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?


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.