Vanguard ETFs vs. Vanguard Mutual Funds: Which Is Best for You?

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Vanguard is an investor-owned asset management company founded in 1975. Over the course of its nearly 50-year history, Vanguard has grown to become the world’s largest such firm with $8.5 trillion in assets under management, according to the Sovereign Wealth Fund Institute.

Unlike the firm’s closest competitors — BlackRock, which is owned by shareholders, and Fidelity, which is owned by its founders — Vanguard is an investor-owned company. The company is owned by its own funds, which, in turn, are owned by the investors who own shares.

The two types of funds you can invest in through Vanguard are exchange-traded funds and mutual funds. Keep reading to learn what they are, how they compare and which type might be the best choice for you.

Vanguard Exchange-Traded Funds

Exchange-traded funds are traded on stock exchanges, just like stocks are. Each fund contains a basket of securities chosen with a particular goal in mind.

Most Vanguard ETFs are index funds that track a particular index, such as the S&P 500. The indexes are quite varied, representing everything from the total market to particular asset classes — investment-grade bonds or high-dividend stocks, for example — and individual sectors like healthcare or utilities.

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You purchase ETFs through a brokerage account and can buy and sell your holdings in real time, at market prices, whenever the market is open. What’s more, you can place the same order types as you can with stocks — the standard market order plus limit, stop and stop-limit orders. There’s no minimum investment, so you can buy as many or as few shares as you want.

Because the funds pool investors’ money, they leverage economies of scale to keep fees low. In fact, the only fees you pay on ETFs are expense ratios, which range from 0.03% to 0.22% depending on the fund. The expense ratio is the fee charged to cover operating costs, and it’s deducted from your dividends and gains.

Vanguard currently has over 80 ETFs. ETF prices rise and fall throughout the day just like stock prices do, but Vanguard ETF prices currently range from just under $50 to just over $100, and they generally don’t go above a few hundred dollars. Vanguard charges $0 commission on Vanguard ETFs you trade through your Vanguard account.

Share prices, or net asset values, are calculated using the following formula:

(Fund assets – fund liabilities) ÷ number of outstanding shares = net asset value

Vanguard Mutual Funds

A mutual fund also pools money from investors to invest in a basket of securities geared to a particular asset or investing goal.

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Vanguard mutual funds include index funds that track a particular index as well as actively managed funds, including targeted retirement funds. Targeted retirement funds are rebalanced periodically to be less risky the closer you get to your target retirement date.

Mutual funds aren’t traded on exchanges the way ETFs are. Instead, you buy directly from the fund or one of the fund’s brokers. When you’re ready to sell, you “redeem” your shares by selling them back to the fund. Orders are placed after the end of each trading day, which is also when the fund’s NAV, or share price, is determined. That means all investors’ orders to buy or sell are executed the next time the markets open, at the NAV calculated after the markets’ last close.

Vanguard doesn’t charge commission when you trade its mutual funds from your Vanguard account. Nor does it charge “loads” on these transactions. However, depending on the fund, you might pay a purchase or redemption fee of 0.25% to 1% of the transaction total.

Vanguard currently has over 160 mutual funds. Share prices range from $1 per share to over $500.

Many Vanguard mutual funds are available in a choice of share classes: investor and Admiral for individual investors, and institutional. Each has its own expense ratios and minimum initial investment requirements. Minimum investments for investor shares range from $1,000 to $3,000, depending on the type of fund. Admiral shares generally have a $3,000 to $100,000 investment minimum. To give an example of how that works, a $3,000 investment in a mutual fund with a NAV of $300 would give you 10 shares.

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Expense ratios average 0.17% for investor shares and 0.10% for Admiral shares.

Vanguard ETFs and Mutual Funds: Similarities and Differences

Vanguard’s ETFs and mutual funds have several features in common, but they differ in important ways.

How Vanguard ETFs and Mutual Funds Are Similar

ETFs and mutual funds both pool investors’ money to invest in a collection of assets selected to help the fund achieve its goals. Here are more things Vanguard ETFs and mutual funds have in common:

Fund Options: Vanguard’s mutual funds and ETFs both give you a variety of options in terms of the types of funds they offer and the assets they invest in.

Professional Portfolio Management: Investment professionals select the securities that make up Vanguard fund portfolios, then manage the portfolios to ensure they’re on track to achieve their goals.

Commission-Free Trading: Vanguard doesn’t charge commission when you trade its ETFs or mutual funds from your Vanguard account.

Risk Level: ETFs and mutual funds both contain a selection of securities. That diversification could make investing in a fund less risky than investing in a single stock, bond or other asset. There’s no difference in risk levels of comparable mutual funds and ETFs — an S&P 500 index fund, for example, should have the same degree of risk whether you purchase it as an ETF or a mutual fund.

How Vanguard Mutual Funds and ETFs Differ

Despite their similarities, mutual funds and ETFs are very different products.

Minimum Investment: ETFs have no investment minimum — you can buy a single share if you want. Most Vanguard mutual funds require a minimum investment of $3,000.

Fees: You might pay a purchase or redemption fee when you buy or sell mutual fund shares.

Trading: Trading ETFs is nearly identical to trading stocks. You can buy and sell in real time whenever the market is open, at the current market price. And you can maximize your returns with limit, stop and stop-loss orders. Mutual fund prices, on the other hand, are set after the end of each trading day. Your order to buy or sell is executed at that price when the market reopens.

Automatic Investing: You can set your Vanguard account to automatically invest or withdraw money from your mutual funds. That option is not available for ETFs.

Vanguard Mutual Funds and ETFs: Which Is Best for Me?

Looking at how mutual funds and ETFs differ can give you good insight into which option is the best one for your budget and investing style. If you’re interested in investing small amounts of cash, an ETF might be the better choice because shares start at around $50, and there’s no minimum requirement. ETFs might also appeal to you if you want the flexibility of buying and selling shares in real time.

A mutual fund might make more sense if your budget allows for the minimum investment, especially if you can invest in Admiral shares to reduce fees. You should also consider a mutual fund if you want the kind of set-it-and-forget-it retirement investment a targeted fund provides.

But what if you’ve already invested in a Vanguard mutual fund but realize an ETF is more suitable? If the mutual fund offers an ETF, you can convert your mutual fund shares to ETF shares without paying tax on capital gains you earned with the mutual fund. There’s no fee for a conversion.

Note, however, that this doesn’t work in reverse. Swapping your ETF for a mutual fund requires that you sell your ETF shares and use the proceeds to purchase mutual fund shares. If the ETF is worth more now than when you bought the shares, you might have to pay tax on the sale. If it’s worth less, you’ll lose money in the sale.

Information is accurate as of July 24, 2022.

Editorial Note: This content is not provided by Vanguard. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by Vanguard.

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About the Author

Daria Uhlig is a personal finance, real estate and travel writer and editor with over 25 years of editorial experience. Her work has been featured on The Motley Fool, MSN, AOL, Yahoo! Finance, CNBC and USA Today. Daria studied journalism at the County College of Morris and earned a degree in communications at Centenary University, both in New Jersey.
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