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The Simple Path to Wealth

You are here: Home / Stock Investing Series / Part XVII-B: ETF vs. Mutual Fund — What’s the difference?

Part XVII-B: ETF vs. Mutual Fund — What’s the difference?

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While I touched on it in Part XVII, the differences between ETFs and Mutual Funds is a recurring question here. Perhaps I should have covered it better. Let’s do that now.

We’ll use VBTLX and its ETF version, BND, as examples since those were my choices in my most recent move.

ETFs (Exchange Traded Funds) were created a number of years ago, mostly to facilitate the trading of mutual fund portfolios.

Since this Stock Series and my book are focused on long-term investing rather than trading, I’ve tended to ignore them here. But there are times when they might make sense for you, so let’s take a look.

Here is the most important thing to understand:

VBTLX and BND  both hold exactly the same Total Bond Market Index portfolio

This is also true of VTSAX and VTI, and every other mutual fund and its ETF companion.

Compared to the reasons to chose any given portfolio, the differences between funds and ETFs are minor — another reason I’ve not bothered till now to address them.

But they are not nothing, so let’s take a closer look…

—Because ETFs were designed for trading, you can buy as little as one share. As I write, the price of one share of BND is $87.20. VBTLX, on the other hand, requires a minimum $3000 investment to start. So even if you have less than that amount, you can still own the portfolio with the ETF version.

—On the other hand, you cannot buy fractional shares with an ETF. With a mutual fund you can. If you have, say, $5000 to invest, you can put that exact amount into VBTLX. With BND, at the current price of $87.20, you’d buy 57 shares for $4970.40 or 58 shares for $5057.60.

Correction: In the comments below, reader Jon pointed out that most brokerages now accommodate fractional shares when trading ETFs. Vanguard remains an exception, so at least my math didn’t go tatally to waste. 🙂

—When you buy an ETF, you get “real time” pricing, just like buying a stock. The moment you place your order, you get that moment’s price per share. Mutual funds trade at the end of the day and you get the price of the shares at the market’s close. If you place your order at 10am, it is very likely that the price will be slightly up or down by the time the market closes. Personally, I place my fund orders near the end of the day so I have a better read on what the price will be. This is particularly important with stock funds that tend to be more volatile.

—Mutual funds allow for setting up automatic deposits and withdrawals. (These are great tools) ETFs do not.

—ERs (expense ratios) can be slightly different between funds and ETFs. For instance, VBTLX has an ER of .05%. BND’s is .035%.

—There will be a “bid/ask spread” when buying ETFs. These are small costs, but they are not zero. So this one is mostly just FYI. Exactly what they are is beyond the scope of this post and unimportant for its purposes.

—Some brokerages also charge commissions to buy and sell ETFs, but this is less common than it used to be. But check. Paying commissions in this day and age is silly.

—If you work with a brokerage other than Vanguard and you want to buy a Vanguard fund, there are frequently extra trading charges. ETFs are the better choice in this case. This is true in most cases where you are working with one brokerage and buying the funds of another.

For my international readers, AA40 offers this in the comments:

—“With the not-so-new FATCA (Foreign Tax Compliance Act part of the 2010 HIRE Act), many U.S. mutual fund companies have introduced policies preventing their funds from being purchased by non-U.S. residents, including Americans abroad. While this is true for Mutual Funds, ETFs are still widely allowed.”

That’s pretty much it for the major differences. Other readers have offered some interesting additional ones in the comments below.

For me, funds are the better choice and so I tend to talk in terms of VBTLX and VTSAX. For you? That depends on how you value the differences.

Here are some other resources:

These might be somewhat redundant with this post, but since they explain things a bit differently they will help if you are still confused.

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This is a great podcast episode from Bigger Pockets:

Early Retirement: Asset Allocation and Safe Withdrawal Rates with Michael Kitces

Critical insights into the 4% Rule: It’s origins and how to best apply it.
 

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Here’s everything you need to know about the 4% Rule:

The 4% rule, withdrawal rates and how much can I spend anyway?

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From my friends Billy and Akaisha, who have been retried and traveling the world for decades now, a beautiful story and lesson…

Living the Village Life

********************************************

 

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Filed Under: Stock Investing Series

Comments

  1. Oh my goodness – thank you! I’ve been searching for a down to earth explanation of mutual funds vs ETFs for a while and was never able to find short, easily understandable points for some reason. You’ve come through just like always!

    Reply

  2. Great overview, Jim.

    Some of the differences come into play when tax loss harvesting, as well. Mutual funds have the advantage of allowing for a simultaneous exchange. You sell one fund (say VTSAX) and that money buys another (like the S&P 500 (VFIAX)) and both transactions occur at the end-of-day closing price.

    With ETFs, you first have to sell one fund, then buy another. Depending on the brokerage, you may have to wait for the funds to settle in a day or two before you can use the funds to purchase a replacement fund. If the market goes up in that time, the benefit gained from tax loss harvesting may be wiped out by missing out on stock market gains.

    I have been able to use unsettled funds to purchase another ETF minutes after selling with Vanguard, but I know that’s not a universal rule. Using ETFs also gives you a wider range of low-cost options from a number of companies. When exchanging mutual funds on Vanguard, you’re limited to the simultaneous exchange of one Vanguard mutual fund to another.

    I know you may not be a fan of tax loss harvesting, but it saves me a minimum of $1,000 (many years closer to $1,400) by virtue of a $3,000 deduction from ordinary income tax.

    Some years, prior tax loss harvesting efforts can save me a five-figure sum. For example, I won’t be paying capital gains taxes on the profits from the sale of a small business I had an ownership stake in (a craft brewery) or the sale of some of our lakefront property. I’ve now got carryover losses to offset six-figure gains and decades worth of $3,000 deductions against ordinary income at my marginal tax bracket.

    Cheers!
    -PoF

    Reply

    • No. You can place market orders to buy one and sell the other at night. They will execute simultaneously at the next market open

      Reply

      • That will depend on the brokerage, but that’s a good trick with ETFs as long as they allow you to make purchases with unsettled funds.

        Going from mutual fund to ETF is trickier. You’ll sell the mutual fund at the closing price, but will have to buy with the next day’s opening price. I’ve gotten burned by a big overnight rise doing this with Vanguard.

        Best,
        -PoF

        Reply

        • Another option is the “market on close “ order for ETFs. This is available at discount brokers e.g., Schwab and allows you to purchase a stock/ETF at the closing price. Note the orders must be placed more than 15 minutes before market close. Note also the different settlement times. If you’re selling a mutual fund and buying an ETF, no problem because the ETF has two day settlement and the mutual fund is one day. If you are doing the reverse (in a margin account) you would pay one day’s margin interest. Note also the amounts won’t be exact. I.e., you need to estimate the number of shares to buy that week equal the dollar amount you’ll get from selling so you need to have some extra cash or pad the numbers so you don’t overspend the account.

          Reply

  3. This may be a niche reason, but I like ETFs over mutual funds because I can easily transfer ETFs between brokerages for the purpose of picking up new customer bonuses.

    Reply

  4. Great article!

    Just so I’m clear. If I buy VTSAX say on Wednesday at 2 pm. I get the price at the end of that day??

    I don’t know why but I always thought it was the close of the next day 🙂 Probably should know this.

    Reply

    • Yep.

      You get the price at the end of the day you place the order, assuming the market is open when your order is placed.

      If you place an order after hours or on a day when the market is closed, you get the price at the close of the next trading day.

      Reply

      • So there must be a cut-off time after hours which should decide which day’s price you get?

        BTW another excellent article Mr. Collins, thank you.

        Reply

        • The cut off is when the market closes.

          Place your order before and you get the price at close.

          Place it after and you get the price at the close of the next trading day.

          Reply

          • Just finished your book The Simple Path to Wealth! Great read! Thank you for writing that! My husband and I (38 and 39 years old) are starting our investing lives! Finally! Neither of us grew up knowing a financially savvy person so we had to figure it out on our own after making years of mistakes. We’ve finally cleaned up the messes we had made along the way. We are ready to heed your advice and dive in with Vanguard. We have 2 children in college (which thankfully are already proving smarter than us..working at ups and getting their college paid for by a program they offer), and 2 remaining children at home. My question is: do we open an account directly with Vanguard and invest that route?.. or use some other platform (ie. TD Ameritrade, etc.)?

  5. You can buy fractional shares of ETF’s in exact dollar amounts at all major brokerage houses (except Vanguard) now, including Fidelity. In addition, almost all no longer charge a trading fee. You can buy all Vanguard ETF’s at Fidelity for free.

    Reply

          • Hi, this may be a silly question, but how is the price of an ETF calculated. If the stocks in USA stock market increase, will that definitely also mean that the ETF price will also increase? I imagine they would, but what if ETF become unpopular? The second question I have is whether the stock market, can become decentralised the way Bitcoin has done to money. It would be much appreciated if someone can help me with these two questions please.

    • D’oh!

      Seems the times they are a-changin’ and you are, of course, correct that many brokerages (other than Vanguard) now allow for trading fractional shares.

      However, this is a somewhat recent change and I haven’t been able to verify that this is true of “all major brokerage houses” so it you have a source for that it would be much appreciated.

      Meanwhile, I’ll update the post.

      Thanks Jon, great catch! 🙂

      Reply

  6. Hi Jim, you missed a very important point for your international followers out there, which are many, myself included.
    With the not-so-new FATCA (Foreign Tax Compliance Act part of the 2010 HIRE Act), many U.S. mutual fund companies have introduced policies preventing their funds from being purchased by non-U.S. residents, including Americans abroad. While this is true for Mutual Funds, ETFs are still widely allowed.
    I just thought I should add this piece of information to your great post.

    Reply

  7. Hi Mr. Collins,

    Good to see you posting more often lately! I enjoyed reading your recent jujitsu moves between VTBLX and VTSAX. 🙂

    On asset allocation, I’ve been re-thinking the role of bond funds. Traditionally, bonds is supposed to move in opposite direction of stocks, therefore serve as a counter-balance and make our portfolio less volatile.

    But since the Great Recession, bonds have not been behaving this way for the most part. Most of the time, they seem to move in the same direction as stocks, only at a much milder curve. (Is it because of all the QEs performed by central banks post-2008?) So I very much doubt holding bond funds really helps smoothing the ride. The only benefit left is, it seems to me, bonds have a slightly higher yield than money market funds.

    In the last year or so, before the recent market turmoil, I had gradually shifted my asset allocation to roughly 20% stocks/5% bonds/75% money market, as I was growing increasingly uneasy with the bull market, the stupid tax cuts last year, etc., and thought a correction was long overdue. When the market came down in March, I moved to about 40% stocks/60% money market.

    My long-term allocation target is 5-7 years living expenses, with the rest in stocks. It’s actually quite conservative, no? I haven’t worked for money since quitting my job in late 2015 (although I do quite a bit of volunteering and community stuff), so my thinking is to have enough cash reserve to ride out tough times like now, but otherwise let stocks do the work for portfolio longevity. So far, so good. I’ve been roughly following the 4% rule and the portfolio is up 15%, after 4 years of no active income.

    As always, would love to hear your thoughts and critique. Thanks and be careful and be well!

    Jian

    Reply

    • Hi Jian…

      Nice to see you back. It has been awhile.

      For me, the main role of bonds remains to smooth the ride. The slightly higher interest over cash such as money market funds is a nice plus.

      While you are correct that bonds don’t nessacarilly move in the opposite direction as stocks, they are far less volatile. If you look at a chart comparing say, VTSAX and VBTLX, over most any time period you’ll see this sharply defined. Even in times when bonds are unusually volatile (for bonds, that is). They certainly served me well in that role during this bear.

      They also provide some “dry powder” to take advantage of stock drops, both when I readjust my allocation and if I should chose to increase my stock allocation to take advantage of lower stock prices.

      As for your allocation shifts, you’ve been engaging in market timing. Sounds like it has worked out very well for you so far. But this is a path that most often leads to tears. I don’t recommend it and avoid it myself. But I know you know this. 🙂

      My last thought on it is to suggest you read my post on the 4% Rule linked to in the post above. One of the most stikeing things about the Trinity Study is that with less than 50% allocated to stocks, the 4% Rule begins to break down. Your current 40% stocks/60% money market allocation is not one I would hold for the long term.

      Finally, from one of your old comments, I recall you saying you hate plastic junk. More and more, me too. Recently we have discovered bamboo toothbrushes. You probably already know about them, but it is a new small victory for us. 🙂

      Take care.

      Reply

      • Dear sir,

        You got me there on market timing! 🙂 Guilty as charged, and I knew better yet couldn’t help it. To my defense, I do plan to move to roughly 70% stocks/30% money market (maybe with a little bit of bond) within the next year and keep it that way for the long term.

        Part of the reason for the large cash position is the possibility of buying a property again. I wouldn’t do it on my own at all, but the bf is handy and for some weird reason he actually likes doing renovation projects. I’m starting to dream of a future with a vegetable garden, chickens and fresh eggs, and rabbits, maybe. 🙂

        Amazing memory you’ve got there! I do indeed hate plastic junk, and yes, I’ve been using bamboo toothbrushes too!! Another household wonder I absolutely can’t live without is these pop-up sponges made of vegetable cellulose sold at Trader Joe’s (https://www.traderjoes.com/digin/post/popup-sponges). They are magical! You MUST try them :).

        Cheers! -Jian

        Reply

    • Hi Jian, a question please. You want to share what your research has shown on Quantitative Tightening (if that is even possible) and what impact it will have on these index funds? JL Collins, i would be delighted if you can assist me with this one please

      Reply

    • They are only slightly more tax-efficient when comparing Vanguard to Vanguard as their ETFs are simply another share class of the mutual fund that trades like an ETF. Their structure (unlike other ETF structures) allows them to reduce the embedded taxes in both vehicles.

      In most cases the tax advantage of the ETF is meaningful, as the realized cap gains in the fund structure must be distributed and in a growing fund unrealized gains are accumulated to be distributed later.

      Reply

  9. For American expats contining to use U.S. brokerages (despite thier terms and conditions requiring U.S. residence), some brokerages MIGHT be more lenient on expats buying ETFs rather than mutual funds as the sale of the funds to non-residents is generally prohibited by brokerages due to concerns about compliance with anti-money-laundering laws. (To be clear, it’s the brokerages choosing to do this rather than an actual legal prohibition.) Some expats favor ETFs for this reason.

    Reply

    • To follow up on this, I just discovered a very important advantage of (some) ETFs over mutual funds for American expats in the UK. Just as the US penalizes ownership of foreign mutual funds with PFIC (passive foreign investment company) taxation rules, the UK taxes the sale of foreign mutal funds as regular income, not capital gains, if the funds are not HMRC reporting compliant. The US penalties are worse than those of the UK so it’s better for Americans in the UK to own US mutual funds. Better yet, they can own American ETFs that do meet HMRC reporting requirements such as many from Vanguard (see link below), allowing any capital gains to meet the UK requirement and be taxed at the lower rate, as well as offset with capital losses which is not allowed on gains from non-reporting funds.

      https://www.bogleheads.org/wiki/Vanguard_US_domiciled_ETFs_that_are_HMRC_reporting_funds

      Reply

  10. I’m in South Africa and the platform we use to by index funds is Easy Equity. We can buy ETFs in South African Rand and ETFs in US dollar, but no mutual funds (in south africa they call it unit trusts). Ex we can by the Vanguard US total stock market (VTI) on there but not the VTSAX mutual fund comparison. There is companies in South Africa ex Satrix where you can buy ex S&P500 ETF in South African Rand or S&P500 Unit trust(mutual fund) in South African Rand, but usually the ETFs are cheaper than the comparison mutual fund. So in South Africa it’s mostly ETFs due to the cost, it’s cheaper, but also due to availability, can only buy ETFs in US dollars and ZAR on Easy Equities.

    Thanks for another great post. I enjoyed reading your book.

    Greetings from South Africa.

    Reply

  11. Thank you on the great explanation on etf vs mutual funds.

    Also, the Michael Kitces’ BiggerPockets podcast was worth the 80+ minutes to listen to. I pulled several good bits of info for the nearing retirement person, BUT it’s a good listen for EVERYONE! He explains his concepts in very simple talk. So glad I took the time to listen to it.

    Thank you for your ongoing efforts to educate all of us.

    Reply

  12. Mr. Collins, Ive bought your book and still unsure. I’m 82 years old and I have a handicap grandson who I worry about his future. Would you recommend I could buy Vanguard Index funds S&P 500 VTSAX Admiral Shares Ten Thousand and never look at it again!!! 20 years later for him?

    Reply

    • Hi Margie…

      Investing in stocks is for the long-term. I frequently say, “think in terms of decades.”

      That’s exactly what you are doing when you talk in terms of 20 years. VTSAX is my favorite fund for this.

      The key will be letting it ride untouched regardless of times like these when panic is in the air.

      Kudos for you in thinking in terms of generations…

      https://jlcollinsnh.com/2019/03/03/stocks-part-xxxv-investing-for-seven-generations/

      All the best to you and your grandson. Have fun together in 2040 looking at the results. 🙂

      Reply

    • Margie,

      I will leave the stock advice to The Godfather, but could I also offer a bit of advice? Our son is also disabled and will likely never live independently. We have sought out the advice of attorneys and other advisors and the most important thing that has been drilled into us is that we should NEVER leave any of our assets in his name, otherwise it could disqualify him from other government benefits. We have set up a special needs trust for him with my mom as the current custodian. If you google special needs trust, that might help you get started.

      Reply

  13. Thanks for another educational post Jim. Has been great to keep reading you blog during these interesting times. I’m 24 and have already gifted your book at a couple weddings.

    BiggerPockets Money Podcasts including yours have been on point lately. Biggest takeaway from the last episode was the discussion on risk, not everyone has the fortitude for an all stocks portfolio not matter their situation. Also enjoyed the recent tip from the mad fientist to automate your investing so your brain doesn’t try and time the market.

    Reply

  15. I prefer funds for the reason that Vanguard allows auto-investing on them but not an ETF. This helps me to look at portfolio only when I need to re-balance. In past, I did make a switch to investing in ETFs (VTI) then I used to look at portfolio frequently and wasted valuable time looking at how the portfolio is doing, monitoring its performance weekly. Personally, I realized that auto-investing into VTSAX took emotions out of investing and helped me focus on long term.

    Reply

  16. I like funds in my tax advantaged accounts but ETFs in my taxable accounts. The reason is that funds allow for scheduled purchases, but they tend to throw off all sorts of strange taxable events. I offloaded a REIT fund this year so I never have to do the “Section 1250 unrecaptured gain” worksheet on my taxes ever again. The equivalent REIT ETF just produces ordinary dividends.

    Reply

    • One solution to this is invest in the funds recommended on this blog. Vanguard has a proprietary fund structure that uses their ETFs to eliminate the vast majority of unexpected taxable events. I think the patent on that is nearing expiration – I imagine other fund companies will change to this structure as well once it is legal for them to do so.

      https://investor.vanguard.com/mutual-funds/profile/distributions/vtsax

      And I’d caution you against comparing what are probably 2 different funds. Section 1250 gains happen when the REIT sells a property. I don’t see why an ETF would be any different on passing those through – if one of the REIT’s sells an asset and realizes a capital gain and doesn’t do something like a 1031 exchange, depreciation recapture is owed.

      Plus, depreciation recapture is taxed at ordinary income rates up to 25%, and you’re saying you’d rather pay ordinary income rates with no cap?

      Vanguard’s REIT index fund and corresponding ETF show the same distributions, which makes sense since they hold the same portfolio. So I’m thinking the ETF and particular REIT fund you are comparing hold different assets.

      Reply

  17. Hey Jim,
    Aussie here, been following simple path for a while now but I wanted to know your thoughts on things like currency risk and diversification for non-US residents?

    Is 100% VTS still a good option for an Australian or should I look at VGS or VDHG? Getting a little confused with this and wanted your opinion.

    Hope you’re well.

    Reply

  18. Thanks for the post, great explanation as usual!

    Might worth mentioning that in Europe the Vanguard ETFs come in two distinct flavours: distributing and accumulating (for example VGWL and VWCE in XETRA).

    The distributing ETF pays dividends while the accumulating one reinvests the income and it will be reflected in the price.

    Reply

  19. Finance newbie here. If I want to buy a house in a couple years, what’s the best place to save my money? Savings account, CD, under the mattress? Or even in MM or 100% stocks and pay capital gains? Thanks Mr. Collins

    Reply

  20. I read your post on how great HSAs are. My follow up question is whether you would contribute to VTSAX or a VTI prior to a HSA. Thank you! Thank you!

    Reply

  21. I’ve always preferred buying Vanguard mutual funds over ETFs because of the auto-investing and fractional share purchase features. However, I just opened an account with M1 Finance which seems to solve those problems with Vanguard ETFs. Still not a perfect solution in some regards, but they have a unique portfolio management process that fits well with my long-term buy and hold style.

    Reply

  22. I stumbled across your site a few days ago after watching your Google speech and absolutely love it. Everything you say really resonates with me. I seriously need some guidance though. My wife and I are in our mid-thirties. We have 2 kids. I have a traditional 401k that I consistently contribute 15% of my income to. My wife has a Roth IRA that we’ve been maxing out as well. But, we are sitting on about $250k in cash savings, and have zero debt. I would really like to put some of this money to work for us, but at the same time, we’ve also been getting the itch to buy a home to call our own. So, I’m not sure what to do. Houses in our area of NY are pretty pricey, most of them need a lot of work/updating, and the property taxes in our area (Long Island) are extremely high. We’ve considered moving to escape the high cost of living here, but we often pull back so we can raise our kids close to family. We’ve been fortunate enough to rent from family at a bit of a discount which has allowed us to save more money, but realize this situation won’t last forever. Buying a house here I can easily see us spending 100-150k between down payment, closing costs, and repairs within the first year. It isn’t out of the ordinary to see property taxes of ~$10k or higher even on a small house worth as low as $350k. Our income before taxes is probably around $120k/year as my wife works part time for now to help raise our 2 young kids. So, my questions… would you touch the $250k, or would you continue to save and sit on it? Would you get the hell out of Dodge and go somewhere more affordable where every house isn’t a HUGE money-pit? If you did tap into that money, where would you put it? If you bought a house, what % of your income would you be willing to spend toward that house on a monthly basis? I’m not sure if I should continue saving for a huge down payment on a house here, but not sure I want to spend more time saving just to drop that kind of cash on a home. It just seems kind of ridiculous that we’ve been responsible with our money. We’ve spent over a decade saving. We’ve stayed out of debt. We’ve worked our asses off to get here and to think that even in our current situation, if we bought a house here, we wouldn’t really be that comfortable. And if we do invest some of our savings, I’m not sure if I should open a brokerage account and park some money in an index fund, or open a Roth IRA for myself… some income now outside of a retirement account would be nice, but the tax advantages of a Roth are also appealing. Your thoughts? I know I threw a lot out there lol. Any input is appreciated. Thanks in advance.

    Reply

  23. Here’s another difference between ETFs and mutual funds for those with automated RMDs (required minimum distributions). In my wife’s inherited IRA, the annual RMD was fully automated when invested in mutual funds–the right amount was automatically sold and distributed. However, once I changed the investment to ETFs, I had to manually sell enough to fund the RMD before the distribution was paid. I only discovered this when I noticed the RMD was late and called to inquire. I’m now switching back to mutual funds so that this will be fully automated and my wife won’t have to deal with it each year if something happens to me and she has to manage the finances on her own.

    Reply

  24. I’m more curious to why you personally choose index fund over ETF. Can you talk a little bit more about that?

    Reply

  25. Very informative post.

    I want to point out that it is also possible to set up automatic savings in ETFs, although it is not as common. My online broker here in Norway (Nordnet) allows you to automatically buy up to 4 ETFs every month without paying commissions. The transfer is done on the same date every month, and you will get whatever is the going market price at the moment.

    Reply

  26. Fantastic explanation! I also recently found out about being able to buy fractional shares of ETF’s which is very exciting. No more waiting to buy a full share.

    Btw, I’m starting a podcast soon about financial independence and would love to have you as a guest on the show. I think it would be great to discuss your stock series, book, and the power of F-You Money. Let me know if you’re interested.

    Thanks!

    Reply

  27. Hi Jim,
    I need your advice, I’m a teacher near my retiement and I have a lot of anxiety getting back to class this fall. My wife and I both have asthma and other health issues. I’m scared to bring this new virus home to my wife and kids. I have listened to your advice and we have saved up F U money to last us for another five years of expenses. If I quit now I will not will be able to retire on time and it might take me a few years to find another job. I had read that you had stopped working for a few year swhen you saved up for your F U money .I’m thinking of doing the same thing.We both have worked hard as teachers to save this money but I feel like we don’t have any other option at this time. Do you think this is a rational thing to do ? Is this the best time to use F U Money?
    Thank you so much for your help and advice.
    Mo

    Reply

  28. This is a great topic to explore, especially since so many things are available online now. My read is that ETFs give new/small-time investors greater flexibility–lower investment minimums, real-time trading, the convenience of quick online access, etc. [Though I should note that there’s online access to traditional funds, too]. But the flip side is that ETFs are often a little more expensive (at least from the ones I’ve seen) than their traditional counterparts.

    But neither ETFs nor traditional mutual funds are a bad option, at least in principle.

    Reply

  29. For an 18-year-old investor that has about $2500, is it recommended to invest in the ETF version of VTSAX (VTI, if I am not mistaken) for now and move the money to VTSAX once there is at least $3000? Thanks.

    Reply

  31. I have pretty much the same comment as Purple: It was nice to see an explanation of ETFs and how they vary from mutual funds. Not needing to have those minimums is really nice for folks just starting out and are probably are what allow a company like Wealthfront to operate as it does. I do wish they’d adopted a different naming convention – maybe adding e to the beginning of the corresponding fund’s designation to make it easier for people to match ETFs with their correlating mutual funds.

    Anyway, great explanation as always!

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  33. This is my first time reading this blog, but I recently finished the Simple Path to Wealth and cannot say enough good things about it. I’m in ETFs in my taxable account and mutual funds in all others (all index funds in both vehicles of course). The biggest benefit of ETFs for me is no capital gain distributions that create tax noise, but if you if you simply like Mr. Collins recommends in his book, capital gain distributions from one or two total market/bond funds would be significant anyway and less noise than you would have in trading multiple ETFs. The biggest disadvantage of ETFs is no automatic investments and my brokerage firm still does not allow the purchase of fractional ETF shares. I agree that there is little difference between the two, but think the automatic investment option of mutual funds outweighs any relative advantages of ETFs for most people from a practical perspective (as long as you keep it simple). I have ETF positions that would be expensive to exit now, but if I had it to do over again, I would invest exclusively in mutual funds. Again though, the mutual fund/ETF decision in a vacuum is not going to make or break anyone.

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  34. I’m pulling my hair out trying to figure out why I should do an index fund over an ETF if the expense ratios are higher for the index. If I have the minimum for VTSAX shouldn’t I put it in VTI ?

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    • My take (which is worth what you are paying for it) is that the difference is too small to worry about. The ability to automate investments and purchase fractional shares in VTSAX far outweighs the miniscule expense ratio difference from a practical perspective. If your brokerage allows automated investment and fractional share purchases in ETFs, however, I would invest in VTI.

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  35. I recently read an an analysis by Bridgewater (Ray Dalio’s firm) that showed there is great downside risk to bonds/bond funds based on risk of rising interest rates since we are near zero and have come to the end of long bond fund bull market of declining interest rates. If rates go to -1% he showed a possible upside 17% gain with unlimited downside risk if rates rise. With this in mind where does one invest one’s
    “safe” money? He was saying that bonds as a hedge to risk with stocks was no longer the case. VBTLX is -2.29% YTD. https://www.bridgewater.com/grappling-with-the-new-reality-of-zero-bond-yields-virtually-everywhere

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  36. Hi Jim,

    Vanguard UK charges you 7.5£ for placing a limit order for ETFs. Do you think it makes sense to use this when buying large amounts of shares?

    Also, not related to the article but it would be really great if you added the published date of each article in your blog. 🙂

    Thanks!

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  37. I am a new learner in financial insurance or what do you call that. So Mutual funds allow for setting up automatic deposits and withdrawals? why it allows you for automatic withdrawals? doesn’t make sense to me, I thought it has a exact time to withdraw or use unless when you sell that to the investor. Sorry I am a newbie

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  38. I just spent 30 minutes on the phone with a representative from Vanguard and I still don’t understand the difference between a mutual fund account and a brokerage account. I’m opening the account to rollover my old 401Ks and I’d like to make long-term investments per the guidance in your book. What kind of account should I be opening?

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  39. Hi, I am about to commit to VTI ETF for the rest of my life. I have done enough research. My only question is that I am UK based and I was wondering if there is anything else I need to consider, which a US national wouldn’t consider

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  40. I’ve been exploring investing options because Vanguard is not able to create new accounts for people right now. I guess this is a known issue and has been going on for a few months without resolution or an eta when this will be fixed. Does anyone have suggestions on the next best option? I was thinking Robinhood for VTI. Need to set up my Roth IRA though and not sure where to go.

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