Vanguard ETF vs. Mutual Fund Admiral Shares

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Building My Portfolio BlocksAllan Roth has a new article called Why ETFs Won’t Replace Mutual Funds. Inside, he offers the following reasons why if you are buying Vanguard funds, he typically recommends the Admiral Shares mutual fund over the ETF.

Vanguard Mutual fund advantages

  1. Can buy fractional shares
  2. No premium or discount—all transactions are at net asset value
  3. No spreads between bid and ask
  4. Less cash drag, as dividends are reinvested more quickly
  5. Can do a tax-free exchange from mutual funds to ETFs, but not the reverse
  6. Can do automated dollar cost averaging

In the interest of fairness, I will offer up the following:

Vanguard ETF advantages

  • Lower minimum investment amounts. Usually one share is only about $100, and some brokers even offer fractional shares.
  • No purchase or redemption fees. No short-term trading fee. Vanguard has these on a few mutual funds, for example the Vanguard Global ex-US Real Estate Fund Admiral Share charges a 0.25% fee on both purchases and redemptions.
  • You can easily hold, buy, trade Vanguard ETFs at any brokerage firm. The cost to trade will be as with any stock. (Vanguard mutual funds and ETFs trade free with a Vanguard brokerage account.) You might prefer the customer service of another firm, or you might prefer the convenience of having everything together if you hold non-Vanguard investments. You might already have free trades anyway, for example with the Robinhood app.

Expense ratio is a tie with Admiral Shares. I don’t know if it an official “written in stone” polcy, but Vanguard has a long history of keeping the expense ratios of ETFs and Admiral Shares mutual funds the exact same (mostly $10,000 minimum investment). The Investor Class usually has a slightly higher expense ratio (mostly $3,000 minimum).

Tax-efficiency is a tie. I will add in this reminder that in the case of Vanguard (and only Vanguard as far as I know), the ETF and mutual funds share the same underlying investments and thus the same level of tax-efficiency, utilizing the benefits of both where possible. From the Vanguard ETF FAQ:

Are there any tax advantages to owning a Vanguard ETF®?
Because Vanguard ETFs are shares of conventional Vanguard index funds, they can take full advantage of the tax-management strategies available to both conventional funds and ETFs.

Conventional index funds can offset taxable gains by selling securities that have declined in value at a loss. In addition, they tend to trade less frequently than actively managed funds, which means less taxable income gets passed on to shareholders. Vanguard ETFs can also use in-kind redemptions to remove stocks that have greatly increased in value (which trigger large capital gains) from their holdings.

My money. I hold most of my portfolio in Vanguard mutual funds (Admiral Shares). One reason is that I am old and have a good amount of capital gains in the mutual funds bought before ETFs gained traction. I also hold some Vanguard ETFs, mostly bought back when ETFs were cheaper because I didn’t have enough money to qualify for Admiral shares. (Prior to 2010, the minimum for Admiral funds was $100,000! These days the minimums are mostly a more reasonable $10,000.) These days, I don’t have a strong preference, but I slightly prefer the simplicity of buying mutual funds.

Vanguard ETF tool. If you really want to pick at the details, Vanguard offers their own ETF vs. mutual fund cost comparison calculator. It’s pretty good and even includes things like historical bid-ask spreads.

Bottom line. There are certainly differences between ETFs and mutual funds. It is worth comparing the advantages and disadvantages before making your decision. However, in terms of the big picture, we are talking about relatively small differences. Being low-cost, transparent, and diversified are more important features. Given that both have their relative advantages, both ETFs and mutual funds will be around for a long time.

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  1. One possible advantage of the ETF – if, as you said in the previous post about buying and selling ETFs, it’s not good to trade in the first or last hour of trading, mutual funds have the disadvantage of all transactions taking place at the closing price.

    • Well, the disadvantage of trading in the last hour is more about bid/ask spreads which may get you prices different than NAV. With a mutual fund you always get NAV, no more no less.

  2. One advantage of Vanguard ETF’s over Vanguard mutual funds that I just started to realize is that I can move them to another broker easily and with no capital gains. I have been a Vanguard client since the mid 1980s and up until the last two years have been very happy with their service. Vanguard’s assets under management have grown incredibly fast in the last few years and their customer service infrastructure has not kept up. I’m now dealing with stupid stuff like duplicate statements that repeated calls couldn’t get fixed (I finally gave up calling and I shred one each month), long telephone hold times, etc. I’m a Flagship client and it seems like every time I call I’m on hold to talk with someone. This wasn’t the case for the previous 18 years. I never thought I would consider changing brokerage firms…but now I’m starting to wonder.

    • You can often move mutual funds over without capital gains with an in-kind transfer, but you may run into trouble buying additional shares. I moved some mutual fund shares over to Merrill Edge and was told I could keep them or sell all or some shares (paying $20 a trade), but I couldn’t buy any more shares. I could simply buy more ETF shares though. 🙂

      I’m with you on Vanguard customer service. They have publicly admitted that they are growing fast and having trouble keeping up the levels of customer service. I wish they’d spend more on customer service and less on advertising! So far it’s not horrible but I may also consider moving more assets out.

  3. Just some trivia: that ETF-mutual fund tax efficiency thing is protected by a Vanguard patent until 2023.

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