETFs.
Each of the arguments for and against ETFs as an investing tool has subtleties worth looking into.
ETF Benefits
Gold Level Scholarship Sponsor
ETF proponents claim a number of benefits of an ETF over a TMF, although these benefits are often oversold for the purposes of a long-term buy and hold investor.
#1 Better Tax-Efficiency
Due to the unique ETF structure, it is easier to flush capital gains out of an ETF than a TMF rather than passing them on to the investor. However, this doesn't matter to an investor in a tax protected account like a 401(k) or a Roth IRA. This especially doesn't matter with the unique Vanguard funds, where the ETFs are a share class of the TMF. In fact, that structure offers the best of both worlds, where the gains can be flushed out of the ETF share class, saving taxes for holders of both the ETF and the TMF share classes.
#2 Higher Transparency
TMFs only have to tell you what they actually own twice a year. It is much easier to see what an ETF is holding as its respective components are available in real time. However, if your investments are primarily in index funds (as they should be), it's pretty obvious what the fund is holding at any given time.
#3 Lower Average Fees
While ETFs, on average, do have lower expense ratios than TMFs, the averages really don't matter much. What matters is how much you are paying. And the best ETFs and TMFs have very low expenses anyway. For example, the admiral shares of the Vanguard Total Stock Market Index Fund have an expense ratio of 0.04% per year, nearly the same as the ETF shares at .03%. In addition to the expense ratio, ETF investors also have to deal with the costs for spreads, premiums and discounts, and commissions, so even a slightly lower expense ratio may not make up for those.
#4 Insulation from Forced Buying and Selling
Gold Level Scholarship Sponsor
ETF proponents correctly point out that in a time of market turmoil, many investors panic and pull their money out of their investments. A TMF is often forced to sell securities at fire-sale prices in order to meet their redemption needs. They may also need to carry a higher percentage of cash to meet redemptions, lowering returns in bull markets. This effect can be minimized by investing in funds held primarily by intelligent, buy and hold investors, like index funds, which tend to have lower turnover during bear markets.
ETF Downsides
ETFs have their downsides as well, although most of these can be minimized relatively easily.
#1 Paying the Spread
When you buy or sell anything on the open exchange, there is a spread. For example, at any given time you may be able to buy shares at $41.09, but only be able to sell them at $41.01. That 8-cent gap is the spread. With infrequently traded stocks or ETFs, the spreads can be quite wide. However, you can minimize the spread by purchasing only very liquid ETFs.
For example, when I originally wrote this article in 2015, the spread on VTI (the ETF shares of the Vanguard Total Stock Market Index Fund) was 2 cents, from $106.78 to $106.80. That represented about 0.02% of your purchase, almost insignificant (although about 40% as large as the expense ratio for the entire year.) A less frequently traded ETF, such as PDH (PowerShares DWA HealthCare Momentum ETF), had a spread of 27 cents, from $54.76 to $55.03, or about 0.5% of your purchase, 25 times as much as VTI.
#2 Premiums and Discounts
Sometimes ETFs are not sold for the same price as the total of the underlying securities in the ETF (Net Asset Value or NAV). While ETFs have a mechanism to correct this problem, in times of severe market volatility, this mechanism can break down. A TMF never has this issue, as its price equals the NAV at the end of every day. This issue can be minimized simply by avoiding trading during periods of high market volatility or when the premium or discount is not in your favor.
#3 Tracking Error
This is really an issue with any index fund, whether exchange-traded or not. The less liquid the asset class, and the more expensive the fund, the higher the difference between the fund’s performance and the index performance will be.
#4 Dividend Reinvestment
One of the most convenient aspects of a TMF is that you can just have the dividends reinvested automatically. Although this may not be a good idea in a taxable account, as it creates a lot of small tax lots to keep track of, it is very useful in a tax-protected retirement account.
Unfortunately, this feature is generally not available for ETFs (although some brokerages are starting to offer this feature, but sometimes only for their own ETFs). Dividends must be reinvested manually. This introduces additional hassle and costs (primarily spreads and trading commissions).
Choosing Between ETFs and TMFs Comes Down to Cost and Hassle
Most smart investors choose between ETFs and TMFs based on practical issues—cost and hassle. Let me show you what I mean. In my 401(k), I can invest my money into a handful of low-cost Vanguard index funds and pay a 401(k) fee of 0.3% per year to the 401(k) company. Alternatively, I can invest my money in anything available through the Charles Schwab brokerage for $200 per year, plus $8.99 per trade. At a certain level of assets ($70-100,000), the 0.3% fee is higher than the flat fees. So when my 401(k) hit that size, I switched. I choose to invest in the ETF version of the same or similar Vanguard index funds available in the 401(k) already, but at a lower price.
In this situation, the supposed advantages of ETFs didn't matter at all.
- I don't need tax-efficiency, as the money in a 401(k) grows in a tax-protected manner.
- Transparency doesn't matter to me, as both the traditional index funds and their respective ETFs hold the exact same securities, and everyone knows what they are—all of the securities.
ETFs, mutual funds, and ice cream should be low-cost and convenient
- The fees on the investments themselves are exactly the same. I certainly don't need intraday liquidity, as I don't need this money for decades.
- In fact, if the costs to me were the same, I would prefer the traditional mutual fund, as I wouldn't have to go through the hassle of placing buy orders, nor have to reinvest dividends manually. But I'm not willing to pay hundreds or even thousands more in 401(k) fees in order to do so.
There are also times when the investment you want is only available as an ETF, or only as a TMF. In these cases, the investor will have to use what is available, or choose a different fund or asset class.
The bottom line is that you can use either traditional mutual funds or ETFs to invest in a reasonable, low-cost manner. You should choose based primarily on cost and amount of hassle.
Where do you come down in the ETF vs traditional mutual fund debate? Do you use ETFs, mutual funds, or both? Why? Comment below!
Like you, I purchase Vanguard ETF’s through Schwab. In addition to the lower cost, I find their share structure advantageous as it offers better liquidity in times of market stress due to the size of their ETF’s. Apparently their share structure is proprietary until sometime in the early 2020’s which made me wonder the following points:
1. Because other companies cannot have their ETF’s as a share class of their mutual funds at present, does Vanguard knowingly or unknowingly contribute to ETF liquidity issues in their competitors which could be a tactical business advantage?
2. Could companies like Fidelity and Oakmark have turned to Collective Investment Trusts (CIT’s), which I find confusing and opaque, as a low cost alternative to compete? I have completely left Oakmark and am in the process of leaving Fidelity for this concern. I do not have access to their CIT’s (which I would not want anyway) but do not like being the leftover, higher fee participant in their funds.
Any opinions or thoughts WCI or fellow commenters?
1. Never thought about it but it makes sense.
2. Perhaps. I also find them a bit opaque, which in the investment world usually means additional expense somewhere. Probably ought to do some more research and write a post about them some time.
I also wonder if Jack Bogle’s disagreement with Vanguard entering the ETF space had to do with how Vanguard entered it with their proprietary ETF share class. Have you ever heard him comment about it?
No, I think that has nothing to do with his disapproval. His disapproval is almost all about frequent trading of ETFs and how the ETF structure encourages that. I think he approves of the Vanguard ETFs that are just shares of the traditional index mutual funds.
I remember reading an article about how the Vanguard ETF helps the Mutual fund investors. I can’t remember the specifics, but with the frequent trading they were able to turn more of the mutual fund portion into long term distributions, or something like that, so the tax effect was less.
Anyone remember something about this?
Nevermind, missed the link for the rest of the article. Thought it looked a little short, but it did tie up nicely…
How much does the lack of “Insulation from Forced Buying and Selling” cause you to select an ETF over a mutual fund? I’ve always prioritized expenses, taxes, and convenience when deciding between the 2, and hadn’t ever really considered this difference. Any good resources for comparing returns in an equivalent ETF vs mutual fund that might show a mutual fund underperformance for this reason?
I don’t think it is a big factor at all.
ETFs can have a different type of forced sale. When an ETF is not paying its way, the management will fold it. I had one that I thought had a promising strategy, but it never got big enough to support itself, so it folded, at a loss of course. I have read that $50 million is the approximate size at which an ETF pays its way.
Yes, I believe that’s true and another good reason (besides the spreads) NOT to buy thinly traded ETFs. (The larger the ETF the more frequent it is traded in general.)
I have been thinking for some time to transfer my individual 401K out of Vanguard since they don’t allow admiral shares in there. At some point the extra fee of 10-15 basis points is not worth the benefit of keeping all my assets in one place. I wish Vanguard would change their policy.
Me too.
God reason to use the Vanguard ETF, if available. They usually carry same management costs as the admiral class. The only problem I have with Vanguard is that ETFs, by nature, are usually indexed, not managed. Vanguard has a few excellent managed funds, which have low fees compared to similar ones elsewhere. Result is that I use both, according to my judgement of what I need to fill a portfolio niche.
Why invest through schwab if you can buy directly from vanguard
Vanguard etfs and funds have the same expense ratio for admiral shares
We originally set up our 401K at Schwab, and I don’t see moving it to Vanguard as worth the time or hassle. As you said, I can get Vanguard’s ETF’s as cheaply as Admiral shares through Schwab. And, I can access other non-Vanguard funds that I prefer easily. While I think Vanguard is a good company, as I stated above, I have some concerns with how they have set up their different share classes. For the moment, using them is to my advantage. Will it always be? IDK.
BTW, I always enjoy your comments! Some of your points in the past have helped me realize that my risk tolerance is too high for my need for risk. Thanks for your insight and for posting.
401(k) is at Schwab. My taxable and Roth IRAs are at Vanguard.
I felt like I needed a dunce cap reading about the 0.3% 401k fee. I feel dumb. I need to go over the fine print on all these accounts again.
As someone new to investing, I have avoided ETFs completely thus far because they seem too tempting to jump in and out of. Thanks for clarifying and expanding on their benefits.
Why a dunce cap? You didn’t know 401(k)s had fees? You’re hardly alone. In the last couple of years laws have been passed that 401(k)s now have to tell you very explicitly about the fees. They didn’t have to do that before. Now I get a letter once a year telling me how much I’ve paid in fees in the last year.
I have a 403b at TIAA-Cref from my previous work, they dont charge a single penny to manage it. 🙂
This is good to know.
Someone is doing some work. So that someone is getting paid. And in some way, you are paying them. Best to know how it is done.
It might be they charge loads (probably not with TIAA-CREF).
It might be they have higher ERs than they otherwise would (compared TIAA-CREF ERs to Vanguard ERs lately?)
It might be that your employer is paying the fees (which he could otherwise use to raise your salary.)
But I assure you they’re not working for free.
Don’t get paranoid or anything though. TIAA-CREF is one of (if not the) very best 403(b) provider out there. Take a careful look at their unique real estate fund if you are offered the opportunity.
OK I looked through all the statements (quarterly for last one year) again and even called up a TIAA-CREF advisor, every where I look it is zero fees. Now my hospital could be paying them, but they are not taking out a yearly/ quarterly fees out of my account. Also this hospital I worked with had close to half billion in retirement accounts. I dont know if that makes any difference.
Awesome for you! In my situation, I am my employer. So I pay those fees to the 401(k) provider either way, whether I do it as an employee or whether I do it as an employer.
For most vanguards funds seem better as it limits your trading which helps most investors in the long term and everything gets reinvested automatically, if desired
I have started doing a backdoor roth due to my change in income. I was thinking about doing ETFs instead of indexed mutual funds for the following reason.
With a backdoor Roth, I plan on trying to enter the market at the beginning of the year every year. With Vanguard ETFs, the expense ratio is lower than for the same indexed fund. Even though I have to pay 7 dollars once every year, I think the savings in expense ratio is worth it.
Thoughts?
It depends on the total cost. Most likely within a few years you will have enough in the roth to buy Admiral shares if you are not buying a bunch of funds.
I have about 7 funds in my portfolio, but my roth IRA only has one so I can buy the Admiral fund and not worry about the price spread. Also can re-invest the dividend easier and I can buy partial shares. With an ETF I can’t do that.
Now, my HSA only allows ETF’s so in that one I have ETF’s but some of the money sits in cash since I can’t ever but the exact number of shares I need, and the dividends can’t reinvest. If I could do mutual funds there also I would though.
I thought this thread would get a lot more comments. Perhaps many of the readers are just like me and a little cautious about posting. Anyway I wanted to clear up a few things I had questions about. It seems as though Vanguard admiral shares are mentioned by a few people in this treads as their go to funds. Correct me if I am wrong but it seems like the admiral funds are all mutual funds. Haven’t we read over and over again that managed funds don’t beat index funds about 80% of the time. Even if they have lower expense costs all of the vanguard etfs have even lower expense costs and on top of that with the managed funds and all the buying and selling you have tax concerns to account for which lowers your return even more right? Sorry if that sounded like a statement but it really is a questions.
I recently graduated residency and just started working and have built up a nice emergency fund and now I am looking at investing more and have done a fair amount of research and I just want to make sure I am looking at it correctly so please let me know what you think of the above comment. I am looking forward to the forum on here where I might be able to post all of my financial info and investments so people can critique it. I want to post of the boggle heads forum but I think the majority of people on there are not in our situation and it would be nice to have my stuff reviewed by peers so to speak. Thanks again for the forum. Maybe I will come out of my shell and post a little more in the future and if you are reading this and not posting don’t be shy.
Yes, actively managed mutual funds generally have higher expenses than index mutual funds. However, actively managed and indexed mutual funds are available as either traditional mutual funds or as ETFs. For example, there are three share classes of the Vanguard Total Stock Market Index Fund.
# 1 Investor Shares – A traditional mutual fund with an expense ratio of 0.17% and a $3,000 minimum to invest
# 2 Admiral Shares- A traditional mutual fund with an expense ratio of 0.05% and a $10,000 minimum to invest
# 3 ETF – An ETF with an expense ratio of 0.05% and a 1 share minimum to invest, but must be bought and sold directly on the exchange
Hope that helps.
correct me if I am wrong, isnt it with TMF at VG you can place a buy order and it will be executed that day, while with ETF, the money has to be in VG account before it will get executed?
There are only a few actively managed ETFs; most are indexed, although the indexes may be very narrow and specialized. It is worth noting that if you have a Vanguard account, you pay no transaction fee for Vanguard ETFs. I believe this is the same for Schwab-sponsored ETFs and perhaps some other companies. It should also be noted that if you have a diversification scheme, there may not be an ETF that fills a particular niche in your portfolio, so you try to find a mutual fund that does.
Hi WCI,
I enjoyed your article, thank you for what you do. Quick question,
1) To minimize the premium/discount downside, you wrote to avoid trading during periods of high market volatility or when the premium/discount is not in your favor. How do I know when the premium/discount is not in my favor? By comparing it with the NAV of the previous market day?
Morningstar will tell you what the premium discount is at any given time. For example, right now with VTI it is -0.08%. But the ETFs I use are so liquid it’s never really very large so I mostly just ignore it.
Oh, that is useful to know.
Now if only there was a way to place a conditional order that executes when the discount was a certain number to compensate for the bid/ask spread.
Dr. Dahle,
Longtime reader, have a question that goes along with this thread.
Employed physician, have a 401k with terrible investment choices, so I do a Schwab PCRA account. My question is why would you spend the commission money on Vanguard ETFs when Schwab has index ETFs for broad market, international, large, mid, and small caps with ER’s of 3-6 basis points? Is there something I’m missing on those funds that makes them less desireable? The Schwab index mutual fund ER’s are 2-3x higher than the ETFs, so there is cost savings, and no fee/commission to buy or sell the ETFs if from the OneSource list.
What are your thoughts on this?
Thanks,
Mike
First, it’s not much money.
Second, I think it’s worth the tiny amount of additional money I spend. For example, let’s look at Total Stock Market Funds.
Schwab: SCHB, 5 year returns are 14.84%. Vanguard’s (VTI) are 14.90%. Conclusion? Vanguard is a little better at indexing than Schwab. On a $200K holding, how much is 0.06% worth over 20 years? About $7K. I figured that was worth paying a few commissions. (and when I say a few, I mean it. We’re talking $16-24 a year for that holding.) It’s the same story with my other two Vanguard holdings there (EM and international small).
If you want to use the Schwab ETFs to save the commissions, I think that’s fine. But I think Vanguard is a little better at this game, their funds are bigger and thus enjoy more economies of scale, I trust them more, and I prefer to reward them for being first to do the right thing for investors.
I understand the essence of why ETF’s are more tax efficient. I currently have an IRA that I plan on converting to a Roth IRA. Would it make sense to buy ETF’s with it instead of index funds with the purpose of decreasing taxes paid during the conversion? (or is my thought process missing something)
First, it’s critical to understand that both traditional mutual funds and ETFs can be either index funds or actively managed funds. Second, it’s important to understand that with Vanguard, the ETF and the index fund are equally tax efficient, since they’re really both share classes of the same fund. The fact that Vanguard has an ETF share class makes them both more tax efficient than they would be otherwise. Third, the tax-efficiency of the investment doesn’t matter within a traditional IRA, a Roth IRA, or during a conversion of one to the other.
Now, understanding those three facts, it becomes pretty clear that it doesn’t make sense to buy ETFs before doing a Roth conversion, right?
Yup, thank you for the ultra-clear explanation.
I just did my annual portfolio review with my Fidelity advisor (I have $$ in Vanguard and Fidelity, and like my face to face meetings which Fidelity offers). She was encouraging me to consider ETFs for tax efficiency. SInce this article is almost 3 yrs old and the last comment is from Oct 2017, I was wondering if there is more info I could have so I can decide if ETFs are right for me.
I am turning 50 in May this year and plan to go part time by 55 as by then I will have overpassed my Financial Independance number by a comfortable margin (my personal comfort number is higher than what Fidelity is predicting, which is that I am at FI now). I have a huge chunk of $$ in a Traditional IRA with Vanguard and cannot afford to pay the huge taxes it will incur to rollover to allow me to do a Backdoor Roth – but atleast, with turning 50, I get to lower my gross income by an extra $6000/yr by putting that into my 401K (along with the $18,500 IRS limit) and hope to rollover when I go part time. Advice will be much appreciated. Thanks!
Why don’t you just roll that traditional IRA into the 401(k) so you can do a Backdoor Roth IRA?
I decide the ETF vs mutual fund issue account by account. In my Roth IRA and taxable account, I own Vanguard admiral shares. In my Vanguard individual 401(k), I own Vanguard investor shares (because admiral aren’t available.) In my Schwab 401(k), I own Vanguard ETFs (because the commissions on ETFs are much less than the commissions on funds.) But I own the Vanguard Total Stock Market Index Fund in all four accounts!
WCI, I thought about the 401k but it is with Transamerica and I have not liked my experience with them so far.
I will look into the Fidelity ETFs. Thanks
That’s disappointing. However, you could do some online surveys, get an EIN, open an individual 401(k) and roll it in there.
So you are allowed to own and operate two 401(k)s? Also, why do you continue to use 2 instead of just consolidating everything into one?
Yes, more details here: https://www.whitecoatinvestor.com/multiple-401k-rules/
I currently have three 401(k)s: One for my clinical practice, one for WCI, and one is my old TSP from when I was in the military.
Yes, that is what I have been thinking of doing by my tax accountant felt it was not worth it for the little amount I make doing disability reviews (surveys are too finicky and waste your time deciding if u r eligible). I have to find a new tax person for next year and will discuss this. I don’t think my current person understands Backdoor Roth. I looked at Transamerica again today, and the pickings are slim with only 2 vanguard funds that I am contributing to. My $4000 from last Friday’s paycheck as part of my $18,500 has still not hit the account a week later. I decided to front load because I can’t keep checking when the money will reach transamerica account, or evaporate on the way. It might mean lesser match, but atleast the $18500 Will be in the market longer and I won’t have to stress after the whole amount is removed from paychecks.
Is there a way to quantify the difference in tax efficiency between mutual funds vs ETFs at Schwab and Fidelity? It’s a new concept that I’m trying to understand. I’m in the asset allocation/planning-my-investment-stage as I’m getting set to graduate residency. My Roth IRA is already with Vanguard. My (future) 401k will be with Fidelity with my new employer.
Is Morningstar’s tax/cost ratio an accurate way of estimating the tax efficiency of a fund or do you recommend a better way?
I prefer funds > ETFs to avoid the tendency to overtinker. I’m trying to decide between VTSAX (ER 0.04%, 10 yr tax/cost ratio 0.5), SWTSX (ER 0.03%, T/C 0.74), FFSMX (ER 0.02%, T/C 0.85) for my taxable accounts.
Is it worth the slightly lower ER to house my taxable accounts at Fidelity with FFSMX over VTSAX? Or do you believe the T/C ratio is an accurate metric and in this case the tax efficiency of VTSAX makes it a better choice than FFSMX?
I’m essentially trying to come up with a good framework for how to compare index funds now that I’ve chosen an asset allocation, and I’m trying to understand tax implications when comparing funds with similar but not identical ERs. What metrics besides ER, associated fees, and indices tracked do you use to compare funds? Any help would be greatly appreciated.
If you’re comparing total stock market index funds to total stock market ETFs for tax-efficiency and expense ratios you’ve already won the game. Further effort isn’t going to make a significant difference. But the answer to your question can be found at Morningstar.
http://performance.morningstar.com/fund/tax-analysis.action?t=VTSAX®ion=usa&culture=en_US
Much appreciated. When you’re just starting out it’s hard to know if you’re on the right track. All I’ve done is read this site and a couple Bogle/Boglehead books consistently during residency and I feel like I have a reasonable plan for after residency. Much more so than the vast majority of residents. Thanks for your time and for this incredible resource.
Love the site. So I set up an individual 401k at E Trade. I can’t participate in the VTSAX (admiral shares) because I’m not with Vanguard, however the VTI ETF (with the same ER as VTSAX) has caught my attention. Should I go with VTI over VTSMX? This would save me 10 basis points. The reason I ask is because I am not an experienced investor and I hear that ETFs are more work intensive. I’m worried about other costs that I’m not aware of and being over my head managing it. What would be the difference between VTSMX and VTI, practically speaking, for long-term investments? Thanks.
Yes at eTrade.
I read the blog article for the first time today and then all reply comments. Noticed that the last comment was posted Oct. 26, 2018.
Much has changed since original article posting and the last comment. My investment accounts are with institutional portion of TD Ameritrade. Both institutional and retail portion offer a commission-free program including over 500 ETFs. Vanguard now has a commission-free program with about 1800 ETFs.
Management of an all ETF portfolio [asset allocation maintenance, dollar cost and value averaging, rebalancing, etc] and lack of fractional share purchases seem one of the major hinderances. Any thoughts on those aspects?
Also, I’m exploring M1 Finance as a possible alternative to major brokerage firms for an all ETF or ETF and some individual stock portfolio. I haven’t found any negatives with an M1 Finance pie type portfolio approach. Do any of you have experience with M1 Finance? What have you found to be negatives as compared to Vanguard type commission-free ETF offerings?
I will appreciate input.
Thank you.
I always gear towards ETFs because of intraday liquidity, though it’s somewhat of a bummer because mutual funds are often beating them on expense ratio nowadays. I always think of some doomsday scenario where the market is about to dip, but I need some money in the near-term and that intraday trading is going to save me a pretty penny. I think I may split to half and half or just put my international holdings in a cheaper mutual fund so I can kinda have my cake and save on expenses too.
That would be a very weird scenario where you couldn’t wait until 4 pm to cash out AND it was possible to get out at a reasonable price in mid-day. More likely, the market would recover somewhat by 4 pm or those trying to rush for the exits would find that intraday liquidity doesn’t actually exist in a crisis. You may not be able to sell at any reasonable price.
Perhaps a silly question, but do you have to pay a transaction/ commission fee each time you buy an ETF share using Vanguard as the platform? If so, how much is it (no straight answer on their site or in the forums I checked)? If so, would it make more sense to save up a small 3-figure monthly investment (I’m still in school, but trying to start good habits now) until I can put it in a mutual fund with a $3000 floor? Or could buying ETFs be more cost effective?
No, you don’t pay a commission when you buy and sell Vanguard ETFs at Vanguard Brokerage.
If you’re borrowing money for school your best investment is likely borrowing less rather than trying to invest.
I currently have a Roth IRA at Vanguard and I also buy Vanguard mutual funds in my HSA and my 401k (accounts at Optum and John Hancock respectively). I’ve been basically following the 3-fund portfolio recommended here and on Bogleheads. I planning to open a ‘taxable’ brokerage account, and after looking at the options available many people seem to recommend TD Ameritrade or Fidelity (among others) and Vanguard is nowhere on the “top 10 lists” of online brokerage accounts. I’m assuming this is mostly due to “friendlier” user interfaces and other trading options available on these other online brokerages. I have no problem with the Vanguard interface, but if I had a TD Ameritrade account for instance, is there any real difference between that and Vanguard if planning to just follow a 3-fund portfolio? At the very least it appears maybe the minimum investment through TD Ameritrade for Vanguard MFs is higher for the investor shares at least. But are there any other significant differences to be aware of before opening a brokerage account (costs, tax efficiency/reporting, etc)? Is it best to set dividends to be re-invested in these account like I do in my HSA/401k/Roth IRA?
My taxable account is at Vanguard. I think it’s perfectly fine. It does everything I need it to do and in my opinion the interface works just as well as the one at Fidelity, Schwab, and TD Ameritrade, all of which I have personally used. Some people do complain about the interface and there are frequent complaints about the quality of service you receive at Vanguard for various services (although it’s infrequent to hear about an issue with taxable accounts.)
One reason you may not hear about Vanguard’s brokerage in online “top 10 lists” is that they don’t have an affiliate agreement like RobinHood, WeBull etc. So you can’t make any money by listing them and getting people to open accounts there. Vanguard also doesn’t cater to traders, so if your interest is in hyperactive trading of your account, Vanguard probably isn’t the place for your taxable account.
I do not reinvest dividends in taxable. I think that’s better to facilitate rebalancing without getting capital gains and just to make for fewer tax lots.
So do you just wait a specified period of time (6- or 12 months) and then re-invest dividends to re-balance to your desired AA? I assume having fewer tax lots come into play when doing tax loss harvesting? Thanks
I lump it into the money I invest every month. I invest the money that I carve out of my budget whether that money came from my clinical practice, WCI profits, or taxable investment dividends.
Yes, fewer tax lots makes tax loss harvesting a little simpler. It’s not the end of the world to reinvest in taxable, but I find it easier not to.
Hi Jim,
On 2/4/23, the Wall Street Journal published an article entitled “How Much More Tax-Wise Are ETFs vs. Mutual Funds?” See link here (https://www.wsj.com/articles/how-much-more-tax-wise-are-etfs-vs-mutual-funds-11675528101?mod=Searchresults_pos1&page=1).
I was wondering if you thought it was worth moving all my mutual fund investments that I have in a taxable account at Vanguard to a similar ETF fund in the same taxable account? The article makes a compelling tax-saving argument but I know your prior comments have said there is not much of a difference between the two at vanguard for tax-saving purposes.
Thank you for your help!
I wouldn’t move money out of a Vanguard traditional mutual fund that also has an ETF share class.
I wouldn’t realize a large capital gain to move the money.
But in general, yes, ETFs are more tax-efficient than traditional mutual funds. The Vanguard funds with an ETF share class are an exception to the data in this article because they function just like an ETF in this respect.