Vanguard Mutual Funds vs. Vanguard ETFs: An Overview

Vanguard, one of the world's largest asset management firms with more than $5.6 trillion in assets under management, has become a popular choice for investors thanks to its long list of low-cost mutual funds. The Vanguard Group has also added a full menu of exchange-traded funds (ETFs) to its lineup, making the company one of the leading providers for both investment products.

Most Vanguard index mutual funds have a corresponding ETF. Both products are similar in management style and returns, but there are differences that can make each product more appropriate to different investors. Vanguard's products also have expense ratio differences between mutual fund/ETF pairs that must be examined to make the best choice.

Key Takeaways

  • Mutual funds and ETFs offered by Vanguard are similar in management style and returns, but there are differences that can make each product more appropriate to different investors.
  • ETFs carry more flexibility; they trade like stocks and can be bought and sold throughout the day.
  • Mutual fund shares price only once per day, at the end of the trading day, but may benefit from economies of scale.
  • While Vanguard fees are low in many of its products, ETFs tend to be more tax-efficient.

Vanguard Mutual Funds

The mutual fund versus ETF debate for Vanguard products in part comes down to how much is being invested. Moreover, for many of its mutual funds, Vanguard offers up to three classes of shares, Investor Shares, Admiral Shares, and Institutional Shares, each class offering progressively lower expense ratios, and thus better performance, in return for higher minimum investments.

Investor Shares in most Vanguard mutual funds require a $3,000 minimum initial investment, but some allow a $1,000 opening investment. For lower-cost Admiral Shares, the typical minimums are $3,000 for index funds, $50,000 for actively-managed funds, and $100,000 for certain sector-specific index funds. Institutional Shares are designed for institutional investors, and typically have a $5 million minimum.

Some funds with high transaction costs may have redemption fees ranging from 0.25% to 1.00% of the transaction amount, to discourage short-term speculative trading. Apart from this exception, Vanguard does not charge front-end or back-end sales loads or commissions.

Vanguard ETFs

ETFs carry more flexibility; they trade like stocks and can be bought and sold throughout the day, in transaction amounts as little as one share. As of February 7, 2020, Vanguard offered 74 ETFs, with market prices per share ranging approximately from $43 to $307. In many cases, ETFs carry lower expense ratios than their mutual fund counterparts, but they must be traded in a brokerage account. ETF trades could come with brokerage commission fees.

When choosing between a mutual fund an an ETF, investors must consider a number of factors. One is whether the investor wants to pursue a buy-and-hold strategy or a trading strategy to help determine which product may be more advantageous. In general, ETFs may be more suitable than mutual funds for investors who seek lower minimum investment amounts and who want more control over transaction prices. However, investors who want to make regularly-scheduled automatic investments or withdrawals can do so with mutual funds, but not with ETFs.

Key Differences

The most significant difference between mutual funds and ETFs is the tradeability of shares. Mutual fund shares price only once per day, at the end of the trading day. Investors can place trade orders throughout the day, but the transaction is only completed at the end of the trading day.

The popular Vanguard 500 Index Fund and the Vanguard S&P 500 ETF provide good examples of the cost and trading differences that come with mutual funds and ETFs. Most mutual funds and ETFs in the Vanguard lineup follow a similar pattern.

Both ETFs and mutual funds are treated the same by the IRS in that investors pay capital gains taxes and taxes on dividend income. However, with generally fewer taxable events in ETFs, tax liability will typically be lower. ETF expense ratios are also typically lower than mutual fund fees. Although there are some options for mutual funds that don't require you to invest a lot of money at once, many mutual funds have higher initial investment requirements than ETFs.

The decision between a Vanguard mutual fund or a Vanguard ETF comes down to trading flexibility and the amount to be invested.

The Vanguard portfolio of investment choices as a whole is generally considered among the lowest cost and highest rated in the investment marketplace, and these products can make ideal choices for long- and short-term investors.