Vanguard Mutual Funds Vs. Vanguard ETFs: What's The Difference?

Vanguard Mutual Funds vs. Vanguard ETFs: An Overview

Vanguard is one of the world’s largest asset management firms, with about $7.2 trillion in assets under management (AUM) as of Jan. 31, 2021. It 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 exchange-traded funds (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-vs.-ETF debate for Vanguard products comes down in part 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—with 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 they 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 of as little as one share. As of Oct. 11, 2024, Vanguard offered 86 ETFs, with market prices per share ranging approximately from $46 to $580. 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 and 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 how tradable the shares are. 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 Internal Revenue Service (IRS) in that investors pay capital gains taxes and taxes on dividend income. Even with the same portfolios, the way that taxable events are treated in ETFs vs. mutual funds means that your tax liability typically will 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.

Fee Comparison: Vanguard Mutual Funds vs. ETFs

The Vanguard 500 Index Fund Admiral Shares (VFIAX), requiring a minimum investment of $3,000, had an annual expense ratio of 0.04% as of Oct. 11, 2024. The Vanguard S&P 500 ETF (VOO), which does not have a minimum investment, had an expense ratio of 0.03% as of the same date.

Overall, Vanguard reports that the average expense ratio for all of its mutual funds and ETFs in 2020 was 0.08%, or $9 annually for every $10,000 invested. By comparison, the average figure for the rest of the mutual fund and ETF industry was 0.47%, or $54 annually for every $10,000 invested.

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-costing and highest-rated in the investment marketplace, and these products can make ideal choices for long- and short-term investors.

What is the difference between Vanguard mutual funds and ETFs?

While both types of products offered by Vanguard are similar in management style and returns, there are distinctions that can make each product more appropriate for different investors. ETFs carry more flexibility, as they can be bought and sold throughout the day. Mutual fund shares price only once per day but may benefit from economies of scale.

What should investors consider when choosing between mutual funds and ETFs?

Investors should determine whether they want to pursue a buy-and-hold strategy or a trading strategy. ETFs may be more suitable than mutual funds for those who seek lower minimum investment amounts and want more control over transaction prices. Meanwhile, investors who want to make regularly scheduled automatic investments or withdrawals can do so with mutual funds but not ETFs.

What are the tax implications of the mutual fund-vs.-ETF decision?

Investors pay capital gains taxes and taxes on dividend income for both mutual funds and ETFs. However, the way that taxable events are treated in ETFs vs. mutual funds means that your tax liability will typically be lower with ETFs. Expense ratios for ETFs are also generally lower than mutual fund fees.

The Bottom Line

Most Vanguard index mutual funds have a corresponding ETF. The most significant difference between mutual funds and ETFs is how tradable the shares are. ETFs can be bought and sold throughout the day, whereas mutual fund shares price only once per day. 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 ETFs.