Vanguard Brokerage vs. Mutual Fund Account (taxable)

[ronin]

Hello,

As a current Vanguard Roth IRA (mutual fund account) and 401k account holder, I am looking to add a taxable account with Vanguard. Given I'll likely invest in mutual funds, is there a reason why I wouldn't want to go with the Vanguard Brokerage account instead of the mutual fund account? It seems the brokerage account would allow me to access all the Vanguard funds (without cost) along with other securities should I ever want to reach beyond funds. What's the downside (if any) in going with this approach?

Does the brokerage account offer some type of money market/cash account that is not available in mutual fund form?

I thought I read someone mentioned in another thread that the brokerage account doesn't allow you to access Vanguard funds, however the Vanguard rep I was corresponding with said this is an option. Is it a matter of not accessing the funds commission-free?

Thanks for any thoughts on this.

[livesoft]

The Vanguard rep is confused and gave you incorrect information. Vanguard ETFs are Vanguard funds, but they are not Vanguard mutual funds. One cannot purchase Vanguard mutual funds with a Vanguard Brokerage Services brokerage account.

[CABob]

The Vanguard rep is confused and gave you incorrect information. Vanguard ETFs are Vanguard funds, but they are not Vanguard mutual funds. One cannot purchase Vanguard mutual funds with a Vanguard Brokerage Services brokerage account.

And conversely, one cannot purchase ETFs through a mutual fund account.
As far as I can see there is no need or advantage to opening a VBS account if one will be buying only Vanguard mutual funds.

[casey2012]

I spoke to a Vanguard rep the other day regarding this topic and she said that there would be a Vanguard Money Market Fund that is tied to the Brokerage Account. She mentioned that if I decided to purchase Vanguard funds, they wouldn't be held within the brokerage account but would be held under the umbrella of the Money Market Fund and that it would listed underneath the Money Market Fund when looking at it on the Vanguard site.

Does this make sense?

[FrugalInvestor]

I spoke to a Vanguard rep the other day regarding this topic and she said that there would be a Vanguard Money Market Fund that is tied to the Brokerage Account. She mentioned that if I decided to purchase Vanguard funds, they wouldn't be held within the brokerage account but would be held under the umbrella of the Money Market Fund and that it would listed underneath the Money Market Fund when looking at it on the Vanguard site.

Does this make sense?

No. The Money Market Fund is a mutual fund like any other. You mutual funds including the Money Market Fund will be categorized by account type - taxable, Traditional IRA, Roth IRA, etc. Your brokerage account will be listed separately. At least this is how mine works.

I don't own any ETFs but I assume they would be shown within your Brokerage account along with any individual securities, CDs, etc. that you may own through Vanguard.

[livesoft]

But it does makes sense since the Money Market fund would be held at Vanguard mutual funds and not at Vanguard Brokerage Services.

The MM fund account has an annotation that it is associated as the sweep account for the VBS account and the VBS account has an annotation that there is a sweep account money market fund held at Vanguard mutual funds. Indeed, the VBS account looks pretty much like any of the external accounts I have entered at Vanguard.

[FrugalInvestor]

But it does makes sense since the Money Market fund would be held at Vanguard mutual funds and not at Vanguard Brokerage Services.

The MM fund account has an annotation that it is associated as the sweep account for the VBS account and the VBS account has an annotation that there is a sweep account money market fund held at Vanguard mutual funds. Indeed, the VBS account looks pretty much like any of the external accounts I have entered at Vanguard.

My Money Market Fund(s) show up in my taxable mutual fund account not under my brokerage account although it is the sweep account for the brokerage account (which I don't use).

[ronin]

Thanks for the replies and clarification. Question: Is there a practical difference between using Vanguard's EFTs via a brokerage account versus using their mutual funds via a mutual fund account, keeping in mind this will be a taxable account? I assume Vanguard offers an EFT of most of their mutual funds and then some unique ones, correct?

Unless the EFTs are unattractive compared to the mutual fund equivalents, I guess I'm not seeing why one wouldn't choose the brokerage account as it provides more options for investments. What is the downside?

Thanks!

Steve

[DSInvestor]

IMO, mutual funds are easier to deal with than ETFs. If you wanted to make purchases regularly, you can create an automatic transaction to buy $X every year, quarter, month or every week. You can also use automatic transactions to sell mutual fund shares or exchange from one mutual fund to another mutual fund. You cannot automate ETF trades.

Several years ago Vanguard's minimum for Admiral shares of mutual funds was $100K and folks who wanted the lower expense ratios purchased Vanguard ETFs at Vanguard or other brokerage firms. Now that Vanguard has lowered the minimum for Admiral shares of index mutual funds to $10K, it is easier to get the lower expense ratios. Vanguard ETF and Admiral shares tend to have the same expense ratio.

Vanguard has a strange account structure. If you want to hold Vanguard mutual funds, you must use a Vanguard mutual fund account. Vanguard brokerage accounts allow you to hold everything but Vanguard mutual funds.

I'm happy with Admiral shares of Vanguard mutual funds so I don't need a Vanguard brokerage account. I have a solo 401k at Fidelity and I hold Vanguard ETFs there. It costs me $7.95 commission for every ETF trade but that's cheaper than paying Fidelity $75 for every purchase of a Vanguard mutual fund.

[jsl11]

Keep in mind that if you have a Vanguard mutual fund account, and later decide you want to add investments outside of Vanguard, you can always open a Vanguard brokerage account. It is not one or the other; you can have both.
Jeff

[jimkinny]

Remember the flash crash of several years ago? If not, google it.

When you buy or sell a stock/etf with a brokerage account you get to select at what price you will buy or sell at. If you select the market price, then if the market gets caught up in another flash crash, you could lose some money when selling or make some when buying. You can avoid this by specifying the price, but this is a risk that mutual funds do not have.

If you want to buy Treasury notes/bonds or CDs, it is easily done using a Vanguard brokerage account.

I do not think there is much of an advantage, at Vanguard, to buying ETFs. Vanguard has more than enough mutual funds to satisfy most investors. I do not know if this still holds true or not but at one time at least one ETF (VSS) had a lower ER than the corresponding mutual fund.

As others have written, the MM account is linked to the brokerage account, although the MM is just a regular mutual fund. This is the account that has to have money available for purchasing anything , using the brokerage account. It is also the account into which money will be transferred once a sale in the brokerage account is complete. There is a delay in this: see Vanguard for the time delays.

Jim

[xrw1]

Sorry to get slightly off topic, but would one be able to see their mutual fund account (taxable) and their roth ira account under the same log in? or would one need two log in names?

[livesoft]

One login is all you need. One can see all accounts. For me, it was the interaction between the Vanguard accounts FOR THE SAME IRA that was problematic.

[Taylor Larimore]

Sorry to get slightly off topic, but would one be able to see their mutual fund account (taxable) and their roth ira account under the same log in? or would one need two log in names?

xrw:

We do not have a brokerage account. Our Vanguard taxable account and IRA account are combined when we log in.

Best wishes.
Taylor

[nisiprius]

To add my own clarification, mutual funds--as far as I know all mutual funds--can be held in two different ways. You can open an account directly with the mutual fund company itself, or you can hold mutual funds in a brokerage account. Usually there are small advantages to holding directly with the fund company itself--little benefits, perks, and cost savings, but there is the considerable additional nuisance of having a totally separate account at a separate firm.

Some firms, for example Schwab, Fidelity, and Vanguard, "have" a mutual fund company and also "have" a brokerage. However seamless it may look, if you look at the statement fine print you'll be amazed at the number of different business identities that make up the thing called "Fidelity." Vanguard operates a brokerage service called VBS. Vanguard operates a (group of separate) mutual fund companies called "The Vanguard Group." Vanguard also issues ETFs.

ETFs are like stocks and as far as I know ordinary retail investors can only buy them through brokerages.



When you have an account "at" Vanguard, you have Vanguard mutual fund accounts, which you hold directly. You may also have a Vanguard Brokerage Services account, in which you can hold AT&T stock, PIMCO mutual funds, iShares ETFs--and Vanguard ETFs.

Is there a practical difference between using Vanguard's ETFs via a brokerage account versus using their mutual funds via a mutual fund account, keeping in mind this will be a taxable account? I assume Vanguard offers an EFT of most of their mutual funds and then some unique ones, correct?

For a summary of the practical differences between ETFs and mutual funds:
[url]http://www.bogleheads.org/wiki/ETFs_vs_Mutual_Funds]ETFs versus Mutual Funds[/url]
I personally find ETFs to be a PITA because you have to place your order when the market is open (which, if you're employed, is a little impolite to one's employer), and because there's no provision for automatic purchases, exchanges, or withdrawals.

For what Vanguard offers, I really suggest that you spend a little quality time exploring their website--at least as much time as you'd spend in an auto dealership when looking for a car, or trying on clothing in a clothing store. ETFs are typically index funds--the Grand Old Original ETF, SPY, was an S&P 500 fund--and the rules for ETFs make it possible but difficult to offer actively managed funds. All the popular mainstream Bogleheadish Vanguard index funds are available as both mutual fund and ETF. There are many funds that aren't available as ETFs, and some ETFs that aren't available as fund.

Go to http://personal.vanguard.com/ , "What We Offer," Vanguard Funds, and high on the page you'll see these two links (or you can click them here):
All Mutual Funds
All ETFs

I'm serious, go there right now, spend ten minutes.

The summary page for every fund shows right at the top if it's available as an ETF, or vice versa.

By the way, an Exchange Traded Fund is an ETF, ee, tee, eff. This is an eft. (Awww! Isn't it cute?)

[MnD]

Why doesn't the Vanguard mutual fund company allow VBS and their customers access to Vanguard Mutual funds for no fee?
If Fidelity and Schwab have separate mutual fund companies as someone stated, that's what they do so you don't need multiple accounts.

[JW Nearly Retired]

Thanks for the replies and clarification. Question: Is there a practical difference between using Vanguard's EFTs via a brokerage account versus using their mutual funds via a mutual fund account, keeping in mind this will be a taxable account? I assume Vanguard offers an EFT of most of their mutual funds and then some unique ones, correct?

Unless the EFTs are unattractive compared to the mutual fund equivalents, I guess I'm not seeing why one wouldn't choose the brokerage account as it provides more options for investments. What is the downside?
Steve

IMO, ETFs are unattractive for reinvesting the earnings because you cannot just set everything on reinvestment autopilot. You accumulate dividends in the money market sweep account and periodically you must put in an order to buy another ETF lot in the same fund or a different one. It leads to many many tax lots to keep track of, but some people like that for tax loss harvesting reasons. For me it's a pain. If you want, you can do the same in a mutual fund account.... i.e. choose not to reinvest dividends for tax purposes.

I have taxable mutual fund accounts at both Vanguard and Fidelity and a brokerage account at Fidelity (for ETFs and a few individual stocks ), the IRAs are all in mutual funds at Vanguard. If you are going to stick to Vanguard funds I can't see any reason not to choose the lower maintenance mutual fund type account.
JW

[livesoft]

IMO, ETFs are unattractive for reinvesting the earnings because you cannot just set everything on reinvestment autopilot. You accumulate dividends in the money market sweep account and periodically you must put in an order to buy another ETF lot in the same fund or a different one.

Sorry, but the above statement is simply not true. One can have their ETF dividends and distributions set on reinvestment autopilot. That is, dividends and other distributions can be set to automatically reinvest without any intervention on your part. And all my brokers do this for free: VBS, TDAmeritrade, WellsFargo, Fidelity. Mechanistically, there is a difference in the way dividends are automatically reinvested by mutual funds and by brokers doing this for your ETFs, but it still gets done if one chooses to have that done.

[JW Nearly Retired]

IMO, ETFs are unattractive for reinvesting the earnings because you cannot just set everything on reinvestment autopilot. You accumulate dividends in the money market sweep account and periodically you must put in an order to buy another ETF lot in the same fund or a different one.

Sorry, but the above statement is simply not true. One can have their ETF dividends and distributions set on reinvestment autopilot. That is, dividends and other distributions can be set to automatically reinvest without any intervention on your part. And all my brokers do this for free: VBS, TDAmeritrade, WellsFargo, Fidelity. Mechanistically, there is a difference in the way dividends are automatically reinvested by mutual funds and by brokers doing this for your ETFs, but it still gets done.

I stand corrected. But wouldn't that expand your tax lots drastically..... how do you set it up to make this manageable?
JW

[HueyLD]

Why doesn't the Vanguard mutual fund company allow VBS and their customers access to Vanguard Mutual funds for no fee?
If Fidelity and Schwab have separate mutual fund companies as someone stated, that's what they do so you don't need multiple accounts.

Since Vanguard hasn't figured out how to integrate its fund company with its brokerage company, I assume that it is the free market at work there. The cost of doing so exceeds the benefit of integration. Maybe most Vanguard customers are more than happy to hold VG mutual funds only and Vanguard has no incentive to do otherwise. Why risk doing something that will increase the ER?

[livesoft]

I stand corrected. But wouldn't that expand your tax lots drastically..... how do you set it up to make this manageable?
JW

The tax lots situation is no different than using a mutual fund. One sets it up in the same ways to make it manageable.

Examples:

For mutual funds and ETFs that give out monthly dividends: Hold them in a tax-advantaged account where the idea of tax lots is moot.
For mutual funds and ETFs held in taxable accounts, use good software or take distributions in cash and reinvest them manually, use them for rebalancing, or spend them.

[ronin]

Thanks to everyone for their comments. It does seem like the mutual fund account is the way to go for now. Should I ever decide to expand my investment choices beyond VG fund, I'll open a VBS account.

Cheers!

[Default User BR]

I stand corrected. But wouldn't that expand your tax lots drastically..... how do you set it up to make this manageable?

The tax lots situation is no different than using a mutual fund. One sets it up in the same ways to make it manageable.

The difference is that ETFs can't use the average cost basis method. Not that I would ever want to, specific ID for me!


Brian

[livesoft]

^That's a good point. So the wiki pros & cons page should be updated with that point, the settlement T+1 vs T+3 differences which affects how quickly one can convert shares to cash in a checking account, and perhaps the differences in dividend mechanics.

[SSSS]

This is an eft. (Awww! Isn't it cute?)

Wait, I thought this was an EFT: http://www.andreacrisp.com/storage/EFT_ ... sh%201.jpg

[MickeyBoy]

To expand this interesting discussion just a little bit:

Is it possible to transfer IRA dollars directly from a Vanguard mutual fund to the VBS in order to fund up a new IRA mutual fund or ETF from another company ? By directly I mean without going through the taxable sweep money-market account? Or perhaps going through the money-market account is not a real problem? Thanks all.

[livesoft]

An IRA at VBS would have a different sweep account than a taxable account at VBS. That is, one would have 2 sweep accounts each consisting of Vanguard Prime Money Market fund if one had an IRA and a taxable account at VBS. If one added a Roth IRA, then one would have 3 sweep accounts.

I do not believe it is possible to sell a Vanguard mutual fund in an IRA and directly purchase an ETF in VBS. The reasons are not complicated: A mutual fund cannot be "sold" when the market is open. Shares are actually "sold" after the market closes and the NAV has been calculated. At that time, since the market is not open, the ETF cannot be purchased. So at least overnight, the money from the sales of the mutual fund has to sit somewhere so that it can be used the next morning to purchase the ETF shares. We call where the money sits a "cash sweep account" and at Vanguard that is a money market fund.

[MickeyBoy]

Thanks for the information, Livesoft. I just phoned and talked to a Vanguard adviser about how I would go about purchasing shares of a mutual fund from another company with money from a Vanguard traditional IRA. He said that I could move the money to a Prime money-market sweep account, which would be designated as an IRA. Then they would use it to purchase shares in the new mutual fund, which would have IRA status. This would deplete the sweep account. This is rather cumbersome, but clears away my misapprehension that the sweep account might have to have a minimum balance or could not have IRA status.