Vanguard Index funds vs. Vanguard ETFs


Dryer sheet aficionado
Feb 4, 2004
I am in the process of choosing between certain Vanguard ETFs and their corresponding Vanguard index mutual funds. I read some threads here related to the ETF vs. mutual fund topic before posting this message. The ETFs I am considering have expense ratios that are equal to those of the corresponding mutual funds, and the after-tax returns for both investment vehicles for the periods available only differ by a number of basis points (literally … in the one to two basis point range). It could be that the ETFs’ tax advantage isn’t showing up because in most cases there is only a one to three year time frame available to compare the competing investment vehicles (the ETFs are relatively new).

Once I begin the withdrawal phase I have no plans to do anything outside of selling once a year or so and periodically shifting my asset allocation. Please assume no brokerage costs for the ETFs – I will trade for free.

My conclusion: It doesn’t matter a significant amount in the end, but my gut says go with the ETF versions of each index simply because in theory it should be more tax efficient over time.

Thanks for any comments, Saver
For your taxable acct I like ETF's as you stated. For me being a Fidelity customer, it is the best way to purchase Vanguard products.
Rick Ferri, author of The ETF Book posted a decision tree of sorts about ETF vs. mutual funds:

To ETF or Not to ETF

IMO, if you've already got a brokerage acct [and free or low cost trades], and won't be making a lot of purchases/sales, go with the ETFs. If you've got everything at Vanguard [and no brokerage acct], and will be making a lot of purchases/sales, go with the MFs, especially if you can get the admiral shares. Remember that Vanguard's ETF are just share classes of its mutual funds, so they will be almost exactly as tax efficient as the corresponding index MFs.

- Alec
Thanks for the responses,

Alec, the point you bring up about Vanguard’s ETF and MF’s being equally tax efficient is a very important one for me, as that was the deciding factor in my decision to lean towards the ETFs. I called Vanguard and they noted that there was, in fact, still a tax benefit to being in the ETFs, but I remember reading your point in a book on ETFs in the recent past. There are still a few cases in which the ETFs look better (noted below):
1. For emerging markets index exposure, there is a purchase and exit fee on the mutual fund but no such fees exists to my knowledge on the corresponding ETF
2. With Vanguard’s small cap value and growth index funds, the expense ratio on the cheapest mutual funds are 10 basis points higher than on the corresponding ETFs as there are no Admiral shares available for the mutual fund options (not a big expense difference, but I’m being picky about this)
The link to Rick Ferri's missive on this is good.

You should be aware that ETFs trade at a premium or discount to the NAV. You can get the NAV by using the open-end mutual fund. Though the purchase/exit fee exists for VEIEX and not VWO, you will likely find that a premium for VWO exists in the same 0.25% range. Also, there is the bid/ask spread of the ETF that does not exist for the open-end mutual fund.

With free trades, there is no contest between the ETF and the open-end mutual fund if you are happy with an integral number of shares of the ETF. If you wish to invest say $2,000 with no leftovers, then the fund is good choice.

I use ETFs for equity funds and open-end mutual funds for fixed income funds because my fixed income funds are in tax-advantaged accounts and I don't want to deal with dividend-reinvestment and fractional shares of the ETFs.
If you have a lumpsum that you are investing and not doing DCA ETF's are the way to go esp. with Vanguard ETF's being highly tax efficient and the ER is supposed to drop comapred to the MF's.

p.s: This is a good place which reinforces everything that has been said by folks above:
Reading Room - Articles/Papers
Though I don;t think it has been updated in a while.
DFA vs. Vanguard - The individual Asset choices have been updated recently with the best choices including ETF's
Even if you are DCA'ing, or more likely Periodic Investing, the ETF may be to your advantage depending on the amount you invest regularly. IIRC Vanguard actually lets you calculate it for their MF's vs ETF's with the variables of how much you invest regularly, your trading costs and how long you are holding it for.

Check the spreads first. Even if you pay no commission, you will not really be trading for free. Noticing the spreads is what kept me in Admiral shares instead of ETF shares awhile back.
Personally I use the ETF versions of Vanguard funds as I cant stand Vanguard interface :) Probably a silly reason but I much prefer using fidelity as the actual account custodian. I guess another reason would be that its easier to re balance using ETFs

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