ETF vs. Index Funds (VTI vs VTSMX)

[Barrett]

Hello,

I just opened a Vanguard account and am trying to decide between investing in VTI (ETF) or VTSMX (Index fund).  I have about $7,000 ready to invest initially (so the VTSMX initial $3,000 investment minimum would not be an issue), but for the next 6 months I would only be able to invest in small amounts (maybe $50/month). It's my understanding that I could buy portions of VTSMX (as low as $1) but would have to buy whole shares of VTI (about $117 right now). So I could either invest very small amounts (eg. $10-50) into VTSMX whenever I have some extra change, or I could wait until I have about $117 (or whatever the VTI share price is at the time) to buy a whole VTI share. I like the lower expense ratio of VTI vs. VTSMX (0.05 vs. 0.16), but I'm concerned that it would be suboptimal to have non-invested money sitting in the bank until I've accumulated a whole VTI share's worth of money to invest. Similarly, I'm concerned that VTI dividends would not be automatically reinvested if they're not large enough to buy a whole share.

Any thoughts or recommendations? Maybe this is such a small detail that it doesn't really matter. I plan to be a buy and hold investor, so some of the other ETF vs. Index fund differences are not as relevant.

[Proud Foot]

How much will you be able to invest each month after those 6 months of $50?  How long do you think it will take for you to add enough contributions to reach a $10k balance?  If it will not take you very long to get the $10k invested then you can ignore the difference in ER between VTI and VTSMX as VTSAX has a 0.05 ER. Obviously the market returns can play a factor in the time it takes to reach $10k especially if you are only adding $50/month.  The larger the contributions the less factor returns have.

[Pipboy]

The difference in expense ratios at your investment amount is less than $10 per year.  It will be way simpler for you to invest, automatically if possible, in the mutual fund instead of the ETF.

[letired]

I didn't do the math, but I like the ability to buy partial shares for my automatic investments. I am perpetually a little annoyed by the account where I have to do the ETF thing and then wait to have enough to buy a whole share and then actually set up the trade and then have a little bit of money leftover still etc etc etc. I'm ok with the short term slight expense ratio hit to have all my money invested right away and not have to think about it.

[MDM]

See ETFs vs mutual funds - Bogleheads for good coverage of this topic.

[Barrett]

Thanks everyone for the responses. That is very helpful. I think I'll probably go with VSTMX since i'll only need a couple more thousand dollars to switch over to Admiral shares (VSTAX). Much appreciated!

[Helvegen]

I didn't do the math, but I like the ability to buy partial shares for my automatic investments. I am perpetually a little annoyed by the account where I have to do the ETF thing and then wait to have enough to buy a whole share and then actually set up the trade and then have a little bit of money leftover still etc etc etc. I'm ok with the short term slight expense ratio hit to have all my money invested right away and not have to think about it.

I'll sit on the bench with you here. I hate that commission free ETFs are the only way I can reasonably invest in my HSA. Everything else is $$$$$. Not being able to buy fractional shares is a PITA, IMO. I'd go for a mutual fund if given a real choice any day of the week.

[Retire-Canada]

Any thoughts or recommendations? Maybe this is such a small detail that it doesn't really matter. I plan to be a buy and hold investor, so some of the other ETF vs. Index fund differences are not as relevant.

I always have a few dollars sitting in cash as the leftover from my last ETF buy. It's pocket change and is immaterial to my investment performance. I would not accept 3x higher fees in exchange for being able to buy partial shares. That's a terrible trade.

[letired]

I didn't do the math, but I like the ability to buy partial shares for my automatic investments. I am perpetually a little annoyed by the account where I have to do the ETF thing and then wait to have enough to buy a whole share and then actually set up the trade and then have a little bit of money leftover still etc etc etc. I'm ok with the short term slight expense ratio hit to have all my money invested right away and not have to think about it.

I'll sit on the bench with you here. I hate that commission free ETFs are the only way I can reasonably invest in my HSA. Everything else is $$$$$. Not being able to buy fractional shares is a PITA, IMO. I'd go for a mutual fund if given a real choice any day of the week.

uuugh yes it's my HSA fund. We hates having to manually set up trades, precious. But I guess I need to get used to it since it ain't changing any time soon.

[Ryland]

Yep, good call. VTSMX and let the transfer hit and bring you to VTSAX with the lower expense ratio. Great question, and way to pay attention to those fees!