Vanguard has become a popular choice for investors thanks to its long list of low-cost mutual funds. Vanguard 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 carry expense ratio differences between mutual fund/ETF pairs that must be examined to make the best choice.

The Difference Between Mutual Funds and ETFs

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.

ETFs carry more flexibility; they trade like stocks and can be bought and sold throughout the day. 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. Investors must decide between a buy-and-hold strategy or a trading strategy to determine which product may be more advantageous.

The Difference Between Vanguard's Investor Class and Admiral Class Shares

The mutual fund versus ETF debate for Vanguard products in part comes down to how much is being invested. Most Vanguard mutual funds come with $3,000 minimum initial investments, but some can be initiated with a $1,000 investment. Initial investments of $10,000 or more are eligible for the company's lower-cost Admiral share class. These are essentially the same products as the investor-class shares, but they come with cheaper expense ratios. The Admiral class shares tend to outperform their investor class share counterparts.

Comparing Vanguard Investor Class Mutual Fund Shares to ETFs

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.

The 500 Index Fund has an expense ratio of 0.17%, while the S&P 500 ETF has a much lower expense ratio of just 0.05%. On a $3,000 investment, investors are paying $5.10 a year in expenses in the mutual fund as opposed to $1.50 with the ETF. The overall cost difference is minor, but it could make a difference for an investor who wants to put the money in an account and leave it untouched until retirement. Conversely, an investor who wants a little more trading flexibility would opt for the ETF, although the trading commissions from a few trades could make it more costly overall. The choice often comes down to investor preference.

Comparing Vanguard Admiral Class Mutual Fund Shares to ETFs

When considering the Admiral shares of the Vanguard 500 Index, the decision between the mutual fund and ETF changes. This fund's expense ratio is 0.05%, which is identical to the ETF's expense ratio. This makes the mutual fund just as advantageous as the ETF for long-term buy-and-hold investors. Only investors who trade throughout the day would find the ETF more desirable. Investors who want to trade but are comfortable with the once-a-day pricing of mutual funds are likely to find that product more beneficial, since there would be no transaction fees involved if they are traded through Vanguard directly.

Conclusion

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.