No transaction fee for Vanguard ETFs?

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danielc
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No transaction fee for Vanguard ETFs?

Post by danielc »

Hello,

I was looking at the brokerage fees at Vanguard and it looks like you can get Vanguard ETFs without any commission. That sounds too good to be true. Why would anyone use investor class mutual funds when they can get the ETF with a lower expense ratio and no transaction fee?

In addition, ETFs would allow me to get around the $3,000 minimum for most Vanguard funds ($1,000 inside an IRA). The only downside I see to ETFs is that you have to buy them in integer units. But with most ETFs in the $40-$100 region, I just don't see that being an issue.

Have I missed something?
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Re: No transaction fee for Vanguard ETFs?

Post by livesoft »

See also: https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

Many people have anxiety with ETFs. When they buy, they can almost instantly see if they paid more than someone a few minutes later, so they have regrets; when they sell they can see that they sold for too little a few minutes later. This sets up the feeling of regret that they don't like. Also many people have a problem with setting a limit price and fear using market orders. There are other behavioral issues with ETFs for them.
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Re: No transaction fee for Vanguard ETFs?

Post by Longdog »

There are some minor differences between the two. For example, you can easily set up automatic purchases into mutual funds, but not ETFs - for those you need to actively make the purchase, either a market order or limit order. With mutual funds, you always get the price at the end of the day; with ETFs, you can buy or sell at any time during the trading day, so there could be misguided temptations to trade. I have both mutual funds and ETFs. For the one I am actively contributing to (Total Market), I use the admiral shares mutual fund for the “set and forget” convenience of automatic purchases. For another which I have a relatively small amount invested which was a one time purchase, I used the ETF for the reason you mentioned.

Like I said, minor differences but could be enough to drive a decision one way or the other.
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Re: No transaction fee for Vanguard ETFs?

Post by Tamarind »

Automatic purchases, and once you have enough to use admiral shares for everything the ER is the same.
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Re: No transaction fee for Vanguard ETFs?

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danielc wrote: Mon Dec 11, 2017 3:08 am Hello,

I was looking at the brokerage fees at Vanguard and it looks like you can get Vanguard ETFs without any commission. That sounds too good to be true. Why would anyone use investor class mutual funds when they can get the ETF with a lower expense ratio and no transaction fee?

In addition, ETFs would allow me to get around the $3,000 minimum for most Vanguard funds ($1,000 inside an IRA). The only downside I see to ETFs is that you have to buy them in integer units. But with most ETFs in the $40-$100 region, I just don't see that being an issue.

Have I missed something?
Many people are investing with 401k/403b retirement funds, in accounts set up by employers.

In our case, we are only permitted to use mutual funds.

No ETF's, no CD's, etc.
But at least we are able to use Vanguard mutual funds, plus mutual funds from an incredible choice of other fund family funds.

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Re: No transaction fee for Vanguard ETFs?

Post by shess »

danielc wrote: Mon Dec 11, 2017 3:08 am I was looking at the brokerage fees at Vanguard and it looks like you can get Vanguard ETFs without any commission. That sounds too good to be true. Why would anyone use investor class mutual funds when they can get the ETF with a lower expense ratio and no transaction fee?
I began using ETFs back before Vanguard released VIPERs. I liked them for their stock-like attributes. I could easily just use specific-lot identification when selling. I wasn't locked down to provider, I could use any brokerage. I could take margin loans against them. I could easily transition between positions in the middle of the day (mutual funds have transfers, but what if you want to tax-loss harvest while shifting ratios in a portfolio? With an ETF, I could just sell, and make obvious calculations using the proceeds). At that time I preferred ETFs to mutual funds in all cases.

Today, I'm partly over that. I use ETFs in taxable accounts for some of the reasons above. I dislike DRIP-type features in taxable accounts because I like to minimize bookkeeping (I let all dividends accumulate for a bit until I can make a single bigger purchase), and I like having nice round holdings. I use mutual funds in tax-deferred accounts because there's no external penalty to doing so (no margin loans there, no tax penalty for selling if I move providers). Also, mutual funds make it easy to have your tax-deferred account 100% invested with all distributions reinvested.

ETFs do have bid/ask. At least with Vanguard, in most cases I think the mutual fund is easier to handle and has no financial penalty. There are a few cases where the ER differs materially between ETFs and mutual funds, but over time they're tending towards the same values, so I'm not sure how worthwhile it is to make decisions based on that.
danielc wrote: Mon Dec 11, 2017 3:08 am In addition, ETFs would allow me to get around the $3,000 minimum for most Vanguard funds ($1,000 inside an IRA). The only downside I see to ETFs is that you have to buy them in integer units. But with most ETFs in the $40-$100 region, I just don't see that being an issue.
IMHO, if your assets are at that level, you shouldn't be invested in more than a few positions in the first place. It may be that you can eke out an additional 25 BP or so of alpha based on tax-efficient asset placement or something, but 25BP on $3k is maybe $8, which is poor payback for managing additional complexity. YMMV, I just avoid adding complexity until the gain is juicy enough for me to make the ongoing time commitment.
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Re: No transaction fee for Vanguard ETFs?

Post by nisiprius »

danielc wrote: Mon Dec 11, 2017 3:08 am Hello,

I was looking at the brokerage fees at Vanguard and it looks like you can get Vanguard ETFs without any commission. That sounds too good to be true. Why would anyone use investor class mutual funds when they can get the ETF with a lower expense ratio and no transaction fee?

In addition, ETFs would allow me to get around the $3,000 minimum for most Vanguard funds ($1,000 inside an IRA). The only downside I see to ETFs is that you have to buy them in integer units. But with most ETFs in the $40-$100 region, I just don't see that being an issue.

Have I missed something?
You haven't missed anything. You can stop reading here.

Of course, at Vanguard there is no fee for the mutual fund purchase, either.

As to "why would anyone use investor class mutual fund" instead of an ETF, I would point out that if you are talking investor class, then presumably you have less than $3,000 to invest. So, if you do the math, the different in cost between, say... let's pick one that is not one of the very cheapest... VGTSX at 0.18% ER versus VXUS at 0.11%... that's an 0.07% difference, which on $3,000 amounts to $2.10/year.

Against that, you have to weigh the relative convenience/inconvenience of ETFs versus mutual funds and that's a personal decision for everyone. Just to pick one point that doesn't seem to get much discussion: if you work, you pretty much need to place your ETF order during work hours, and in practice that often means keeping an eye on the ETF to decide when to push the "buy" button; and the ETF mavens say not use market orders, so if it's a limit order, after you push "buy" you have your attention slightly distracted for ten or fifteen minutes waiting to see if the order went through.

I'm not saying mutual funds are better. I'm saying a sane person could have a personal preference for the mutual fund and feel that $2.10 was not an unreasonable "convenience" fee. In the other direction, if you are experienced with stock trades, comfortable with them, and are accustomed to trade stocks when the stock market is open, there probably isn't any reason to buy the mutual fund rather than the ETF.*

One final note. What matters with expense ratios is not the ratio, it's the difference. The difference between 1.25% and 0.25% is 1.00%; that's huge. The difference between 0.25% and 0.05% is 0.20%; it's not nearly as important. When John C. Bogle started talking about the "cost matters hypothesis," I think the typical active mutual funds people liked to invest in, the Magellans and so forth, had expense ratios up in 1.20%, 1.40% territory, while Vanguard index funds were down there in 0.30% territory. That really matters. If you're an expense absolutist who think it's really important to pick up pennies from the sidewalk, I can't say the difference between 0.18% and 0.11% doesn't matter at all, but in a world where indexes jink up and down 1% every day, I personally find it hard to get very emotional about 0.07%. It's sort of like a sale sign, "Buy 1,428, get one free."

*I am thinking here of big, mainstream, heavily traded ETFs like Vanguard's. I am not going to reproduce this chart, showing what happened to VTI (Vanguard Total Stock Market Index ETF) during the 2015 "Flash Crash" because I think it is completely irrelevant and I would never engage in irresponsible fearmongering. Oops, too late. Seriously, ignore this chart except that you should know that "stuff happens." I don't think one single person on this forum reported being affected by the flash crash. And stuff happens in mutual funds, too, and, again, I don't think anyone in this forum reported being affected by the collapse of the Third Avenue Focused Credit mutual fund.

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Last edited by nisiprius on Mon Dec 11, 2017 11:04 am, edited 4 times in total.
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Re: No transaction fee for Vanguard ETFs?

Post by rgs92 »

Fidelity sells many ETFs for zero commission, about anything anyone could want. You can buy or sell the shares for free (as long as you are not doing frequent short term trades in and out of the same ETF). Schwab also does the same.
No-commission trades (within various over-trading limits) are now common.
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Re: No transaction fee for Vanguard ETFs?

Post by nisiprius »

rgs92 wrote: Mon Dec 11, 2017 10:55 am Fidelity sells many ETFs for zero commission, about anything anyone could want. You can buy or sell the shares for free (as long as you are not doing frequent short term trades in and out of the same ETF). Schwab also does the same.
No-commission trades (within various over-trading limits) are now common.
However, these "commission-free" ETF lists are promotional and subject to change, and when Fidelity expanded theirs a few years ago, the new list was probably better overall but they did drop some that had previously been commission-free. A Google search says it was in 2013, and they added 45 and removed 10.

Of course, there's no guarantee that Vanguard ETFs will always be commission-free at Vanguard.
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Re: No transaction fee for Vanguard ETFs?

Post by danielc »

Thanks to everyone for all the feedback. Yeah, I had forgotten about all the hassle of ETFs. I think what I'm going to do is just use ETFs temporarily while I build enough money to gradually move each allocation to mutual funds.

nisiprius wrote: Mon Dec 11, 2017 10:45 am As to "why would anyone use investor class mutual fund" instead of an ETF, I would point out that if you are talking investor class, then presumably you have less than $3,000 to invest.
My thinking was that if my goal is 20% bonds, I'd need to have $3,000/0.2 = $15,000 sitting in a bank account before I can even get started. $50k if we are talking of admiral shares. One other option I forgot about is that I could just park the money in a fund-of-funds, like the "target date" funds, until I amass enough to do the individual allocations. So then I could start with only $3k.

nisiprius wrote: Against that, you have to weigh the relative convenience/inconvenience of ETFs versus mutual funds and that's a personal decision for everyone. Just to pick one point that doesn't seem to get much discussion: if you work, you pretty much need to place your ETF order during work hours, and in practice that often means keeping an eye on the ETF to decide when to push the "buy" button; and the ETF mavens say not use market orders, so if it's a limit order you have your attention slightly distracted for ten or fifteen minutes waiting to see if the order went through.
Yeah. I forgot about that too.

nisiprius wrote: *I am thinking here of big, mainstream, heavily traded ETFs like Vanguard's. I am not going to reproduce this chart, showing what happened to VTI (Vanguard Total Stock Market Index ETF) because I think it is completely irrelevant and I would never engage in irresponsible fearmongering. Oops, too late. Seriously, ignore this chart except that you should know that "stuff happens." I don't think one single person on this forum reported being affected by the flash crash.

Image

!!!!!! Yeah. I'm glad I don't look at the market.
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Re: No transaction fee for Vanguard ETFs?

Post by danielc »

rgs92 wrote: Mon Dec 11, 2017 10:55 am Fidelity sells many ETFs for zero commission, about anything anyone could want. You can buy or sell the shares for free (as long as you are not doing frequent short term trades in and out of the same ETF). Schwab also does the same.
No-commission trades (within various over-trading limits) are now common.
Wow. I don't think that was the case last time I was investing. About 10 years ago I was living in Europe and the only way I could get access to diversified low-ER index funds was to pay E*Trade a ~$6 trading fee to get me a Vanguard ETF.
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Re: No transaction fee for Vanguard ETFs?

Post by triceratop »

danielc wrote: Mon Dec 11, 2017 11:16 am
nisiprius wrote: *I am thinking here of big, mainstream, heavily traded ETFs like Vanguard's. I am not going to reproduce this chart, showing what happened to VTI (Vanguard Total Stock Market Index ETF) because I think it is completely irrelevant and I would never engage in irresponsible fearmongering. Oops, too late. Seriously, ignore this chart except that you should know that "stuff happens." I don't think one single person on this forum reported being affected by the flash crash.

Image

!!!!!! Yeah. I'm glad I don't look at the market.
No, the takeaway is to use limit orders and to look at the market to help place those limit orders.
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Re: No transaction fee for Vanguard ETFs?

Post by livesoft »

The takeaway is to take opportunities when they appear and to buy ETFs when there is a flash crash. :twisted: So I think the chart posted by nisiprius is a very strong reason to use ETFs.
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Re: No transaction fee for Vanguard ETFs?

Post by nisiprius »

livesoft wrote: Mon Dec 11, 2017 12:24 pmThe takeaway is to take opportunities when they appear and to buy ETFs when there is a flash crash. :twisted: So I think the chart posted by nisiprius is a very strong reason to use ETFs.
Is there a known example of someone actually managing to buy VTI, or indeed any heavily affected ETF, during the flash crash? And were they allowed to keep their profits or were those transactions unwound along with the others?
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Re: No transaction fee for Vanguard ETFs?

Post by triceratop »

danielc wrote: Mon Dec 11, 2017 11:19 am
rgs92 wrote: Mon Dec 11, 2017 10:55 am Fidelity sells many ETFs for zero commission, about anything anyone could want. You can buy or sell the shares for free (as long as you are not doing frequent short term trades in and out of the same ETF). Schwab also does the same.
No-commission trades (within various over-trading limits) are now common.
Wow. I don't think that was the case last time I was investing. About 10 years ago I was living in Europe and the only way I could get access to diversified low-ER index funds was to pay E*Trade a ~$6 trading fee to get me a Vanguard ETF.
It's even better than that. Many of us pay no commissions on any ETF or stock trade. This requires substantially more assets than you have now, but in several years you may want to think about that.

Of course, I still mostly buy Vanguard and iShares ETFs anyway.
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Re: No transaction fee for Vanguard ETFs?

Post by mega317 »

The problem with a plan to start with ETFs and then move to mutual funds, in a taxable account, is you could have capital gains on which you will have to pay taxes to change funds.
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Re: No transaction fee for Vanguard ETFs?

Post by triceratop »

nisiprius wrote: Mon Dec 11, 2017 12:29 pm
livesoft wrote: Mon Dec 11, 2017 12:24 pmThe takeaway is to take opportunities when they appear and to buy ETFs when there is a flash crash. :twisted: So I think the chart posted by nisiprius is a very strong reason to use ETFs.
Is there a known example of someone actually managing to buy VTI, or indeed any heavily affected ETF, during the flash crash? And were they allowed to keep their profits or were those transactions unwound along with the others?
Were a substantial amount of the flash crash trades indeed unwound? I don't remember reading about that.
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Re: No transaction fee for Vanguard ETFs?

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nisiprius wrote: Mon Dec 11, 2017 12:29 pm Is there a known example of someone actually managing to buy VTI, or indeed any heavily affected ETF, during the flash crash? And were they allowed to keep their profits or were those transactions unwound along with the others?
livesoft reported on this previously:
viewtopic.php?p=729920#p729920

viewtopic.php?p=734619#p734619
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Re: No transaction fee for Vanguard ETFs?

Post by triceratop »

A number of Bogleheads made money on the August 2015 crash too.

But mutual fund diehards continue to say volatility is only a problem for ETF investors, as if there is no risk in the snapshot price they receive. It's an amusing problem; I admit behavorially the constantly-changing prices in the market were at first discomfiting, until one realizes that happens with mutual fund investments too. So there is nothing to worry about.
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Re: No transaction fee for Vanguard ETFs?

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danielc wrote: Mon Dec 11, 2017 3:08 am Hello,

I was looking at the brokerage fees at Vanguard and it looks like you can get Vanguard ETFs without any commission. That sounds too good to be true. Why would anyone use investor class mutual funds when they can get the ETF with a lower expense ratio and no transaction fee?

In addition, ETFs would allow me to get around the $3,000 minimum for most Vanguard funds ($1,000 inside an IRA). The only downside I see to ETFs is that you have to buy them in integer units. But with most ETFs in the $40-$100 region, I just don't see that being an issue.

Have I missed something?
At that level of investment the dollar value value from the expense ratio difference is trivial. On a $3,000 investment saving 0.10% in expense ratio amounts to just $3 per year.

Trading mechanics on mutual funds are more convenient. You can buy one or sell fractional shares, you don't need to use limit orders, and it's easy to set up automatic investment and automatic reinvestment of dividends and gains.
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Re: No transaction fee for Vanguard ETFs?

Post by livesoft »

ruralavalon wrote: Mon Dec 11, 2017 4:12 pm . On a $3,000 investment saving 0.10% in expense ratio amounts to just $3 per year.
This makes me wonder why Vanguard even bothers having the "investor" share class. They should have only the Admiral share class for everybody because of the all the costs to run 2 different share classes (more web pages, more ink on prospectuses, more training of customer service reps) and so on all for a measly $3 to $9 a year. What a waste!
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Re: No transaction fee for Vanguard ETFs?

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livesoft wrote: Mon Dec 11, 2017 4:29 pm
ruralavalon wrote: Mon Dec 11, 2017 4:12 pm . On a $3,000 investment saving 0.10% in expense ratio amounts to just $3 per year.
This makes me wonder why Vanguard even bothers having the "investor" share class. They should have only the Admiral share class for everybody because of the all the costs to run 2 different share classes (more web pages, more ink on prospectuses, more training of customer service reps) and so on all for a measly $3 to $9 a year. What a waste!
I've wondered about this too. I haven't sat down and tried to do the math, but I have considered a potentially relevant example with Vanguard's muni funds.

High Yield TE Admiral 0.09% Investor 0.19% ($25.0 billion)
Short Term TE Admiral 0.09% Investor 0.19% ($15.1 billion)
Limited Term TE Admiral 0.09% Investor 0.19% ($25.0 million)
Inter Term TE Admiral 0.09% Investor 0.19% ($56.0 billion)
Long Term TE Admiral 0.09% Investor 0.19% ($10.9 billion)
CA IT TE Admiral 0.09% Investor 0.19% ($12.9 billion)
CA LT TE Admiral 0.09% Investor 0.19% ($3.4 billion)
NJ LT TE Admiral 0.09% Investor 0.19% ($1.9 billion)
NY LT TE Admiral 0.09% Investor 0.19% ($4.4 billion)
PA LT TE Admiral 0.09% Investor 0.19% ($3.2 billion)
Tax-Exempt Bond Index Admiral 0.09% Investor 0.19% ETF 0.09% ($2.0 billion, but $1.9 billion is in ETF)

But compare

MA LT TE 0.15% (no Admiral shares) ($1.7 billion)
OH LT TE 0.15% (no Admiral shares) ($1.2 billion)

The regular muni funds were 12 bp and 20 bp a few years ago, while MA and OH were 16 bp. So however Vanguard is assigning costs, the muni funds with no Admiral shares end up in the middle. (The MA and OH funds are not called Investor Shares, but they do have $3,000 minimums.)
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