Vanguard Offers More ETF Equivalents To Their Index Mutual Funds

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With Vanguard recently launching their new bond ETFs, I can almost reconstruct my entire portfolio of Vanguard mutual funds using their equivalent ETFs instead. While they won’t work well for everyone, I am glad that Vanguard is offering this option to the public. Here are some index mutual funds and their ETF counterparts:

Vanguard ETF and Mutual Fund Pairs

The ETFs certainly have an advantage in expense ratio if you don’t have the $50,000 needed to buy the Admiral shares of each fund. On average, the savings is 10 basis points, or 0.10%. That’s $10 a year on a $10,000 account, or $100 a year on a $100,000 account. In addition, the ETFs allow you to get around the minimum initial investments, as well as avoid the $10 per-fund low-balance fees, $10 per-fund IRA fees, and the purchase/redemption fees of many of their mutual funds.

In the disadvantage department are possible premium/discounts to NAV, the bid/ask spread, and commission costs. Vanguard even offers a cost-comparison calculator that takes many of these things into account.

The only ETF missing for me is their International Value fund, but I could replace that with the WisdomTree International SmallCap Dividend Fund (DLS).

Free Trades + ETFs = Cost-Saving Opportunity?
Right now, offers free trades with an account value of $2,500, while Wells Fargo offers free trades with an account value of $25,000. (Bank of America’s offering stinks, so I’m ignoring it.) Buying these ETFs with free trades would take away much of the traditional advantage of mutual funds.

Before I would switch to ETFs, my concerns include whether these brokers can sustain giving out free trades, and how good the customer service is. If they fail, would I keep paying slightly higher commissions on ETFs, or sell them all and go back to mutual funds? Something to ponder.

(You know what? I just figured out that Zecco stood for Zero Cost Commissions. No, I’m not the sharpest tool in the shed.)

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  1. The Sun just found out that Zecco lowered it’s account minimum to$1,000.

    I thought it was a prudent bit of information for your article. link

  2. When you have a portfolio all nicely balanced, and you want to contribute more money, say on a monthly basis, how do you ensure it stays balanced? For example if you wanted to contribute $1000 monthly would you put in 20% here, 10% there, etc etc? With ETF’s especially it seems like that would really make each contribution a pain since you’d have to break it up into its constituent parts (not to mention multiply any possible commission you had to pay).

    But it also seems like the only way to maintain the ratios no?

  3. ETFs look like the way to go these days esp. with free trades. I am wondering why you say BoA’s offering stinks? I am considering opening an account somewhere that offers these free trades so wondering why you feel Wells Fargo or Zecco is better than BoA?

    Great posts though! Home buying vs Renting was a good one too.

  4. BofA requires savings deposits of $25K to count for the free trades. That means $25K earning rather uncompetitive rates. Meanwhile, Wells Fargo counts your brokerage account against the $25K threshold.

  5. hayhehes,
    Each month you can contribute to one or two of the ETFs in your portfolio and still maintain the balance. You should have a range for each asset class/ETF that you want to maintain a balanced portfolio. You can use the new cash for any ETF that falls below your range to bring it back in line.

    If none have gotten out of their target range, pick one or two to contribute to and review the holdings the next month. It doesn’t have to be exact, close is good enough.

    You could also deposit the new cash in one of the higher interest paying online savings accounts and make your ETF purchases each quarter.

  6. Another thing to note is that it will be difficult to maintain a particular asset allocation with ETFs since the shares can not be partially bought. Unless you have a sharebuilder account, but they don’t have free trades. So the only way you can maintain the asset allocation is to buy in bulk, $1000+. The larger the purchase the easier it be will be to maintain your asset allocation. John, since your Vanguard portfolio is in a ROTH IRA, I assume that you would contribute the max once a year. But could you imagine trying to maintain your asset allocation through a direct deposits to a taxable account? It would be very difficult.

  7. I have BofA… I’ve been very happy with it. While you’re correct that you do need to keep savings deposits $25k, don’t forget items like their CDs do count as well… and they currently have 8 month CD’s earning 5.10%. I’ve really enjoyed consolidating all of my financials with BofA… checkings, savings, cds, now my brokerage… and I pay $0 for trades. You can almost think of the savings on trades as a higher interest rate on your savings. BofA’s bill pay, ebills, and “My Portfolio” (Yodlee) are fantastic. All of this combined has really allowed me to take charge of my finances…

  8. if only i had 25k to take advantage of their offer(s) :X

  9. thanks for the notice, you’re the first source I heard this from! I love Vanguard’s index fund philosophy, but now I’m starting to consider moving out of mutual funds and going with ETFs, because I filed my taxes and realized what a PITA mutual funds were.

    Using average cost basis single category seems very inefficient, but using any other method would not be worth the effort either. I’m thinking about only using mutual funds in retirement accounts where tracking cost basis is not necessary, and ETFs in non-retirements.

  10. I am personally considering Firstrade and 3 ETFs for myself. When you transfer in a reasonable balance you get some free trades, so you can start at no cost. After that trades are $6.95.

    If I make my contribution once per year and execute 3 trades, I can run the account on less than $21 plus expense ratios. Zecco has free trades, but their IRAs have a $30/yr fee (as do many others).

    Firstrade has free dividend reinvestment, so I should be able to stay as fully invested as possible without executing other trades to do something with my dividends.

    By the time I have enough accrued in the account that I can’t rebalance each year with my new contribution, I would be saving enough in fees (over mutual funds) that I could afford an extra trade or so to get things back in balance. Sensibly, I would still do it at contribution time, selling a big gainer and then allocating all of my purchases.

    Admittedly, since I intend a lazy portfolio of 3 ETFs, rebalancing is simpler than if I had something elaborate. I would build an account with VTI, VEU, and BND. Or perhaps VTI, EFA, and AGG.

    For people starting early (I know a lot of college students) I think avoiding the $30 IRA fee is essential. If I had only $1000/yr to invest, I’d not worry overly about exact allocation. I’d just buy VTI this year, BND next year, VEU after that. Vary which ETF you buy to “bounce around” your desired allocation until you can start contributing larger amounts and allocate more accurately.

    With the long time horizon of a 22-year-old, the extra volatility of having an out-of-balance account is probably a lot less to worry about than the benefit of getting time in market. But even they need to avoid fees, and they’ll definitely be glad down the road to be avoiding fees. I’ve estimated that a reasonable portfolio of ETFs could save me $160/yr in fees at my investment level, which isn’t even astonishingly large yet (and I’m with pretty low-cost mutual funds). And I’ve been contributing less than 10 years.

  11. off topic but I went to Wamu’s site and I can’t find the 5% savings account anywhere on there…a few days ago it was being advertised on the front page. So I went to the “savings” section and they are only paying 0.25% on savings??!! For those who already signed up, are you still getting 5%? Also, do you think its a teaser that will adjust down soon?

  12. I have openned an account at Zecco a few months ago and it is going well. I have moved via ACAT most of my money out of Scottrade to Zecco. I continue to use index mutual funds for accounts were I am making regular additions. I use the Zecco account for some high yield dividend stocks. I hope the Zecco model proves profitable for them and they are a long term option.

  13. Just an FYI, I received an email a few days ago from Zecco saying that the minimum account balance needed has gone down from $2500 to $1000 for a limited time. Don’t know all the details.

  14. Although I already have another IRA with another institution, this year I opened a TDAmeritrade IRA account, and made my 2006 and 2007 contributions. Their account has no maintenance fees and the signon bonus gave me free trades for 45 days and a free copy of MS Money Deluxe (which I have never paid for going back to 04). I put it all in VTI and called TDAmeritrade to set up their DRIP option and to confirm that VTI qualified. Effectively, it is on autopilot, and I am sure that in April of 08/10/12/etc, I can find another broker offering something similar.

  15. David Zhao says

    Hi, I asked you a question about Vanguard a few days back, thanks very much for your reply.
    Now I’m thinking about transferring my rothIra account to vanguard to take advantage of their funds without paying too much commissions. What’s your suggestions on fund portfolio for rothira,?’I don’t want to use ETF because I’m contributing monthly towards $4000 limit?


  16. I invest through fidelity even through their trading costs are significantly higher than the discount brokerages. The reason I do this is because holding an account with Fidelity gives me access to all their research, which I use quite a bit when picking individual stocks.

    Also, their customer service is top notch. When it comes to someone handling my money, I’m willing to pay a little more.

  17. i had originally planned to use ETF’s in the short term to avoid account and fund minimums at Vanguard, and use free trades where i can get them with lump sum yearly contributions to a roth… even after paying $25 to transfer out (@ td ameritrade for example), i think i should come out slightly ahead. any flaw to this thinking/plan?

    now if i specifically buy vanguard etf’s, does anyone know if i can convert those into vanguard mutual funds sometime down the road? (once i transfer the account(s) to vanguard)

  18. I am thinking of opening and account at foliofn and creating a folio of vanguard etf and mutual funds (for the asset classes that don’t have etfs yet). Can you weight the folio as you wish? This will allow periodic contributions without having to worry about transaction fees, etc.

    Any thoughts?

  19. Conversion w/o tax consequences from Vanguard mutual funds to ETFs is very cheap — only $50 per fund/amount. Conversion the other way is extremely expensive. I looked through my prospectus for the Vanguard World ex USA and it was $18K. Vanguard probably does not want people constantly converting back and forth trying to take advantage of the ETF premium/discount.

    I’d say keep the ETFs and as you build up your account balance, switch to a $0 commission broker.

  20. “When you have a portfolio all nicely balanced, and you want to contribute more money, say on a monthly basis, how do you ensure it stays balanced?”

    Don’t worry about it. You can cycle among different investments (if you have 3 different investments, purchase a different 1 each month for 3 months then go back to the 1st one) or simpy re-balance every 6 or 12 months.

  21. You can’t convert them without selling and re-purchasing, but I can’t really think of a reason you’d want to.

  22. I have a question. Can ETFs be bought in odd lots. For example, if I want to buy $1000 of an ETF and that comes out to around 27 shares, can I buy 27 shares?

    I once tried to buy 50 shares of an ETF and it never got filled. So I’m wondering if buying in even odder lots would get filled. I noticed the volume of many ETF are always in lots of 100. Would that make balancing your portfolio a bit more difficult with ETFs?

  23. The Bank of America free trade offer requires $25k in deposit accounts like including checking, savings, and CDs in addition to your brokerage balances. If the interest rate is low, you’re paying for your “free” trades with lost interest. Even if the rates are good, who knows if they will stay that way? What if you want to take the money out? You always need to keep $25k in there.

    The WellsFargo offer simply requires $25,000 in account equity, including the value of your stock, ETF, or mutual fund investments. Zecco require $2,500 to open, but then you can take it all out with no fees.

    Upon further thought, I suppose the BofA offer might work well for those with lots of cash and small brokerage balances. Still, I don’t like the idea of being held captive by the brokerage account.

    Some brokerages allow the purchase of partial shares of ETFs. Overall, it may still be hard to maintain a finely slice-n-diced portoflio with a small amount of money invested, but you can still build a pretty good simple portfolio with smaller amounts.

    For example, if you had a few thousand to invest and just wanted 1/3rd each of VTI, VEI, and BND, it would be pretty easy to rebalance between them.

    David – Some of my opinions on investing can be found here.

    I think FolioFN is a bit expensive at $15/trade or $200/year, depending on what you wish to accomplish.

    Regarding portfolio balancing, it’s never to going stay “nicely balanced”. The markets still go up and down, right? 🙂 You can either just buy in your set ratios automatically (like 50% fund #1, 50% fund #2), which would probably be my preference, or buy whatever is currently lagging in the market. At the end of your chosen period, you can rebalance everything as needed. I think I’m going to rebalance annually.

    Yes, you can buy odd lots of ETFs. I’ve bought one single share before without an issue. Did you issue a market order or limit order? Some ETFs have a relatively low trading volume.

  24. i’m just curious, but what do you guys do with the extra cash sitting in your retirement accounts?

    i just contributed to my first ira (a roth @ td ameritrade), and as i decide what i want to buy with my free trades (probably some vanguard etf’s) i am realizing that there is (obviously) no way i can use exactly all of the $4000 i contributed… and i dont think they allow partial share purchases.

    in a taxable account i would just transfer the remaining few dollars and cents back to my bank account (since it earns terribly low interest in a sweep account), but what can i do in a retirement account? my trades expire within 45 days and i want to make sure i get all that money invested with no commissions (partly b/c td ameritrade takes fees/commissions/etc directly out of the ira contributions 🙁 )

  25. That’s why I don’t get too excited about any “Free Trades for XX Days” offers. I have no free cash in my IRAs, because I buy my mutual funds in dollar amounts and all dividends are reinvested. And then you have to incur more commissions later if you want to rebalance. 🙁 I do get hit with a few low-balance fees here and there, though.

    The best you can do is ask if they have a better money market sweep option, which I don’t think Amertrade does for smaller balances. You could find stocks with cheap shares to gamble with, but then you’d still have to sell later 🙁

  26. if thats the case then i’m almost considering just doing a transfer out NOW and chalking up the $25 transfer fee to my own stupidity. (b/c if i just cancel the few day old account i lose the 2006 contribution i made… although as a 22 year old it isnt that critical, i still want all the money i can compounding away).

    my original intention was to buy vanguard ETFs for a couple of years while i build up enough money to avoid per fund and account minimums @ vanguard. i guess it would have made more sense to just go with vanguard and stick to funds so i can rebalance whenever and buy what i want dollar wise (without the $50 td ameritrade charges for their funds). besides, they let you pay those minimums and such (fees) from outside the retirement account (with a check), right?

    suggestions are welcome… i’ll play around with my options to see just how much of the $4000 i can use with different asset allocations.

  27. Well, if you just bought some ETFs and kept them in there indefinitely, it might be okay. Just don’t trade too much.

    For smaller accounts, commissions eat away much of the benefits of ETFs. So really the only way to stay ahead is to have a broker that has free trades all the time. For larger accounts, the savings from the lower expense ratios can counterbalance some or all of the commissions being paid.

    I think Ameritrade has free dividend reinvestment, I’d also look into that.

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