Should You Invest In Vanguard Mutual Funds Or ETFs?

Vanguard funds have some of the lowest expense ratios in the industry. Almost all of Vanguard’s ETFs have a corresponding mutual fund that either track an asset class or an index. But then, for an investor, deciding between a Vanguard ETF and mutual Fund is just not a trade-off between convenience and flexibility, although it may seem so. The cost structure between Vanguard’s ETFs and mutual funds are actually quite different.

I decided to take a closer look at some of Vanguard’s funds.

Vanguard ETFs vs. Mutual Funds

Assumptions
Should you pick Vanguard's mutual funds or ETFs?

  • The holding period is assumed to be for 5 years
  • The commission is set at $3.95
  • Additional purchase for each fund/etf set at $1000/year
  • The expected return percentages are set to 5 year average annualized returns as of 06/30/2011. Past performance is not a guarantee of future returns
  • The initial purchase amount is set to the minimum required to purchase Vanguard investor class mutual funds which is normally $3000 unless otherwise stated
  • The expense ratios are for Vanguard’s investor class shares. If you hold Admiral class shares, which has lower costs and high minimum requirements, your results may vary

Vanguard Large Cap

Expected return3.46%
ETF (VV) total cost
ER: 0.12%
B/A spread: $0.02
$57.91
Mutual fund (VLACX) total cost
ER: 0.26%
$69.07
Winner: ETF
($11.16)

Vanguard Mid Cap

Expected return5.08%
ETF (VO) total cost
ER: 0.12%
B/A spread: $0.03

$59.20
Mutual fund (VIMSX) total cost
ER: 0.26%
$71.46
Winner: ETF ($12.26)

Vanguard Small Cap

Expected return5.52%
ETF (VB) total cost
ER: 0.17%
B/A spread: $0.03
73.37
Mutual fund (NAESX) total cost
ER: 0.31%
85.89
Winner: ETF ($12.52)

Vanguard Emerging Markets

Expected return10.83%
ETF total cost
ER: 0.22
B/A spread: $0.01
$93.13
Mutual fund total cost
ER: 0.35%
Purchase Fee: 0.50%
Redemption Fee: 0.25%

$167.82
Winner: ETF ($74.69)

Vanguard REIT

Expected return2.83%
ETF total cost
ER: 0.12%
B/A spread: $0.01
$56.38
Mutual fund total cost
ER: 0.26%
Redemption Fee: 1% if held < 1 yr
$78.16
Winner: ETF ($21.78)

Vanguard EAFE

Expected return1.79%
ETF (VEA) total cost
ER: 0.12%
B/A spread: $0.01
$102.29
Mutual fund(VTMGX) total cost
ER: 0.18%
Redemption fee: 2% if held < 2 mos
Min purchase amt: $10000
$111.82
Winner: ETF ($9.53)

Vanguard S&P 500

Expected return2.86%
ETF (VOO) total cost
ER: 0.06%
B/A spread: $0.01
$40.65
Mutual fund (VFINX) total cost
ER: 0.17%
$44.68
Winner: ETF ($4.03)

Vanguard Long Term Bonds

Expected return7.67%
ETF (BLV) total cost
ER: 0.11%
B/A spread: $0.10
$64.53
Mutual fund (VBLTX) total cost
ER: 0.22%
$63.89
Winner: Mutual Fund($0.64)

Vanguard Short Term Bonds

Expected return5.20%
ETF (BSV) total cost
ER: 0.11%
B/A spread: $0.01
$54.88
Mutual fund (VBISX) total cost
ER: 0.22%
$60.67
Winner: ETF ($5.79)

The results speak for themselves. If your trading commission is low and if you don’t trade frequently, in most cases, ETFs seem to be a better deal. Atleast one of Vanguard’s mutual funds (VEIEX), had a purchase fee, redemption fee and an expense ratio! VEIEX’s ETF peer doesn’t carry any restrictions and it’s expense ratio is lower than VEIEX’s ER. You need to pay careful attention to costs when deciding between Vanguard’s mutual funds and ETFs.

Although for most of Vanguard’s mutual funds, the minimum required is around $3,000, some funds like the Vanguard Tax-Managed International Fund (VTMGX) have a high barrier to entry with a minimum investment of $10,000.

From what I see, the advantages are tilted heavily towards Vanguard ETFs.

Why Vanguard?

Vanguard was founded by the legendary investor, John Bogle. Bogle was is credited with having created the first index fund, the Vanguard 500 Index fund in 1975. At a time when actively managed mutual funds were all the rage, Bogle advocated passive funds with emphasis on low costs and zero loads. Bogle believed that costs matter as much as returns and as a result, Vanguard funds have low expense ratios when compared to its peers.

Today, Vanguard is the world’s largest no-load mutual fund company with over $1.8 trillion in assets under its belt. Vanguard’s company structure is also little unusual. A regular investment firm has to make money for its investors and it’s shareholders, often at the expense of each other.

At Vanguard’s, each fund contributes a certain amount towards management overhead, thus pooling the money back into the firm. Vanguard specializes in indexed funds since they pioneered this concept. With the explosion of ETF’s, Vanguard also started offering ETF equivalent to most of its indexed mutual funds.

Along with Schwab and Fidelity, Vanguard too started offering commission-free trades of it’s ETFs.

Recommended Slideshow: Step-by-step guide to opening an account at Vanguard

This is for informational purposes only and not a recommendation to buy or sell securities mentioned in this post. While every effort is made to ensure accuracy of the data presented here, the author is not responsible for errors or omissions.

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38 thoughts on “Should You Invest In Vanguard Mutual Funds Or ETFs?

  1. They both have their place, but I’m more of a mutual fund investor. I don’t need the additional liquidity that an ETF offers. Love Vanguard by the way.

    • When it is time to rebalance, that’s when I miss Mutual Funds! I like clean numbers! :)

      Either way, you can’t go wrong with Vanguard when it comes to costs!

  2. Interesting post MC, Vanguard is coming to Canada and I sure hope they spin some Canadian ETFs up here. I’d be a taker for my retirement account.

  3. Wow… EFTs are the clear winner here. Even the one Mutual Fund that did win only did so by a few cents. Interesting.

    • If you are hold Vanguard’s Admiral shares, the numbers may be different since the ER is even lower, but then for a larger capital, Vanguard waives commissions on their ETFs – that will be another post!

  4. Nice analysis. I like to know what the price of something is in case I have to sell it so I’m a big fan of ETFs.

  5. Really interesting analysis and comparison here. I haven’t utilized ETFs before, but I will definitely look into them after this.

  6. Thanks, I have been trying to decide between Vanguard’s ETFs and mutuals funds and you did all the work for me. Great blog, btw.

  7. Great call out! I’m glad to see the math!

  8. I like ETFs due to the flexibility of trading when you want as opposed to having to wait for settle at the end of the day, but overall? Vanguard is best in class for both. Love em!

  9. I wouldn’t worry about etfs vs mutual funds, especially wrt to Vanguard. The expense ratios are so low that the key is just to start investing and keep adding to your investments to build your wealth over time. Disclosure; I own shares in most of the highlighted investments.

  10. I own most of the shares you highlighted. In the retirement accounts, we have it in mutual funds, taxable investments have mostly been in ETFs just because when we started ETFs were cheaper than MF.

    • If you qualify for Vanguard’s commission-free ETFs, nothing like it! But I do like investing by dollar amounts that mutual funds offer.

  11. If you buy Vanguard ETFs through a Vanguard account, it’s even better of a deal! You get commission free ETF trades.

  12. MoneyCone, great article!

    It just goes to show you, no matter what way you slice the pie, mutual fund fees will eat away at your profits. Invest in ETFs instead of mutual funds when possible :)

    Cheers
    Dividend Ninja

  13. Moneycone,

    Thanks for the article and comparisons.

    I agree with Ninja on this one. Just say no to mutual funds!

    Take care. :)

    • I do think Vanguard will eventually cut the fees on mutual funds as well, to be on par with ETFs. Until then, weigh the pros and cons of ETFs and MFs.

  14. Thanks for this timely post!
    Our 401k is switching to Fidelity Brokerage link.
    We’ll have a lot more choices, but only Fidelity funds are commission free. If we want Vanguard funds, we’ll have to pay $75 per transaction! yuk! That’s a huge rip off. Fortunately, we can purchase ETF for $8. I’ll probably go for the Vanguard ETF and maybe one or two Fidelity Spartan funds.

    • $8 isn’t too shabby! I do like the selection of etfs Fidelity offers that are commission-free. Pretty well thought out actually. Would be a killer if they offered Vanguard funds commission-free!

  15. Thanks for the breakdown on costs. We have to roll over our 401k soon & will definitely keep this in mind. Thanks!

    • Good luck Maggie! Make sure you tell them this is a rollover; some of them hand you a check leaving you deal with the consequences!

  16. Wow, thank you for the easy to use comparisons and breakdown calculations. Its hard to see why anyone would go against Vanguard when the results seem to almost be unanimous. No wonder Vanguard has had such success over the last few decades…

  17. Another fantastic post MC. I personally have mutual funds and not ETFs. Mostly because I have not opened a new investment account in awhile, and I didn’t know enough about ETFs when I started investing in my last mutual fund.

    I love Vanguard, and have invested with them for years and years.

    Also, some mutual funds don’t require a minimum balance as long as you are auto depositing monthly.

  18. Very nice post, MC. I agree with the commenter above, that if the initial fees are reasonable, ETFs seem to be the way to go.

  19. I’ve actually been contemplating opening an account with them so your timing is spot on. I’ve always liked ETFs and am not a frequent trader. I like the set it and forget it style. -Sydney :)

  20. Love Vanguard and Schwab — and I ONLY invest in ETFs! Nothing beats the low fees, liquidity, and the ability to start investing in a new fund with for only the price of one share ($30 bucks) rather than needing a $2000 minimum.

  21. Nice job! I like how you stacked them up against each other. Looks like ETFs take the cake here! My evaluation did not end in a land slide, each held their own pretty well.

  22. Wow, the numbers speak for themselves. All this time I used mutual funds and didn’t look at ETF’s until recently. Thanks for opening my eyes!

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