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Vanguard funds have some of the lowest expense ratios in the industry. Almost all of Vanguard’s ETFs have a corresponding mutual fund that either track an asset class or an index. But then, for an investor, deciding between a Vanguard ETF and mutual fund is not just a trade-off between convenience and flexibility, although it may seem so. The cost structure between Vanguard’s ETFs and mutual funds are actually quite different.

I decided to take a closer look at some of Vanguard’s funds.

Vanguard ETFs vs. Mutual Funds

Assumptions

  • The holding period is assumed to be for five years.
  • The commission is set at $3.95.
  • Additional purchase for each fund/ETF set at $1,000/year.
  • The expected return percentages are set to five-year average annualized returns as of June 30. Past performance is not a guarantee of future returns.
  • The initial purchase amount is set to the minimum required to purchase Vanguard investor class mutual funds, which is normally $3,000 unless otherwise stated.
  • The expense ratios are for Vanguard’s investor class shares. If you hold Admiral class shares, which has lower costs and high minimum requirements, your results may vary.

Vanguard Large Cap

Expected return3.46%
ETF (VV) total cost
ER: 0.12%
B/A spread: $0.02
$57.91
Mutual fund (VLACX) total cost
ER: 0.26%
$69.07
Winner: ETF ($11.16)

Vanguard Mid-Cap

Expected return5.08%
ETF (VO) total cost
ER: 0.12%
B/A spread: $0.03
$59.20
Mutual fund (VIMSX) total cost
ER: 0.26%
$71.46
Winner: ETF ($12.26)

Vanguard Small-Cap

Expected return5.52%
ETF (VB) total cost
ER: 0.17%
B/A spread: $0.03
73.37
Mutual fund (NAESX) total cost
ER: 0.31%
85.89
Winner: ETF ($12.52)

Vanguard Emerging Markets

Expected return10.83%
ETF total cost
ER: 0.22
B/A spread: $0.01
$93.13
Mutual fund total cost
ER: 0.35%
Purchase Fee: 0.50%
Redemption Fee: 0.25%
$167.82
Winner: ETF ($74.69)

Vanguard REIT

Expected return2.83%
ETF total cost
ER: 0.12%
B/A spread: $0.01
$56.38
Mutual fund total cost
ER: 0.26%
Redemption Fee: 1% if held < 1 yr
$78.16
Winner: ETF ($21.78)

Vanguard EAFE

Expected return1.79%
ETF (VEA) total cost
ER: 0.12%
B/A spread: $0.01
$102.29
Mutual fund (VTMGX) total cost
ER: 0.18%
Redemption fee: 2% if held < 2 mos
Min purchase amt: $10,000
$111.82
Winner: ETF ($9.53)

Vanguard S&P 500

Expected return2.86%
ETF (VOO) total cost
ER: 0.06%
B/A spread: $0.01
$40.65
Mutual fund (VFINX) total cost
ER: 0.17%
$44.68
Winner: ETF ($4.03)

Vanguard Long-Term Bonds

Expected return7.67%
ETF (BLV) total cost
ER: 0.11%
B/A spread: $0.10
$64.53
Mutual fund (VBLTX) total cost
ER: 0.22%
$63.89
Winner: Mutual Fund($0.64)

Vanguard Short-Term Bonds

Expected return5.20%
ETF (BSV) total cost
ER: 0.11%
B/A spread: $0.01
$54.88
Mutual fund (VBISX) total cost
ER: 0.22%
$60.67
Winner: ETF ($5.79)

The results speak for themselves. If your trading commission is low and you don’t trade frequently, in most cases ETFs seem to be a better deal. At least one of Vanguard’s mutual funds, VEIEX, had a purchase fee, redemption fee and an expense ratio. VEIEX’s ETF peer doesn’t carry any restrictions and its expense ratio is lower than VEIEX’s ER. You need to pay careful attention to costs when deciding between Vanguard’s mutual funds and ETFs.

Although for most of Vanguard’s mutual funds, the minimum required is around $3,000, some funds like the Vanguard Tax-Managed International Fund (VTMGX) have a high barrier to entry with a minimum investment of $10,000.

From what I see, the advantages are tilted heavily towards Vanguard ETFs.

Why Vanguard?

Vanguard was founded by the legendary investor John Bogle, who is credited with having created the first index fund, the Vanguard 500 Index fund, in 1975. At a time when actively managed mutual funds were all the rage, Bogle advocated passive funds with emphasis on low costs and zero loads. Bogle believed that costs matter as much as returns and as a result, Vanguard funds have low expense ratios when compared to its peers.

Today, Vanguard is the world’s largest no-load mutual fund company with over $1.8 trillion in assets under its belt. Vanguard’s company structure is also little unusual. A regular investment firm has to make money for its investors and its shareholders, often at the expense of each other.

At Vanguard’s, each fund contributes a certain amount towards management overhead, thus pooling the money back into the firm. Vanguard specializes in indexed funds since they pioneered this concept. With the explosion of ETF’s, Vanguard also started offering ETF equivalent to most of its indexed mutual funds.

Source: Comparing Vanguard's ETFs and Mutual Funds