Vanguard's VTSAX vs. VTSMX vs. VTI

[europe]

Hi all,

investing in single stocks for 2 years, I lost a little bit of my motivation and I'm too lazy at the moment to make these little researchs and think about what to buy. So I decided, that I want to invest at least a little bit into one of Vanguard's Total Stock Market products. Unfortunately, I didn't really understand what the difference between these three products is (respectively what the pros/cons of each are).

On Vanguard's website one can easily compare these three funds/ETF's; so the first difference are the yearly costs. The ETF and the Admiral shares are cheaper than the "normal" fund. The second thing is, that the ETF's NAV is double than VTSAX's and VTSMX's - what does that mean for an investor and how can this actually be?

Am I right assuming, that there's no difference between VTSAX and VTSMX except for the minimum investment of $10.000 (and that's the reason why the Admiral Shares are cheaper than the VTSMX)?

I guess if I want to invest less than $10.000, it's better to buy the ETF (because it's cheaper) and if I want to invest more than $10.000 the Admiral Shares are the better choice (but why is it better to prefer a mutual fund to an ETF?)

As I live outside the US I have no possibility to buy that funds/ETF for a tax sheltered account, but I guess the tax is the same for all three products.

Thanks for bringing some light into darkness (and sorry for any mistakes/errors - it's not my mother tongue :-) )

[tj]

Hi all,

investing in single stocks for 2 years, I lost a little bit of my motivation and I'm too lazy at the moment to make these little researchs and think about what to buy. So I decided, that I want to invest at least a little bit into one of Vanguard's Total Stock Market products. Unfortunately, I didn't really understand what the difference between these three products is (respectively what the pros/cons of each are).

On Vanguard's website one can easily compare these three funds/ETF's; so the first difference are the yearly costs. The ETF and the Admiral shares are cheaper than the "normal" fund. The second thing is, that the ETF's NAV is double than VTSAX's and VTSMX's - what does that mean for an investor and how can this actually be?

Am I right assuming, that there's no difference between VTSAX and VTSMX except for the minimum investment of $10.000 (and that's the reason why the Admiral Shares are cheaper than the VTSMX)?

I guess if I want to invest less than $10.000, it's better to buy the ETF (because it's cheaper) and if I want to invest more than $10.000 the Admiral Shares are the better choice (but why is it better to prefer a mutual fund to an ETF?)

As I live outside the US I have no possibility to buy that funds/ETF for a tax sheltered account, but I guess the tax is the same for all three products.

Thanks for bringing some light into darkness (and sorry for any mistakes/errors - it's not my mother tongue :-) )

The NAV is irrelevant. Mutual fund is theoretically better because you don't ahve to worry about intraday pricing, you just get the end of day price.

[Indexer]

As noted the NAV is pointless with the mutual funds.  You decide the $ amount, and you get how ever many shares including fractional shares.  So at $11.11 a share a $100 investment would buy 90.009 shares. 

Now with the ETF you can't buy fractional shares.  Same situation you would have 90 shares at $99.99 and have $0.01 sitting in cash.

VTSAX, VTI, and VTSMX are all the same thing.  You are buying the same fund.

The first difference is ETF or mutual fund.  With the ETF you get intraday trading, but the fund always trades at the close of business.  The disadvantage to the ETF is the spread.  You might pay slightly more for it.

In terms of cost the investor shares cost more at 0.17%.  The admiral shares and ETF are both 0.05%. 

As a general rule if you have less than 10k the ETF is normally the better route, and if you have more than 10k the admiral is normally better.  The admiral will normally be better at higher dollar amounts because there is no spread like the ETF, and since you can invest in fractional shares it allows automatic investments and you won't have money just chilling in cash.

[forummm]

If you have $10k to invest, just put it in VTSAX.

If you don't have $10k but have $3k, then:
1) put it in VTSMX
2) keep putting more into VTSMX until you get to $10k
3) convert the VTSMX into VTSAX (non-taxable, easy to do by clicking a link)
4) keep putting more into VTSAX until you retire

If you don't have $3k, then wait until you have $3k and do the steps above. You need $3k to open a Vanguard brokerage account anyway, so trading ETFs doesn't really make sense for a 1-fund portfolio. It's less convenient. And trading Vanguard ETFs through some other broker doesn't make sense for under $3k because you'll have to pay brokerage fees. Vanguard is free to trade Vanguard ETFs.

[Left]

The NAV is irrelevant. Mutual fund is theoretically better because you don't ahve to worry about intraday pricing, you just get the end of day price.

I don't understand this, I hold etfs because I like them for some reason. But even if I don't day trade them, and I hold them for the long term, what difference does it make what the intraday price is? Sure if I sell it, it might be lower for the day, it could be higher too. Does it matter? It'll still be higher than 10 years ago. And I can mitigate some of it by putting a sell limit on it when I'm selling so I don't give up too much money, same with buying limits.

[tj]

The NAV is irrelevant. Mutual fund is theoretically better because you don't ahve to worry about intraday pricing, you just get the end of day price.

I don't understand this, I hold etfs because I like them for some reason. But even if I don't day trade them, and I hold them for the long term, what difference does it make what the intraday price is? Sure if I sell it, it might be lower for the day, it could be higher too. Does it matter? It'll still be higher than 10 years ago. And I can mitigate some of it by putting a sell limit on it when I'm selling so I don't give up too much money, same with buying limits.

You don't have to worry about limits, bids and asks with a mutual fund. That was the point.

[hodedofome]

My broker allows me to do market on close orders. I put it in during the day for a Vanguard ETF and at the close of the day I get the closing price. Same as the mutual fund. As long as your not slinging millions of dollars around you won't affect the closing price.

[Retire-Canada]

Thanks for bringing some light into darkness (and sorry for any mistakes/errors - it's not my mother tongue :-) )

I'm outside the USA and buy VTI via brokerage. Shop around. I found one that doesn't charge any fees to buy ETFs.

-- Vik

[zataks]

If you have $10k to invest, just put it in VTSAX.

If you don't have $10k but have $3k, then:
1) put it in VTSMX
2) keep putting more into VTSMX until you get to $10k
3) convert the VTSMX into VTSAX (non-taxable, easy to do by clicking a link)
4) keep putting more into VTSAX until you retire

If you don't have $3k, then wait until you have $3k and do the steps above. You need $3k to open a Vanguard brokerage account anyway, so trading ETFs doesn't really make sense for a 1-fund portfolio. It's less convenient. And trading Vanguard ETFs through some other broker doesn't make sense for under $3k because you'll have to pay brokerage fees. Vanguard is free to trade Vanguard ETFs.

Not true.  I opened with $1000 and made my first purchase of VTI with ~$960.

[forummm]

If you have $10k to invest, just put it in VTSAX.

If you don't have $10k but have $3k, then:
1) put it in VTSMX
2) keep putting more into VTSMX until you get to $10k
3) convert the VTSMX into VTSAX (non-taxable, easy to do by clicking a link)
4) keep putting more into VTSAX until you retire

If you don't have $3k, then wait until you have $3k and do the steps above. You need $3k to open a Vanguard brokerage account anyway, so trading ETFs doesn't really make sense for a 1-fund portfolio. It's less convenient. And trading Vanguard ETFs through some other broker doesn't make sense for under $3k because you'll have to pay brokerage fees. Vanguard is free to trade Vanguard ETFs.

Not true.  I opened with $1000 and made my first purchase of VTI with ~$960.

They must have raised their minimums:

https://investor.vanguard.com/etf/fees

"For a new brokerage account
When you open your Vanguard Brokerage Account, you'll initially need to add at least $3,000 to your settlement fund."

[zataks]

Actually pretty sure that said the same when I began my account as well.  In January.  =\

[a1smith]

Vanguard brokerage account has no commissions to buy any Vanguard ETF.

TD Ameritrade has over 100 commission free ETF's to choose from; 32 of them are Vanguard ETFs.  See http://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp  You have to enable the commission free trading.

[forummm]

I really don't get why people are so excited about ETFs. With the bid-ask spread losses and not being able to auto-invest with each paycheck, and not being guaranteed to redeem at the underlying value of the assets, I just don't understand how they are better. I can see how they would be useful in certain limited situations--like if your 401k let you hold individual stocks but not low-cost mutual funds. But if you're opening an account with Vanguard anyway, why not just buy the fund directly.

[a1smith]

I have Vanguard Admiral funds now and agree with your points to an extent.

One reason for ETF's is that if your asset allocation requires less than the minimum investment for a particular Admirial fund (usually $10K but some are higher, even $100K) then you can purchase the corresponding Vanguard ETF and still have the same low expense ratio.  The Vanguard ETF's are traded a lot so the discount/premium and bid/ask spreads are usually really low.

[a1smith]

Here's today info on VTI from www.etf.com

Average Spread (%) 0.01%
Average Spread ($) $0.01
Median Premium / Discount (12 Mo) 0.02%
Max. Premium / Discount (12 Mo) 0.09% / -0.05%

So, if you buy when there is a discount or sell when there is a premium over NAV (including spread) then you are getting a better deal.

It's not always a loss over purchasing/selling the fund.

[Pooplips]

Actually pretty sure that said the same when I began my account as well.  In January.  =\

I opened an account in February and was only required to deposit $100. Strange.

[a1smith]

Here is an example comparing fund to ETF.  Morningstar shows total annual return for VTI based on price (ETF) and NAV (underlying Admiral fund).  You can find the data for VTI here:

http://performance.morningstar.com/funds/etf/total-returns.action?t=vti

If you calculate the total return from 2005-2014 (inclusive) you get the following values:

VTI (Price) 118.26%
VTI (NAV)  118.04%

So, over a ten year period the ETF beats the fund by 0.22% total return.  This is because of what I mentioned above, trading the ETF doesn't always result in a loss, sometimes it's better than trading the fund.

Of course, YMMV since Morningstar is likely using end of year values to calculate these returns.  The point is that the difference is small and not always in favor of the fund.

NOTE: One additional comment - this has worked out in favor of the ETF because the Vanguard ETF's have very low bid/ask spreads and for this ten year period it looks like the premium/discount history has worked in favor of ETF.  You need to look at each ETF individually; for ETF's with large bid/ask spreads this analysis will almost certainly always come out in favor of the fund.

[seattlecyclone]

I prefer the mutual funds because I don't have to babysit limit orders to make sure I'm getting a good price, or even place an order when the market is open, for that matter. For most Vanguard ETFs that have sufficient trading volume, I don't think you're likely to do significantly better with one option over the other in the long run. Go with what you prefer.

[fired]

Sorry for digging this up - but I think it best to keep the advantages of each of these instruments in one thread.

Last year I began my early retirement.   This year is my first without 'income'.  I am beginning my Roth Conversion Ladder and I understand that the 5 years begins the date the conversion happens.  So the earlier in the year I do it the better.

That said - last year I had ~$7k in dividends from my taxable accounts - which leads me to think I should put about ~$5k of my Traditional IRA into the Roth conversion accounting for the $12k 2018 Standard Deduction.

I was planning on opening a new Roth IRA for each year of the Roth Ladder to simplify it.  Should I do the ETF VTI - because I have under $10k?   Or should I use one Roth IRA buy VTSMX, and next year with the next contribution of $5k+ convert to Admiral VTSAX?

[secondcor521]

I am beginning my Roth Conversion Ladder and I understand that the 5 years begins the date the conversion happens.  So the earlier in the year I do it the better.

This is inaccurate.  The 5 year conversion clock effectively starts on January 1st of the year in which the conversion happens.  So from a 5-year-clock stand point it doesn't matter when in the year you do the conversion.  Conversions today or 1/1/18 or 12/31/18 will all meet the 5-year-clock requirement on 1/1/2023.

Personally I keep everything in one Roth IRA and just keep track of the conversion amounts in a spreadsheet.  That way I can keep everything in Admiral shares.

One other thing:

At ~$7K you'll pay approximately $0 federal income taxes on the converted amount.  Most typical early retirees convert into the 12% bracket.  That will give you more spending flexibility ~5 years from now when your Roth conversion ladder from this year matures.

How much money will you need from your ladder in 2023?  Do you have most of your spending covered other ways, or do you really spend very little?

Note that if you convert $7K this year, you'll only be able to withdraw that $7K in 5 years; the earnings/growth on the $7K have to stay in the Roth until you hit 59 1/2 in order to be withdrawn without penalty.

[Rob_bob]

Vanguard brokerage account has no commissions to buy any Vanguard ETF.

TD Ameritrade has over 100 commission free ETF's to choose from; 32 of them are Vanguard ETFs.  See http://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp  You have to enable the commission free trading.

I have a TDA account, they dropped Vangaurd from the NTF list.

[fired]

How much money will you need from your ladder in 2023?  Do you have most of your spending covered other ways, or do you really spend very little?

Thanks for your reply!  I think I will do the same with a single Roth and convert to VTSAX the next year.  I may be able to harvest  foreign tax credits to bump the amount up -- gotta read up on that.

I should be able to live off a 4-5% draw down on my brokerage account to keep me under the long term cap gains taxable.  With the $7k per year dividends from the brokerage account would end up being around $25400 for myself.

[chasesfish]

I'm kind of in the same position....tired of individual stocks.

For ETFs, I own VTI and ITOT, the ishares equivalent

I own the Fidelity Version of VTSAX, FSTVX.

All good options.  Use the ETFs when you're below the mutual fund minimum.  The mutual fund takes a slightly lower amount of work

[ChpBstrd]

So correct me if I'm wrong, but the downsides to VTI (and my proposed solutions are):

1) Intraday price quotes instead of end-of-day (ignore them?)
2) Bid-ask spread (place your orders at the ask price instead of the bid? At a 2 cent bid/ask spread, it'll execute in a minute.)
3) VTSAX allows automated deposits (If buying VTI is commission-free in your Vanguard account, just make frequent purchases?)

So a preference for VTSAX comes down to a desire to be as absolutely passive/lazy as possible?

For TD Ameritrade account holders, SCTM is commission-free AND has a lower expense ratio than VTI.

[appleshampooid]

So correct me if I'm wrong, but the downsides to VTI (and my proposed solutions are):

1) Intraday price quotes instead of end-of-day (ignore them?)
2) Bid-ask spread (place your orders at the ask price instead of the bid? At a 2 cent bid/ask spread, it'll execute in a minute.)
3) VTSAX allows automated deposits (If buying VTI is commission-free in your Vanguard account, just make frequent purchases?)

So a preference for VTSAX comes down to a desire to be as absolutely passive/lazy as possible?

For TD Ameritrade account holders, SCTM is commission-free AND has a lower expense ratio than VTI.

Another downside is inability to buy fractional shares. With VTSAX you buy a dollar amount and all your cash is in.

The effect of this "cash drag" is minimal over time but for the borderline-OCD among us, it's nice to see that cash balance sitting at zero (there was a thread about this recently).

[Arioch]

I’ve recently read about dividend reinvestment being another difference for consideration when choosing mutual fund vs. ETF. It appears mutual funds usually win out here. Always important to look at your specific broker’s DRIP policies with both mutual funds and ETFs.

http://www.etf.com/sections/blog/23595-your-etf-has-drip-drag.html?nopaging=1

[Telecaster]

Another downside is inability to buy fractional shares. With VTSAX you buy a dollar amount and all your cash is in.

^ For me, that is the hands-down advantage of mutual funds.   With ETFs you wind up a few dollars in each of your accounts that sit around and don't do anything.  It isn't a ton of money, but why? 

[ChpBstrd]

Another downside is inability to buy fractional shares. With VTSAX you buy a dollar amount and all your cash is in.

^ For me, that is the hands-down advantage of mutual funds.   With ETFs you wind up a few dollars in each of your accounts that sit around and don't do anything.  It isn't a ton of money, but why?

I was able to set up DRIP to buy fractional shares of VTI in TD Ameritrade as of last year.

[MustacheAndaHalf]

In theory, when you're outside the U.S. you can't buy Vanguard mutual funds, only ETFs.  If at some point you must update your address, I believe they would not allow you to purchase further shares in mutual funds - only ETFs.  Your existing holdings could still be held or sold, but not increased.

So for that reason, I'd strongly favor ETFs in your case.  Since ITOT and VTI both hold 3500-3600 stocks, their contents seem like a very close match - but you can still tax loss harvest between them owing to different fund names and index.  Note at Vanguard you pay $7/trade to buy ITOT but $0/trade for any Vanguard ETFs.  So while ITOT has a lower expense ratio (0.03%) than VTI (0.04%), if you invest $10,000 in ITOT you're paying $7/$10,000 or 0.07% in fixed costs which wipes away any benefit of the lower expense ratio.

So go with VTI, since that entails the least risk of your international address becoming a problem.  As a side benefit, any brokerage can accept ETFs, so if you needed to transfer those shares it will be easier than if you own VTSAX (which cannot be transferred to another brokerage).

[appleshampooid]

Another downside is inability to buy fractional shares. With VTSAX you buy a dollar amount and all your cash is in.

^ For me, that is the hands-down advantage of mutual funds.   With ETFs you wind up a few dollars in each of your accounts that sit around and don't do anything.  It isn't a ton of money, but why?

I was able to set up DRIP to buy fractional shares of VTI in TD Ameritrade as of last year.

Correct, this is true of most brokerages. It's the investment of new capital where you get the cash drag effect - you have to buy whole ETF shares in this case.

I only have personal experience at Vanguard and Schwab, YMMV. But I hear basically the same story everywhere else too.