VEIEX Fund vs. VWO ETF Performance Comparison

The bottom line for converting to the ETF version of equivalent mutual funds: lower costs = greater returns = more money. To illustrate this, I ran over to Mornginstar.com and compared the 5-year returns for VEIEX and VWO, the mutual fund and ETF versions of the Vanguard Emerging Markets Index Fund, respectively. Here’s the growth chart of $10,000 invested from 6/24/2005 to 6/24/2010 (click to enlarge):

Looks pretty much the same, right? That’s because they hold the same stocks inside, but VWO has a lower cost through its lower annual expense ratio. That initial $10,000 would have ended up as $18,086.98 invested in VEIEX, while it would have become $18,374.63 invested in VWO – a difference of $287.65. Not a huge difference, but significant in my book, considering it required no increase in risk.

This comparison also doesn’t take into the additional 0.5% purchase fees and 0.25% redemption fees charged by VEIEX when buying and selling shares, although the hit does become less significant as your holding period lengthens.

Comments

  1. The total number of ETFs offered by Vanguard will now be 66 including 16 that are based on S&P and Russell indexes, 3 municipal-bond funds, and 1 global ex-U.S. real estate fund.

    I’m not quite so interested in going through this same comparative analysis looking how these new ETFs stack up to other competitor ETFs or similar mutual funds. I’m going to wait a couple of years to see how these perform before I consider any of these.

  2. Whenever I read on a forum or blog someone complaining about the purchase and redemption fees of VEIEX, someone else always points out that the fees go directly to the fund and thus all investors benefit from the fees charged to other investors.

    Since VWO and VEIEX are share classes of the same fund, do holders of VWO also benefit from the fees charged on VEIEX transactions, even though VWO doesn’t charge them itself?

  3. @Dan – I used to be one of those people, but now I don’t know. A couple people on Bogleheads seem pretty sure that the ETF also benefits from those purchase/sell fees from the mutual funds. I asked a Vanguard rep and I’m not quite sure if they understood the question, but they said no.

    It would seem that it makes sense for the ETF to “help” the fund with tax-efficiency due to its unique structure and for the fund to help offset some of it’s higher redemption costs due to the mutual fund trading structure. VEIEX would have higher trading costs due to some of the foreign exchanges it trades on.

  4. @Ron – Vanguard sent me that press release as well. I prefer to wait until I actually see the ETFs on the market. Haven’t they been talking about a TIPS ETF for a while now?

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