Q.
In terms of Vanguard, are the ETFs really any cheaper than an admiral share mutual fund? I'm not sure the ER could really get any lower than 0.1%. I'd like to get in a pattern where my monthly contributions are being directed into funds on a routine basis. Is a mutual fund better in this regard? I haven't used ETFs before. When using Vanguard funds, should I be using the ETFs or traditional mutual funds?
A.
The quick answer is that it doesn't matter. Many novice investors who learn a little more about the importance of keeping costs low are shocked to find out they're paying 2-3% or more per year to invest. Advisor fees, high mutual fund expense ratios, and poorly disclosed 401K fees can add up quickly. But once you're getting expenses down below 0.25%, the law of diminishing returns quickly kicks in. Since most Vanguard index funds have expense ratios in this range, it just doesn't matter much whether you use an exchange-traded fund (ETF) or a mutual fund. I actually use both, depending on the situation.
Where I Use ETFs
I use ETFs in my 401K, which is basically a Charles Schwab brokerage account with an extra $200/year fee. At Schwab, the Schwab ETFs are traded commission-free, and Vanguard ETFs are subject to a low $8.95/trade fee. If I used Vanguard mutual funds, I would have to pay $76 each time I bought ($0 to sell). So for $58 less per round trip, I'm willing to put up with the hassle of using the ETF.
Where I use Mutual Funds
With my personal and spousal Vanguard Roth IRAs, I prefer using the mutual funds. My account balances qualify for admiral funds, so there's no difference in expense ratios, and using the funds allows me to buy, sell, and rebalance when markets aren't open, which is much more convenient for me.
Comparing expenses
Let's take a look at the actual expense ratio difference between the commonly-used share classes at Vanguard.
| Fund | Investor | Admiral | ETF |
| Total Stock Market | 0.18% | 0.06% | 0.06% |
| Total International Stock Market | 0.22% | 0.18% | 0.18% |
| Total Bond Market | 0.22% | 0.10% | 0.10% |
| REIT Index | 0.24% | 0.10% | 0.10% |
| Small Cap International Index | 0.50% | None | 0.28% |
As you can see, Vanguard sets the admiral and ETF expense ratios at exactly the same level. The ETFs, however, must be bought and sold on the open market, so there are some bid-ask spreads you are also paying when you buy and sell. You may also find yourself buying at a higher or lower price during the day than you'd get just putting in a mutual fund buy order which always transacts at the close of day prices. ETFs give you more control, but also more hassle.
A special case can be made for newer Vanguard funds that don't have an admiral class yet, or those funds which have a buy/sell fee. The Small Cap International Index fund, for instance, has no admiral shares AND is subject to a 0.50% buy/sell fee. For this reason, I've moved that fund to my 401K and buy it as an ETF share. I'd rather pay $8.95 to buy/sell and have half the ongoing expense ratio than pay 0.50% to buy and sell along with an ER of 0.50% each year.
For someone with enough money to get the admiral shares (generally $10K per fund) that wants to minimize hassle, there's absolutely nothing wrong with using the traditional mutual funds at Vanguard. It is much easier to automate mutual fund buying than ETF buying so the investor looking to minimize hassle should usually choose the traditional mutual fund.
So many brokerage accounts have “no transaction ETFs” that they are definitely becoming an easy choice.
Vanguard has all theirs
Fidelity has a ton of I-Shares ones
E-Trade has the ones from Wisdomtree and Global X (most of these i dislike)
But overall once you get your expense ratios under 0.25% i agree that from there you’re just splitting hairs. You’d have to have a TON of money to notice a real difference between 0.06% and 0.12% even if the latter is 2X as “expensive”
What about the tax impacts. I know that mutual funds shove the results through on a yearly basis, and I think ETF’s only tax when sold. If true it could be a large difference in the amount of money you have to invest in taxable accounte. No difference in retirement accounts.
Schwab’s are free too at their brokerage.
With such a small difference to consider, many people prefer to automate mutual funds because it saves time. For the big players, that time could mean more money than switching over so it makes sense.
Could you explain this statement a bit more, I have a IRA at Vanguard and wasn’t aware of a fee difference with funds vs. ETFs….”If I used Vanguard mutual funds, I would have to pay $76 each time I bought ($0 to sell). So for $58 less per round trip, I’m willing to put up with the hassle of using the ETF….”
Thanks, Dave
As a resident, I don’t have enough money in my Vanguard Roth IRA to put $10K into all my the funds I’d like to use. I fit into the fund junkie category and like having diversity. The Vanguard ETFs give me the flexibility to put a little money into each of several funds while still getting the cost benefit of Admiral shares. That said, as soon as I have enough money in a fund to buy the Admiral shares, I’ll switch because the ETFs are definitely more time-intensive.
Dave-
Those are the fees the Schwab brokerage charges to buy Vanguard funds there. Vanguard doesn’t charge those fees if you buy direct from Vanguard.
Just curious and to be sure I understand correctly, you state that for your Roth IRA you prefer Vanguard Mutual Funds. Are you investing the ROTH in the Total Stock Market, Total International Stock Market, Total Bond Market, REIT Index, and Small Cap International Index Mutual Funds?
Which asset classes I actually hold in my Roth IRAs right now include (keep in mind it changes frequently as 401Ks change and amounts in each account change):
Bridgeway Roth IRA: Bridgeway Ultra small market fund
Lending Club Roth IRA: Lending Club Notes
My Vanguard Roth IRA: Emerging markets index, small cap international index, REIT index, Total international index funds
My wife’s Vanguard Roth IRA: Small value index, Large Value index, and Total international index funds
Everything else in my asset allocation is in the TSP (G, S, I) or my 401K (TSM ETF, Schwab TIPS ETF, and Small cap international ETF).
You always have to look at your retirement portfolio as a whole. Take the best of what’s in your 401K, then supplement with IRAs.
Hello – I’m new here and I love this blog! I’m actually an architect (as is my wife) but there is so much here relevant to us.
Wondering why you have multiple Roth IRAs? Is it a pain to track accounts in multiple locations? My assets are in many different places now. I want to consolidate everything under one roof.
Which leads to my main question: hold everything at schwab to take advantage of research and multiple investment possibilities vs hold everything at VG to take advantage of admiral shares and no cost contributions. (At schwab this would have to be ETFs to avoid the $76 fee).
What research are you finding valuable? The only reason I have anything at Schwab is that’s where my 401(k) is. I certainly don’t bother with their research.
The term mutual fund is less widely used outside of the United States and Canada. For collective investment vehicles outside of the United States, see articles on specific types of funds including open-ended investment companies, SICAVs, unitized insurance funds, unit trusts and Undertakings for Collective Investment in Transferable Securities, which are usually referred to by their acronym UCITS.::.-
All the best to you
So other than automatic investing or admiral shares with lower ER, why would one invest in mutual funds over ETFs? Are there any negative tax implications to ETFs?
Automatic reinvesting of dividends is nice with MFs too.
I was recently looking into tilting more of the assets in my taxable account to ETFs instead of index funds, mainly through new purchases, the thought being that while both are low-cost to own, index funds tend to generate capital gains distributions which are taxed, and these taxable events can’t be controlled. This is traditionally one of the arguments in favor of owning ETFs, that they are more tax-efficient. But as I dug deeper I came across this on the Bogleheads site saying that Vanguard ETFs and index funds are identical from a taxation perspective:
http://www.bogleheads.org/wiki/Exchange-traded_funds
I though this was surprising. Any thoughts on this–i.e. would you recommend shifitng toward ETFs as a portfolio gets larger and one’s income increases, possibly hitting the 20% capital gains bracket? If one is Vanguard-exclusive, is there truly no tax advantage to owning ETFs (i.e. VTI vs. VTSAX/VTSMX)?
The nice thing about Vanguard’s structure is they use the ETF shares to flush capital gains out of the index funds, making the index funds more tax-efficient. I would not necessarily go for ETFs over the same index fund just for the very, very slight increase in tax-efficiency. This is something that matters very, very little in the grand scheme of things. I use ETFs in my 401(k) because they cost less in trading commissions than using the exact same funds. I use the traditional mutual funds in my Roth IRAs because it is more convenient for me. The investments, however, are exactly the same.
Whitecoat, if I wanted to buy a set of Vanguard funds/etfs and basically store them for 30 years as part of my portfolio (the strategy of hold onto it forever until retirement while investing monthly across that portfolio) would it still be better to go with the Mutual funds?
I’m trying to avoid the capital gains taxes every year for holding the same set of 5 funds every year without selling until retirement. I’ve read a few places that ETFs dont trigger the taxes (until sold) unlike mutual funds do but don’t see it in many places. What would be the best way to go about this?
Thanks for the advice.
Both share classes of Vanguard funds (and remember that’s what a Vanguard ETF is, just another share class of the fund) make small capital gains distributions every year. The only way to avoid that is to buy the stocks yourself and not use a fund. However, the main capital gains tax bill comes due when the fund shares themselves are sold. Buying and holding avoids that. If you use broadly diversified, low turnover mutual funds like a total stock market fund, that capital gains distribution will be pretty darn low.
Personally, I prefer the admiral share class ($10K minimum but with a similar ER to the ETFs) because I can avoid the hassles of buying and selling. But there really isn’t a bad choice there. If you like ETFs, use those. If you prefer the funds, use those. This is really a tiny issue compared to everything else in investing.
WHITE COAT
Thank you again for this blog I learned a ton of info !!
The expenses of the admiral mutual fund and ETF are the same but the price range is different for example
if I buy VTI (vanguard total stock market etf) it is about 113 per share but as a admiral mutual fund it is priced as 55$ that is like half if you have the money for admiral that is a no brainer or I am missing something here ?
You’re missing something that is important to understand. A share of the ETF is about twice as valuable as a share of the admiral shares. So if you buy $50K worth of the fund, you either get 500ish ETF shares or you get 1000ish admiral shares, but either way it’s still worth $50K. It doesn’t matter that the share prices as different.
Thank you.
I’m opening a new Vanguard IRA Roth for my wife. Was thinking of starting with Vanguard Total Stock Market ETF. I was wondering if you could switch from ETF to MTF once you have enough money to quality for Adrmial shares. Thanks.
Yes, you could do that. No tax consequences in a Roth IRA and no commissions if you do it all at Vanguard.
This has been a very helpful discussion. Thank you. I need to put bonds in my taxable as all those available in my 401k/Roth are actively managed and lowest ER is .42. Therefore, will be buying municipal bonds in my taxable. I don’t have the 50k minimum to get admiral with vanguard and don’t need 50k in bonds. I’m debating paying the higher ER (0.19) for non-admiral vs do ETF for the muni bonds at similar ER as admiral. Any tax or other issues from using ETF with the muni bond fund at vanguard? Appreciate your thoughts.
I’d probably just do the ETF in that case.