Author Topic: VTI vs. VTSMX  (Read 1930 times)

alcon835

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VTI vs. VTSMX
« on: July 17, 2018, 05:08:19 PM »
Just starting my personal investment journey and I want to invest into ETF funds through Vanguard because their expenses are much lower than Mutual Funds. However, I can automate the purchase of mutual funds, but not ETF funds.

Is there a way to automate this, or will I need to manually invest into the funds each month?

chasesfish

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Re: VTI vs. VTSMX
« Reply #1 on: July 17, 2018, 06:15:58 PM »
Do you get charged a trading commission each time you buy VTI?

Hargrove

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Re: VTI vs. VTSMX
« Reply #2 on: July 17, 2018, 07:28:34 PM »
At Vanguard's brokerage, the expense difference in VTSMX may cost you all of two dollars (sub-10k only; free, fast conversion to VTSAX when you break 10k). In exchange you get an easier conversion (you can go MF -> ETF if you want later without the potential tax hit) and free automation without mutual fund fees. I have also heard you get very very slightly better tax treatment via tax-loss-harvesting methods in the mutual fund, if a taxable account.

Whether you can automate, though, is a function of your brokerage when it comes to ETFs. We need to know the brokerage to help with that. If they charge commission on ETFs, you're almost certainly better going with Vanguard's brokerage, especially investing small, regular amounts.

Invest $100 for July
Lose $6.95 brokerage fee
Immediate loss: 6.95%

(Sure, there isn't an ongoing charge on the same $100, but a 6.95% tax on incoming money makes VTSMX fees look like Christmas in July).

alcon835

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Re: VTI vs. VTSMX
« Reply #3 on: July 17, 2018, 07:49:59 PM »
No trading commissions because it's with Vanguard and is a Roth IRA at this point. In the future, I plan to do non-retirement investing (probably starting in a few months).

From what I'm getting here, it sounds like the cost difference is minimal and going with the mutual fund over the ETF may be a better play since I can automate my investment.

Orin!

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Re: VTI vs. VTSMX
« Reply #4 on: July 17, 2018, 07:54:23 PM »
They are basically identical. I like VTSMX because with VTI you can only buy one share at a time and cannot buy a partial share. Whereas with VTSMX you can just throw $100 every week or month or whatever.

alcon835

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Re: VTI vs. VTSMX
« Reply #5 on: July 17, 2018, 08:46:48 PM »
They are basically identical. I like VTSMX because with VTI you can only buy one share at a time and cannot buy a partial share. Whereas with VTSMX you can just throw $100 every week or month or whatever.

This is the other part I'm interested in. Being able to buy partial shares and not have invest-able money sitting there

terran

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Re: VTI vs. VTSMX
« Reply #6 on: July 17, 2018, 09:01:28 PM »
Sounds like you really want to invest in mutual funds (auto investing and partial shares). Under $10k the extra expense ratio of VTSMX won't add up to that much anyway and over $10k you'll be switched to VTSAX which has the same expense ratio at VTI. I wouldn't worry about it.

Orin!

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Re: VTI vs. VTSMX
« Reply #7 on: July 18, 2018, 01:20:44 AM »
They are basically identical. I like VTSMX because with VTI you can only buy one share at a time and cannot buy a partial share. Whereas with VTSMX you can just throw $100 every week or month or whatever.

This is the other part I'm interested in. Being able to buy partial shares and not have invest-able money sitting there
You want VTSMX mutual fund then. Get the Vanguard app if you don’t already have it and play around with it a bit to figure out how to auto invest per unit of time into your VTSMX. If you can’t figure it out let me know. Minimum is 3k to start but any flows after that are workable. If you can’t start with 3k, then you are looking at whole shares of VTI.

chasesfish

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Re: VTI vs. VTSMX
« Reply #8 on: July 18, 2018, 05:42:35 AM »
I ran the math for a family member recently, it took $40,000 to be meaningful between VTI and VTSMX.  He didn't want to use Vangaurd directly, so he didn't have access to the admiral shares.

MustacheAndaHalf

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Re: VTI vs. VTSMX
« Reply #9 on: July 18, 2018, 06:50:28 AM »
Next month Vanguard is eliminating commissions for hundreds of non-Vanguard ETFs.  They haven't made it exactly clear which ones, but I'm guessing SCHB or ITOT would be among them.  Those are total stock market funds with 0.03% expense ratios, which are even lower than VTI or VTSAX.

You might also want to look at international or even bonds.  Vanguard's target date funds use a mix of 10% bonds, 54% stocks, 36% international stocks (for those far from retirement).  You might model your portfolio based on how Vanguard selects it's target date funds, since they have billions of assets behind those allocations.  Which is more significant than any reason I could provide.

Another benefit of diversifying is you can use ETFs and not worry about the leftover cash.  With US and international, there's more combinations that use up the last bit of cash.  Also the growth on your first year contributions are probably much less significant than you making contributions for the next 5 years.

alcon835

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Re: VTI vs. VTSMX
« Reply #10 on: July 19, 2018, 06:23:01 AM »
Next month Vanguard is eliminating commissions for hundreds of non-Vanguard ETFs.  They haven't made it exactly clear which ones, but I'm guessing SCHB or ITOT would be among them.  Those are total stock market funds with 0.03% expense ratios, which are even lower than VTI or VTSAX.

You might also want to look at international or even bonds.  Vanguard's target date funds use a mix of 10% bonds, 54% stocks, 36% international stocks (for those far from retirement).  You might model your portfolio based on how Vanguard selects it's target date funds, since they have billions of assets behind those allocations.  Which is more significant than any reason I could provide.

Another benefit of diversifying is you can use ETFs and not worry about the leftover cash.  With US and international, there's more combinations that use up the last bit of cash.  Also the growth on your first year contributions are probably much less significant than you making contributions for the next 5 years.

Yeah, I am diversifying between a few different ETFs right now, but I was really surprised I couldn't auto-invest into them. For the short-term, I think I'm going to manually buy ETFs with the plan of switching over to Mutual Funds sometime early next year when I'm in a better position to do so.

ardrum

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Re: VTI vs. VTSMX
« Reply #11 on: July 23, 2018, 01:12:39 PM »
Sounds like you really want to invest in mutual funds (auto investing and partial shares). Under $10k the extra expense ratio of VTSMX won't add up to that much anyway and over $10k you'll be switched to VTSAX which has the same expense ratio at VTI. I wouldn't worry about it.

Does this switch occur automatically?  I switched manually from VTSMX to VTSAX in my IRA at Vanguard once I hit $10k because I wasn't sure if/when it would switch automatically.  In a taxable account, would switching at $10k from VTSMX to VTSAX be considered a taxable event?

Raymond Reddington

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Re: VTI vs. VTSMX
« Reply #12 on: July 23, 2018, 01:21:54 PM »
Sounds like you really want to invest in mutual funds (auto investing and partial shares). Under $10k the extra expense ratio of VTSMX won't add up to that much anyway and over $10k you'll be switched to VTSAX which has the same expense ratio at VTI. I wouldn't worry about it.

Does this switch occur automatically?  I switched manually from VTSMX to VTSAX in my IRA at Vanguard once I hit $10k because I wasn't sure if/when it would switch automatically.  In a taxable account, would switching at $10k from VTSMX to VTSAX be considered a taxable event?

Posting to see the answer to this, as this will be my exact situation as well.

Hargrove

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Re: VTI vs. VTSMX
« Reply #13 on: July 23, 2018, 02:06:45 PM »
The conversion is not taxable. ETFs can't convert because their sales DO create a taxable event.

Vanguard reviews accounts periodically, and will offer the switch eventually if you haven't been paying attention.

Alternatively, there's a conversion option you can just check online. It will initiate the changeover for you.

If the market dips and you go under 10k, I have never heard of that being an issue. If, however, you withdraw below 10k, it is possible they will revert your account.

https://investor.vanguard.com/mutual-funds/convert-to-admiral-shares
« Last Edit: July 23, 2018, 02:57:44 PM by Hargrove »

Lindsay517

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Re: VTI vs. VTSMX
« Reply #14 on: July 24, 2018, 01:38:40 PM »
Just out of curiosity, if you don't have $3k on hand, would you be better off investing in VTI because you can start investing with smaller amounts (even though you can't automate it)? Or just save up $3k and then invest in VTSMX? 

Orin!

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Re: VTI vs. VTSMX
« Reply #15 on: July 24, 2018, 02:56:56 PM »
Just out of curiosity, if you don't have $3k on hand, would you be better off investing in VTI because you can start investing with smaller amounts (even though you can't automate it)? Or just save up $3k and then invest in VTSMX?
Start VTI now. No commission fee to buy through Vanguard. Only real difference is VTI you have to buy whole units at a time (approx $145 each) and you do it manually through the app or browser. With the mutual fund you can set up auto investments and don’t have to do whole units at a time. VTI actually has slight less fess (.1% annual) than VTSMX. When VTSMX gets up to 10k it goes into a different class and the annual fee is same as VTI (.04 percent instead of .14%) but these percentages are really negligible as you are talking about $5 a year.

MustacheAndaHalf

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Re: VTI vs. VTSMX
« Reply #16 on: July 25, 2018, 08:54:06 AM »
The conversion is not taxable. ETFs can't convert because their sales DO create a taxable event.
Almost everywhere you can't convert to/from ETFs without paying taxes, but there's an obscure exception.  Vanguard index funds include "ETF" as one of the share classes of the index fund, and so in theory they can convert without it being taxable.  Vanguard patented this setup, so it's only available at Vanguard.  And Vanguard doesn't allow converting from ETFs "in kind" to other share classes.  Here's a (probably outdated) entry from their ETF FAQ:

https://investor.vanguard.com/etf/faqs
"Can I convert my conventional Vanguard mutual fund shares to Vanguard ETF Shares?
Yes. Most funds that offer ETF Shares will allow you to convert from conventional shares of the same fund to ETF Shares. (Four of our bond ETFs—Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—don't allow for conversions.)

Conversions are allowed from both Investor and Admiral™ Shares and are tax-free if you own your mutual fund and ETF Shares through Vanguard.

Keep in mind that you can't convert ETF Shares back to conventional shares. If you decide in the future to sell your Vanguard ETF Shares and repurchase conventional shares, that transaction could be taxable."

Hargrove

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Re: VTI vs. VTSMX
« Reply #17 on: July 25, 2018, 03:24:37 PM »
Almost everywhere you can't convert to/from ETFs without paying taxes...

Uhhh. You still can't convert from ETFs without paying taxes. You quoted the part that says so.