Author Topic: Vanguard MF vs Vanguard ETF? Help  (Read 4401 times)

tsmith321

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Vanguard MF vs Vanguard ETF? Help
« on: December 13, 2016, 05:38:20 AM »
Good Morning,

I am about to start with 10K to invest with Vanguard.  This topic has probably been discussed at nauseam.  I plan to do a three fund portfolio consisting of total us stock market, total international stocks, total us bond.  I haven't decided on allocation but I am thinking 80/20 (stocks/bond), focusing at least 65% in US stocks.

My real debate is should I go with the MF or ETF.  I do not plan on trading daily.  I plan to fund at least $1000-$1500 monthly.  I do not plan on withdrawing, this is for the long term.

Any suggestions are welcomed!  This is my first post on this forum, so please take it easy on me.  I really do not want to come across as ignorant!

Thanks

Tom
tsmith321

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #1 on: December 13, 2016, 09:40:48 AM »
Mutual Fund all the way. If you change your mind later, you can convert to ETFs with no tax penalty. If you go with ETFs first, you can't easily switch (assuming it's a taxable account).

There are very few differences between Mutual Funds and ETFs, but if you're planning on contributing monthly, Mutual Funds are just so much easier. You push the button and you're done. Doesn't matter what time of the day you pushed it, it just happens. You can even tell Vanguard to automatically contribute $1500 from your bank account each month. You can't do that with ETFs:

https://investor.vanguard.com/etf/etf-vs-mutual-fund

Brokefuturedoctor

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #2 on: December 13, 2016, 10:14:27 AM »
If you do not have the capital to go straight to admiral shares for each of the funds you want, you could start out in ETFs because they get the lower ER of the admiral funds I believe. Then when you have >$10,000 you could switch over to MFs. I don't know what the process is like of switching from ETF to MF though.

I like the full automation like IC pointed out. It's what I would do if I wasn't a student and had actual money. I am also pretty sure that dividends aren't automatically reinvested with the ETF option whereas they are in the MF.

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #3 on: December 13, 2016, 10:15:21 AM »
Mutual Fund all the way. If you change your mind later, you can convert to ETFs with no tax penalty. If you go with ETFs first, you can't easily switch (assuming it's a taxable account).

There are very few differences between Mutual Funds and ETFs, but if you're planning on contributing monthly, Mutual Funds are just so much easier. You push the button and you're done. Doesn't matter what time of the day you pushed it, it just happens. You can even tell Vanguard to automatically contribute $1500 from your bank account each month. You can't do that with ETFs:

https://investor.vanguard.com/etf/etf-vs-mutual-fund

+1 to all this.  Also with a Mutual Fund you invest on the dollar amount rather than number of shares.  This will allow you to keep your contribution amount the same from month to month.  Also if you want any distributions to be automatically reinvested it is a lot easier to do with a mutual fund as not all ETF's allow this.

neo von retorch

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #4 on: December 13, 2016, 10:35:17 AM »
If you do not have the capital to go straight to admiral shares for each of the funds you want, you could start out in ETFs because they get the lower ER of the admiral funds I believe. Then when you have >$10,000 you could switch over to MFs. I don't know what the process is like of switching from ETF to MF though.

I like the full automation like IC pointed out. It's what I would do if I wasn't a student and had actual money. I am also pretty sure that dividends aren't automatically reinvested with the ETF option whereas they are in the MF.

There are technically three options - ETF, investor shares (MF) and admiral shares (MF).

The ETF matches the admiral shares on expense ratio. I do not know if you pay any transaction fees for buying them (if your account is held at Vanguard).
But I do know that if you meet the minimums for investor shares (~$3000), once you hit the minimums for admiral shares (~$10000) they can be upgraded at no cost.

I don't think you can instantly/easily go from ETF to MF though. So investor shares are my recommendation.

ysette9

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #5 on: December 13, 2016, 11:15:50 AM »
I'd add that if you have a tax-advantage account like an IRA or a 401(k) then you should put your bonds there, not in a taxable account. This is for tax purposes since bonds give you income and you want income to be sheltered if at all possible.

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #6 on: December 13, 2016, 12:04:00 PM »
I agree with the people who prefer mutual funds for the convenience. Especially living on the west coast, we're outside trading hours more often than not when I check my bank account balance and decide to invest some new money. With a mutual fund this doesn't matter; I can put in my order at any time and I'll buy the shares for its fair market value at the end of the next trading day. The money will be transferred out of my checking account directly into the mutual fund.

With ETFs, I have to transfer cash from my checking account into my brokerage, wait for the transfer to go through, remember to log in the next time the market is open after that, put in a limit order so that I have no chance of getting my order executed at some crazy price, and check back every once in a while to make sure the thing gets executed. After all that I'm left with a few dollars left in cash because the ETF share price wasn't an exact multiple of the cash I had available.

At the end of the day, you're investing in the same thing either way. Your long-term performance should be essentially identical. The ETF is just a bit more of a hassle when it comes time to buy or sell.

Radagast

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #7 on: December 13, 2016, 01:47:52 PM »
I have my money approximately equally split between ETFs and mutual funds, and I gotta say: mutual funds are waaayyy better.
-ETFs lose money to bid/ask spreads and usually NAV at every transaction, so they are more expensive than a mutual fund with the same expense ratio
-ETFs should be purchased/sold 9 am to 4 pm Eastern time, which might mean you can't get to them for several weeks due to work, holiday, illness, life
-To avoid stupid market tricks you need to use limit orders which takes work, and sometimes the market runs the other way so you are unable to buy/sell at the price you wanted, which means you need to repeat the order the next day at a worse price
-If the market is doing something extraordinarily dumb while you are trying to make a transaction, a fund manager will likely be able to execute it more efficiently
-ETFs require each buy or sell to be a conscious, deliberate decision requiring at least a basic calculation (# of shares) which vastly increases the chances of doing something stupid or second guessing
-Regular purchases need frequent interaction and keep investing on your mind at all times, which vastly increases the chances of doing something stupid or second guessing
-Because of the above, investors in Vanguard ETFs realize returns an average of 1.6% lower than investors in Vanguard mutual funds (because of investor stupidity and second guessing)

So, mutual funds are clearly better in terms of time and money.

Cezil

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #8 on: December 14, 2016, 09:55:01 AM »
I'm happy to have found this thread.  I wish I had read it a few years ago when I was doing the same exact thing (moving from a State Farm fund ($$$!) to Vanguard (much cheaper), and I went the ETF route instead of MF.  I haven't put any more money into it since then (shame on me, I know!), but once I do start with regular contributions again, I wonder if I should move it from the ETF to MF, if possible (still way under the 10K mark).  If I recall correctly, my decision to go the ETF route was due to lower ER and something about taxes.  :/

Interest Compound

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #9 on: December 14, 2016, 02:38:56 PM »
I'm happy to have found this thread.  I wish I had read it a few years ago when I was doing the same exact thing (moving from a State Farm fund ($$$!) to Vanguard (much cheaper), and I went the ETF route instead of MF.  I haven't put any more money into it since then (shame on me, I know!), but once I do start with regular contributions again, I wonder if I should move it from the ETF to MF, if possible (still way under the 10K mark).  If I recall correctly, my decision to go the ETF route was due to lower ER and something about taxes.  :/

The lower ExpenseRatio for amounts lower than $10,000 is an advantage, but not taxes. Vanguard's funds are every bit as tax efficient as their ETFs. They actually have a patent on this, so this is a Vanguard exclusive.

For other vendors, their ETFs are indeed more tax efficient.

bender

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #10 on: December 14, 2016, 03:44:41 PM »
Here's some hard data on ETF vs. MF.

I purchased VTI on 11 separate occasions this year.  Typically I would put in a limit order during the day for a round number and keep an eye on it.  This is kind of a fun diversion / market timing thing for me.  The dates are not really relevant, but they were part of my plan to front-loaded DCA a large chunk of cash into VTI.  The number of shares was the same per purchase.

The following table shows the raw data of my actual intra-day purchase prices of VTI and a hypothetical identical investment in VTSAX, made at market close.

Date         VTI price   12/13   Gain/loss   VTSAX      12/13    Gain/loss   VTI vs VTSAX
         Paid      Close         Price         Close                        
3/15/2016   $101.95    $117.53    15%      $49.75       $57.20    15%       0.31%
3/30/2016   $105.25    $117.53    12%      $51.08       $57.20    12%      -0.31%
4/15/2016   $106.10    $117.53    11%      $51.64       $57.20    11%       0.01%
5/4/2016      $104.70    $117.53    12%      $50.95       $57.20    12%      -0.01%
5/18/2016   $104.30    $117.53    13%      $50.88       $57.20    12%       0.26%
6/10/2016   $107.70    $117.53    9%      $52.32       $57.20    9%      -0.20%
6/24/2016   $104.95    $117.53    12%      $50.67       $57.20    13%      -0.90%
8/5/2016      $111.33    $117.53    6%      $54.48       $57.20    5%       0.58%
10/3/2016   $110.70    $117.53    6%      $54.02       $57.20    6%       0.28%
10/24/2016   $110.39    $117.53    6%      $53.72       $57.20    6%      -0.01%
11/30/2016   $113.95    $117.53    3%      $55.36       $57.20    3%      -0.18%

I 'beat' VTSAX 5 times and VTSAX was better 6 times. The total difference is 0.017% which is insignificant.  So thanks for the discussion - I can see I truly am wasting my time toying with intra-day buys, but it is kind of fun and now I see also pretty harmless :)

If I get bored and want to move to the systematic approach, I know it will all likely turn out the same.




human

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #11 on: December 14, 2016, 04:16:57 PM »
In Canada we don't have the option to buy Vanguard mutual funds so ETFs it is. If they had cheap mutual funds I definitely would have went with those instead.

Radagast

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #12 on: December 14, 2016, 09:49:59 PM »
Here's some hard data on ETF vs. MF.

I purchased VTI on 11 separate occasions this year.  Typically I would put in a limit order during the day for a round number and keep an eye on it.  This is kind of a fun diversion / market timing thing for me.  The dates are not really relevant, but they were part of my plan to front-loaded DCA a large chunk of cash into VTI.  The number of shares was the same per purchase.

The following table shows the raw data of my actual intra-day purchase prices of VTI and a hypothetical identical investment in VTSAX, made at market close.

Date         VTI price   12/13   Gain/loss   VTSAX      12/13    Gain/loss   VTI vs VTSAX
         Paid      Close         Price         Close                        
3/15/2016   $101.95    $117.53    15%      $49.75       $57.20    15%       0.31%
3/30/2016   $105.25    $117.53    12%      $51.08       $57.20    12%      -0.31%
4/15/2016   $106.10    $117.53    11%      $51.64       $57.20    11%       0.01%
5/4/2016      $104.70    $117.53    12%      $50.95       $57.20    12%      -0.01%
5/18/2016   $104.30    $117.53    13%      $50.88       $57.20    12%       0.26%
6/10/2016   $107.70    $117.53    9%      $52.32       $57.20    9%      -0.20%
6/24/2016   $104.95    $117.53    12%      $50.67       $57.20    13%      -0.90%
8/5/2016      $111.33    $117.53    6%      $54.48       $57.20    5%       0.58%
10/3/2016   $110.70    $117.53    6%      $54.02       $57.20    6%       0.28%
10/24/2016   $110.39    $117.53    6%      $53.72       $57.20    6%      -0.01%
11/30/2016   $113.95    $117.53    3%      $55.36       $57.20    3%      -0.18%

I 'beat' VTSAX 5 times and VTSAX was better 6 times. The total difference is 0.017% which is insignificant.  So thanks for the discussion - I can see I truly am wasting my time toying with intra-day buys, but it is kind of fun and now I see also pretty harmless :)

If I get bored and want to move to the systematic approach, I know it will all likely turn out the same.
Thanks for posting these, this is only a theory to me so it's good to see data. It's sorta freakish that they work out to almost exactly the % difference that I would expect. Over the long run obviously this is negligible but persistant. VTI is one of the most liquid ETFs, for most others the difference would likely be larger because spreads would be wider.

slugsworth

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #13 on: December 17, 2016, 02:37:56 PM »
The ETF is just a bit more of a hassle when it comes time to buy or sell.

This has been my experience! I only recently got to a place where I was maxing out all of my tax advantaged accounts and started a taxable account. I automate the withdraw from checking to money market, but then have to log in and put in the buy order for VTI.  I was planning on just selling all of my ETF and then putting the funds into a VTSAX. I have some capital gains do to the recent run-up but nothing major - is there a better way to handle this before I pull the trigger?

seattlecyclone

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #14 on: December 17, 2016, 06:15:40 PM »
The ETF is just a bit more of a hassle when it comes time to buy or sell.

This has been my experience! I only recently got to a place where I was maxing out all of my tax advantaged accounts and started a taxable account. I automate the withdraw from checking to money market, but then have to log in and put in the buy order for VTI.  I was planning on just selling all of my ETF and then putting the funds into a VTSAX. I have some capital gains do to the recent run-up but nothing major - is there a better way to handle this before I pull the trigger?

Personally, I wouldn't pay capital gains taxes just to switch from an ETF to the mutual fund version of the same fund. Why not direct new purchases into the mutual fund, and hang onto the ETF shares until you have some real reason to sell them?

Retire-Canada

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #15 on: December 17, 2016, 06:20:42 PM »
In Canada we don't have the option to buy Vanguard mutual funds so ETFs it is. If they had cheap mutual funds I definitely would have went with those instead.

I'm in Canada and prior to this never had my own brokerage account so buying and selling ETFs was completely new to me. Took me about 20 mins to figure it out. I work at a computer so getting transactions done during the day is not an issue. Since I am only doing monthly additions it is a handful of transactions a year.

dividendman

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #16 on: December 17, 2016, 10:22:17 PM »
The ETF is just a bit more of a hassle when it comes time to buy or sell.

This has been my experience! I only recently got to a place where I was maxing out all of my tax advantaged accounts and started a taxable account. I automate the withdraw from checking to money market, but then have to log in and put in the buy order for VTI.  I was planning on just selling all of my ETF and then putting the funds into a VTSAX. I have some capital gains do to the recent run-up but nothing major - is there a better way to handle this before I pull the trigger?

Personally, I wouldn't pay capital gains taxes just to switch from an ETF to the mutual fund version of the same fund. Why not direct new purchases into the mutual fund, and hang onto the ETF shares until you have some real reason to sell them?

Too bad there is no "wash buy" rule.

slugsworth

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #17 on: December 18, 2016, 05:27:07 PM »
The ETF is just a bit more of a hassle when it comes time to buy or sell.

This has been my experience! I only recently got to a place where I was maxing out all of my tax advantaged accounts and started a taxable account. I automate the withdraw from checking to money market, but then have to log in and put in the buy order for VTI.  I was planning on just selling all of my ETF and then putting the funds into a VTSAX. I have some capital gains do to the recent run-up but nothing major - is there a better way to handle this before I pull the trigger?

Personally, I wouldn't pay capital gains taxes just to switch from an ETF to the mutual fund version of the same fund. Why not direct new purchases into the mutual fund, and hang onto the ETF shares until you have some real reason to sell them?

Too bad there is no "wash buy" rule.

Agreed!

It might be good advice to just sit on it until I have a low earnings year. . . Or for the market to drop.

I do really value simplicity.

human

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #18 on: December 19, 2016, 01:37:28 PM »
In Canada we don't have the option to buy Vanguard mutual funds so ETFs it is. If they had cheap mutual funds I definitely would have went with those instead.

I'm in Canada and prior to this never had my own brokerage account so buying and selling ETFs was completely new to me. Took me about 20 mins to figure it out. I work at a computer so getting transactions done during the day is not an issue. Since I am only doing monthly additions it is a handful of transactions a year.

It is pretty easy but the last time I wanted to buy etfs I was busy with meetings all day during trading hours for several days. In that sense it's a pain. Of course you could probably set a market limit order after hours but I would rather not. I also buy every two weeks, plus I use my bank's brokerage which 9.99 per trade. I'd rather keep things in one place. I know questrade is free to buy. I've never read a good explanation as to how much they actually charge for selling.

Retire-Canada

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #19 on: December 19, 2016, 01:48:56 PM »
I know questrade is free to buy. I've never read a good explanation as to how much they actually charge for selling.

Selling costs $0.01/share of an ETF with a min of $4.95 and a max of $9.95. This info is posted on their website under the "Pricing" tab.

MaxPowers

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #20 on: December 22, 2016, 12:17:25 PM »
I have a similar question to the OP, but with difference that i only have $5k to invest up front right now. I would like to auto invest $500 each month after that.

I would prefer to go the mutual fund route, but don't have the $10k minimum to open the VTSAX.

The Total Market ETF has a $3,000 minimum to get started. I would prefer to get the money invested as quickly as possible, so the ETF is doable, but ideally for me, i would like to be in the mutual fund long term for the ease and automation.

People are saying it's not easy to to convert a ETF to MF, but i also gather that it's not impossible.

Or would it be best just to go with the Investor's Shares, which looks the same, just with a little higher ER. If I did this, could I convert it over to the Admiral Share's when it reaches $10k? If this is possible, the slightly higher ER would be rather minimal while it grows from $5k to $10k.

Thoughts?

« Last Edit: December 22, 2016, 12:21:30 PM by MaxPowers »

slugsworth

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #21 on: December 22, 2016, 12:26:06 PM »
Or would it be best just to go with the Investor's Shares, which looks the same, just with a little higher ER. If I did this, could I convert it over to the Admiral Share's when it reaches $10k? If this is possible, the slightly higher ER would be rather minimal while it grows from $5k to $10k.

The funds basically auto-convert to the cheaper fund when it reaches $10k- I think I might have had to log in and press "ok".  I did this in my IRA and it was absolutely painless.



seattlecyclone

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #22 on: December 22, 2016, 12:27:57 PM »
Yes, you can convert Investor Shares to Admiral Shares when you have a high enough balance. With $5,000 right now and $500 monthly additions to the account, you should be at $10,000 within a year. The extra expenses you'll pay for holding Investor Shares for that length of time will be less than $10.

MaxPowers

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Re: Vanguard MF vs Vanguard ETF? Help
« Reply #23 on: December 22, 2016, 03:00:56 PM »
Brilliant! seems like the way to go then.

Thanks guys!