The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: andysandp on May 28, 2017, 06:42:40 AM
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I have been buying Vanguard VFIAX, but recently my friend said buying ETFs (VOO) is better?
What makes VOO better then VFIAX? Or what makes ETF's better?
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I have been buying Vanguard VFIAX, but recently my friend said buying ETFs (VOO) is better?
What makes VOO better then VFIAX? Or what makes ETF's better?
I get free etf trades with my brokerage account, and the difference is that a mutual fund, after the buy in (3k, 5k, 10k whatever), you can purchase any dollar amount, but the ETF you have to buy whole shares. So if VOO costs $220, you have to buy a whole share (multiple of 220) or none at all. The benefit is that you get to pick the price you purchase the ETF at since it's traded as a stock. With the mutual fund, you buy some, and it's traded at the end of the day whatever it closes at, so it could go up or down and you have less control over what the price is.
That's as far as I understand it..
Edit: also, you don't have to buy $10k or any minimum for the etf, only the price of the current share. So if you don't have the minimum but want that low expense ratio, I'd go etf not mutual fund.
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10K invested in VFIAX for the last 5 years is now $18,950.
10K invested in VOO for the last 5 years is now $18,950.
(VOO hasn't been around for 10 years, so I couldn't do that comparison. I used schwab.com as fidelity "didn't recognized" VFIAX.)
I didn't imagine that the returns would be within pennies. It's the return (and risk) that matters, not the management fee. Rarely does the cost to purchase matter--but in this case it does. There might also be a cost for redemption for VFIAX?
As for the differences between a low-cost mutual fund and ETF, the most compelling one I know of is that mutual funds trade at the end of the day so you can't take full advantages of flash crashes. It also means that if you want to transfer money from the mutual fund, there are potentially 2 or 3 days where you won't know how things wind up (sell, wait for processing at end of day, possibly one day idle, then buy at end of next day).
OTOH, mutual funds trade only at the end of the day, so you're protected somewhat against impulsive buying and selling.