Cost Comparison Tool For Comparing Vanguard ETFs and Mutual Funds

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While on Vanguard’s website I recently ran across a new and useful tool that help helps you calculate and compare costs for similar Vanguard ETFs and mutual funds. The tool takes into account trade commissions, the difference in expense ratio, redemptions fees, future purchases, and even the expected bid-ask spread.

For the unfamiliar, I’ll be very simplistic and say that exchange-traded funds, or ETFs, are mutual funds that can be traded like individual company stocks. Due to the way they are constructed, ETFs tend to have lower expense ratios than their mutual fund counterparts, but you will need to pay a commissions each time you trade. There is also a little bit of added loss due to the bid-ask spread.

For example, you could compare the Vanguard Total Stock Market Index Fund (VTSMX) with the Vanguard Total Market ETF (VTI). Both invest in the exact same set of companies, and holds over 1,000 companies that track closely the entire U.S. market. VTSMX charges an annual expense ratio of 0.19%, or $19 on a $10,000 investment. VTI has an expense ratio of only 0.07%, a mere $7 for each $10,000 invested.

I tried an example where I start with $10,000 of either VTSMX or VTI, and say that I will add another $1,200 each quarter for another 10 years. I assumed $5 trade commission and a 8% annual return. Here are the results:

Cost Results

(fixed the numbers :P) The cost edge goes to the ETF in this case, with a cost difference of $300. Really, I don’t see that as all that much over 10 years. But, as you get into larger amounts, the gap widens. If you continued the same example for another 20 years, the ETF’s cost advantage would be $7,000.

For this reason, I feel like it is only a matter of time before I start moving all of my current all-mutual fund portfolio into ETFs. In fact, the majority of my funds already have an identical ETF counterpart.

Anyhow, you can play with this calculator and change the variables to see your situation. Note that Admiral shares are an option once you reach $100,000 per fund. I’ve got a while before that…

But in terms of the big picture, both of these funds have very low costs and would serve as a great cornerstone to a retirement portfolio. If you are just starting out, I think you’ll see the difference is very small; I really wouldn’t stress too much about going either way.

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  1. Why you never mentioned Wells Fargo’s 100/year free trades? Would it help making ETFs more attractive?

  2. Consider the folks who only contribute to their IRA once a year to “adjust” their taxes. I’ve historically not been one of those people, but this year was special. I did in fact manipulate my taxable income to within $4 of an optimal amount.

    Most of my investments run month to month, dollar cost averaging, but conceivably my traditional IRA (when I use it for the purpose of adjusting my income) and Roth IRA can expect to see rare single contributions.

    In a situation like that, the ETF has even greater cost advantages.

  3. A few more thoughts about using ETFs to replace mutual funds:

    You’ll probably want to pick up a discount broker that will reinvest your dividends for free. Firstrade has $7 trades and will reinvest dividends (using partial shares). TDAmeritrade has $9.99 trades and will reinvest dividends. Both will give you some initial trades for free if you transfer a reasonable balance, so you are even more ahead.

    Since the idea of using ETFs is to avoid fees, getting free dividend reinvestment will allow you to stay more fully invested at no extra cost.

    Another nice thing about ETFs is that if you decide you don’t like your broker, you should be able to transfer your account shares to another broker “in kind” without having to be out of market. I’m currently with TIAA-CREF for a bunch of my funds. If I wanted to transfer to Firstrade, I’d have to sell and be out of market and then buy my ETFs.

    We’ve had weeks recently that were up 5%. If that happened while I was out of market, it would blow everything that I expected to save in fees for a long time.

  4. However…

    Vanguard has “Admiral” shares.

    (50K balance in a 10 year open fund or 100K balance)


    This lowers the expense ratio of VTSMX from .19 to .09 (VTSAX)

    Still something to look in to.

  5. The difference is even more dramatic when you look at Vanguard Emerging Markets ETF (VWO) and Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX). The Emerging Markets Mutual Fund has a .5% purchase and redemption fee. Try it out on the Vanguard Calculator. For my calculation I got a cost difference of ?$1,164.22.

  6. My understanding is that ETFs are more tax efficient than mutual funds if:

    * you hold them for at least 60 days before the ex-dividend date

    * the fund does not have a whole lot of recently purchased equities (ex: 2005 Vanguard VTV had 100% qualified dividend income, whereas VO had 88%, iShares IWM had only 50%)

    Does that mean that all other things being equal, it’s better to keep ETFs in your taxable accounts rather than your qualified accounts, because you have the potential of getting the 15% tax treatment?

  7. Also another great feature of Vanguard is the mutual fund to ETF Share conversion, which is usually tax-free. From the FAQ.

    Can I convert conventional Vanguard mutual fund shares to Vanguard ETFs?

    Shareholders of Vanguard index funds that offer Vanguard ETFs may convert their conventional shares to Vanguard ETFs of the same fund. This conversion is generally tax-free, although some brokerage firms may be unable to convert fractional shares, which could result in a modest taxable gain.

    Vanguard will charge $50 for each conversion. (This fee is waived for Flagship clients.) Your brokerage provider may charge an additional fee for this service. For more information, contact your brokerage firm, or call 866-499-8473.

    Once you convert to Vanguard ETFs, you cannot convert back to conventional shares. Also, conventional shares held through a 401(k) account cannot be converted to Vanguard ETFs.

  8. Especially with free trades from WellsFargo and Bank of America brokerages, will the ETF not look more attractive?

  9. And let’s not forget that Wells Fargo now has 100 free trades/month/account, meaning you can essentially do away with all commissions. Should bump those ETFs ahead a bit more.

  10. Wonderer says

    How does this square with Bogle’s denunciation of ETFs?

    See for Bogle’s comments.

  11. i always just thought that if i was going to do lump sum purchases (ie one a year in an ira), etf’s would be the way to go (and i could just hunt for broker deals with low/no commissions). whereas if i was doing dca or lots of small purchases + rebalancing, a mutual fund account directly with fidelity or vanguard would be best.

    don: i didnt know you could do the dividend reinvestment with etf’s… thanks for the tip – if this is done in a taxable account, how does that end up working? (tax wise)

    heather: your post about “qualified” dividend income has just confused me 😡

  12. One other consideration: Index funds generally have minimum requirements where you either are forced to purchase a certain minimum or you are fined if you have a lower balance. Vanguard charges $10 for index funds below $10,0000, which isn’t much but is still annoying.

    To get $10,000 most people would need to incur other costs and opportunity costs like taxes on capital gains or would have to sit their money in a money market account while they wait to save up the fund minimum.

    ETFs allow the small investor to immediately start enjoying market returns without those costs and opportunity costs.

  13. Sorry I composed my above post poorly; I should have said that ETFs can be more tax efficient than mutual funds because they may not have to sell their underlying stocks as frequently, and then my question is should ETFs be favored in your taxable account but mutual funds in your IRA, if you don’t consider dollar cost averaging (which favors mutual funds).

  14. First, you must have made a mistake in your calculation, since $1200/quarter for 10 years is already $48,000, which is more than you end up with.

    Also, if you have larger amounts you can get the Admiral shares of VTSMX which has a 0.09% expense ratio. Or you can go for the Fidelity Spartan total market fund which has a 0.10% with a $10k minimum. I ran the numbers you posted and the ETF saves about $100 over the mutual fund over 10 years (on about $280k of assets). On the other hand if I use $7.95 for the trade cost then the mutual fund is cheaper. There is also a benefit to contributing more frequently with the mutual fund. In fact if you contribute monthly instead of quarterly you gain about $1200 over the 10 years.

    I would stick with mutual funds because they are more convenient and it is not at all clear that ETFs are cheaper.

  15. I wrote about Wells Fargo’s 100 free trades when it first came out, as well as Zecco’s free trades.

    Good point about the minimum requirements of ETFs.

    I’m reading Bogle’s “Little Book of Common Sense Investing” to fully understand why he doesn’t like ETFs, and will comment on that soon.

  16. Here is my tenuous understanding of qualified dividends. Sorry if I used the word interest inappropriately. Qualified dividends are taxed at 15% (or less depending on your bracket), and comes from stuff like US stock dividends (unhedged) but not REIT dividends and similar “interest-style” monies like bond interest. This is as of 2003 (“Bush Tax Cut”).

    ETFs that hold stock that are paying qualified dividends may pass those dividends to you at the low-low capital gains rate if they’ve held the underlying stock long enough (which they won’t have done if they are rapidly growing) and if you yourself have held the ETF for long enough.

    The full article on this is here:

  17. Gah. Thanks for pointing out the error. Gotta stop writing posts so late at night. Fixed the numbers…

  18. I’m not an ETF expert, but how I understand it is that ETFs have some sort of inherent tax-edge due to how they buy and sell their underlying stock holdings when people buy/sell the ETFs. I need to dig up the article where I read that. However, some mutual funds have actually been more tax-efficient than their ETF counterparts. Also there are specifically tax-managed mutual funds that I would consider if I was keeping these in a taxable accounts. Since I don’t have hardly any taxable investments right now, I’m not really caught on all this.

    Re: Free Trades – I am kind of in the wait-and-see camp about the free trades offers. They do look tempting, and hopefully we’ll be see lower and lower commissions in the future. However, keep in mind we have been having a healthy bull stock market for the last two years, which means lots o’ trades to keep those brokerages’ profit level acceptable at such low commissions.

    Didn’t Firstrade already get rid of their free mutual fund trades?

  19. Jonathan, just so you know, you can convert your funds at Vanguard to the equivalent ETF for somethijng like $50. By doing this you avoid any capital gains that you may realize in a retail (non-retirement) account.

  20. Firstrade did get rid of their free mutual fund trades. But you can still get a number of free stock/ETF trades if you fund your new account with a sufficient initial balance. And their dividend reinvestment is still free; I assume that would apply to an ETF like any stock.

  21. One instance that would incur excess commissions is when one balances his portfolio for the desired asset allocation. Even though this would probably occur every one or two years, I believe it would make ETFs less attractive, except in a commission-free account.

  22. Are you making this assumption ?

    ‘ You will get out of the investment all in once’

    Most likely in reality we will take money out at regular intervals. Won’t that will tip you to mutual funds ?

  23. G: I saw a very reasonable approach to cashing out that would work well with ETFs. You take out 2-3 years worth of living expenses and transfer the funds to a money market. From the MM, you pay yourself a monthly check.

    Each year or so, you cash out about a year’s worth of “pay,” except you let yourself be guided by the way the market has behaved. If it’s been a big down year, you would hold off and give your equities time to recover (that’s why there is more than one year’s worth in the MM).

    If the malaise outlasts your MM or looks to, you have a few strategies left. 1) you can reduce your income to stretch the MM further and wait for the recovery or 2) you can selectively cash out the non-equity portions of your portfolio, which will have suffered less. Since you are in retirement, the assumption is that your portfolio should have a reasonably large non-volatile component. You goal is still to allow your equity portfolio to recover.

    When the recovery finally occurs, you rebalance your account (because you unbalanced it by selling down your non-equity portions) and you refill your MM.

    In backtesting, this strategy was much more successful (in a Monte Carlo sense) than just rebalancing each year and selling parts of your portfolio all along the way. You have a better chance of weathering a downturn, especially a downturn at the very beginning of retirement (dangerous) and you save a lot in transaction costs.

    I can find a reference if people are interested.

  24. For someone like me that dollar-cost averages their Roth by contributing a little bit from each paycheck, the ETF option doesn’t make a lot of sense given the commissions. I’m better off letting that money grow until I build up balance large enough to move into Admiral shares.

    Even if you buy $4,000 worth of ETF’s once a year in a Roth, you’re out 25 basis points w/ a $10 commission. Combine that with the expense ratio for ETF’s, and you already outweigh VIFNX’s 18 bps expense ratio.

    I’m not an expert of the tax benefits of ETF’s, however, so maybe that counterbalances the commissions in the long run.

  25. Hi Jon,

    Now, even after reading your blog all this time, I STILL can’t understand most of these charts and graphs and financial lingo, so I was hoping you could answer a little opinion question for me.

    My fiance just got his 401K packet to fill out, and it’s Vanguard who handles the plan. His company matches 100% of the first 3% he puts in, and 50% of the next 3%, so he’s decided to contribute 6%.

    We’re faced with a massive spectrum of thingies to which we must choose what percentage to allocate… blah. Neither of us can understand any of it. We don’t care about risk and return, we just want to make as sure as possible that the account is not going to LOSE value. We think the money the company is putting in to match is quite a nice return on his investment, and we want to pick the LEAST risky, most stable choices we can choose.

    So I was kind of hoping you could dispense some advice as to which of these funds or plans or whatever they’re called we ought to choose, because we’re utterly stumped.

    Is there actually any way to make sure the money will still be in there in forty years, even if it hasn’t grown much at all, or in the event of economic catastrophe would it all pretty much be lost no matter what?

  26. Hi Jon,

    do you know, for any particular Mutual Fund, how to find the equivalent ETF?

    I’ve not found an easy way yet… I’ve grubbed around in google, and the prospectus’s

    Thanks in advance…


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