Mutual Funds as Cheap as ETFs: Vanguard Admiral Shares

If you can meet the minimums and would rather invest in any of Vanguard’s mutual funds instead of ETFs, your average expense ratio would be 0.18 percent for the Admiral shares versus 0.17 percent for the ETFs.

Indexing leader Vanguard, as low as its fund costs are, has always charged larger investors even less. With a certain amount to invest, which was $100,000 until not long ago, you could qualify for Vanguard’s ultra-low-cost Admiral shares.

In October 2010, largely due to competition from ETFs (including Vanguard’s own ETFs), Vanguard lowered the minimum investment in its Admiral shares to a much smaller amount: $10,000 for most Vanguard index funds, and $50,000 for most actively managed funds.

In many cases, you can choose the very same fund in either the mutual fund or ETF class. For example, you can purchase the Vanguard Extended Market Index Admiral Shares mutual fund (VEXAX) or the Vanguard Extended Market Index ETF (VXF). Same fund.

The mutual fund will cost you 0.16 percent a year in management fees; the ETF will cost you 0.16 percent. (If you were to purchase the Investor class of the mutual fund, however, you’d pay 0.30 percent.)

In some cases, the ETF may be a sliver cheaper than the Admiral class mutual fund; in other cases, it’s the other way around. But we’re talking pennies here.

Keep in mind the basic differences between ETFs and mutual funds:

  • ETFs allow you to trade throughout the day, which can be a good thing or a bad thing, depending on whether you use or abuse that privilege. (Vanguard founder John Bogle has numerous times expressed dismay that ETFs encourage investors to trade frequently.)

  • ETFs typically involve trading fees and small spreads, and they may be subject to some small tracking error (nothing to worry much about unless you are trading frequently).

  • Also, Vanguard Admiral shares are not available at all brokerage houses. You can’t get them at Fidelity, for example.

On balance, whether you go with a Vanguard ETF or Vanguard Admiral share mutual fund, assuming we’re talking about two classes of the same fund, is a decision of no great consequence.

Keep in mind that a few favorite Vanguard funds — all in the municipal bond category — have not been issued as ETFs . . . yet. These include the Vanguard Intermediate-Term Tax Exempt Admiral fund (VWIUX), and a number of state-specific municipal funds, such as the Vanguard Pennsylvania Long-Term Tax-Exempt Admiral fund (VPALX) and its New York and Ohio equivalents.

In early 2011, Vanguard was all set to issue a lineup of muni ETFs that may have included versions of the funds listed here, but the firm decided to pull the plug given recent turbulence in the municipal markets. Stay tuned.

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