Updated with more examples. Up until recently, Vanguard has had a long history of keeping the expense ratios of their corresponding ETFs and Admiral Shares mutual funds the same. As of 2019, this is no longer the case. Inside a Vanguard notice, this was quietly added:
The growing size and scale of our funds have helped fuel operational efficiencies that lower our costs to serve clients, particularly ETF shareholders. As a result, the ETF share class of these ten funds is now lower than their Admiral™ share class counterparts.
Initially, I figured it was just a matter of the reporting dates being staggered and the Admiral Shares expense ratio would soon be updated back to being identical. But Allan Roth at ETF.com interviewed a Vanguard spokesperson who confirmed that the expense ratios of ETFs and Admiral Shares will no longer automatically be matched up:
What’s largely driving these changes is the increasing adoption of ETFs by Vanguard investors as their index vehicle of choice, which has enabled us to pass along the cost savings of scale,” Woerth said. “To put some numbers around it, even though ETFs make up only about 20% of our assets, they’ve garnered more than 35% of Vanguard’s net cash flow over the past three years.”
Another reason given is that the mutual fund structure requires more administrative paperwork than ETFs and thus inherently cost more to run.
The most recent expense ratio update as of 4/26/19 is further evidence of this new stance. The expense ratios of 21 different ETFs were dropped, yet the corresponding mutual fund expense ratios all remained the same.
Expense ratio comparison, ETF vs. Admiral Shares (4/30/19):
| Fund | ETF expense ratio | Admiral Shares expense ratio |
| US Total Stock Vanguard Total Stock Market Fund (VTI, VTSAX) |
0.03% | 0.04% |
| US Large (S&P 500) Vanguard 500 Index Fund (VOO, VFIAX) |
0.03% | 0.04% |
| Total World Stock Vanguard Total World Stock Index Fund (VT, VTWAX) |
0.09% | 0.10% |
| International Total Stock Vanguard Total International Stock Market Fund (VXUS, VTIAX) |
0.09% | 0.11% |
| International Real Estate Vanguard Global ex-U.S. Real Estate Index Fund (VNQI, VGRLX) |
0.12% | 0.14% |
| Emerging Markets Vanguard Emerging Markets ETF (VWO, VEMAX) |
0.12% | 0.14% |
| Total US Bond Market Vanguard Total Bond Market Fund (BND, VBTLX) |
0.035% | 0.05% |
| Municipal Bonds Vanguard Tax-Exempt Bond Index Fund (VTEB, VTEAX) |
0.08% | 0.09% |
| Total International Bond Vanguard Total International Bond Index Fund (BNDX, VTABX) |
0.09% | 0.11% |
Should I convert my Admiral Shares to ETFs? Vanguard lets you convert most Vanguard mutual funds held at Vanguard to their ETF version (if it exists) on a tax-free basis. Allan Roth goes on to discuss this question as well. You should first set your tax lot tracking to “SpecID” if you want the cost basis to carry over to every specific share (otherwise they would use average cost basis on all of them).
I always liked the “slow food” feel of mutual fund investing. Your trade doesn’t execute until the end of the day. You just enter your trade whenever, and it gets filled at the end of the next market day. The price is set exactly at net asset value (NAV). There are no high frequency traders involved.
Now, a single basis point (0.01%) is a difference of $1 annually per $10,000 invested. In many cases, the difference may not be worth much attention. However, if you have $1,000,000, that becomes $100 every year. Two basis points is $200 every year. Will the gap widen further?
Sometime this year, I will probably convert my Admiral Shares to ETFs. Vanguard is basically telling me that mutual funds are old technology, and they won’t be spending any more resources on future updates. In the last few years, Vanguard has been aggressively converting people with old mutual fund-only accounts into brokerage accounts.
I’ve kept my primary brokerage account at Vanguard because they offer commission-free trading of mutual funds. However, if I am switching to ETFs, then I can have commission-free trades at many different brokerage firms. I recently opened a new IRA account at M1 Finance because they will give me back free dollar-based transactions of mutual funds (i.e. I can buy exactly $500 via fractional shares) while also adding a free rebalancing service that has Vanguard never offered.
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Last December, I ended moving my Roth ira to M1 Finance and it was the best thing I could have done. It’s easy to setup a portfolio that requires little to no intervention. Three fund portfolio with automatic investing into fractional share ETFs. I am now considering rolling over my IRA to them.
https://m1.finance/tbwezpRYn
ETFs will also make tax loss harvesting on new money more annoying.
Can you articulate why TLH is more annoying with ETFs?
Good article Jonathan.
The reason is because with a fund you can do an exact exchange. ETF you have to do more math and it won’t be exact. Additionally, there is a settlement time with an ETF.
I have been investing almost exclusively with mutual funds for 19 years. Over the past 4 years I’ve set up new accounts with large brokerages and was shocked at the lack of what I considered basic features for mutual fund transactions (inability to specify tax lots in a sale at Merrill Edge, inability to view/edit dividend redistribution settings on E*Trade). Maybe they see that as a feature, rather than a bug?
Any special reason you have a preference for VXUS over VYMI. I’m trying to decide between the two and am drawn to VYMI’s higher yield
Some people like to screen for high-dividend stocks. I think total market cap-weighted indexes are rather elegant, but otherwise I would rather screen by other factors like value or size.
Agreed. High div yield funds will miss out on growth companies.
I believe that current market conditions may favor value vs growth in ways we won’t understand for years (if at all), and total market funds are a valuable diversification strategy, especially over very long time pwriods. Also VXUS cost is 23 bps lower than VYMI.
This article triggered me to double check where I’m invested in my 401k. Turns out I’m in Vanguard’s institutional shares, which still have lower expense ratios than the ETFs.
Jon,
Was looking over at the M1 site. I agree that their platform is very intriguing. Quick question for you. I’m in a unique situation where one of my kids developed an extremely expensive health condition (cancerous brain tumor) which has rendered him disabled. I live in the worst tax state in the nation and Trump made it even worse. Making a long story short, due to the emptying of my rainy day fund and fundraising dollars, we have ran up a bit of debt on 0% credit cards that will not come due until over a year from now as we are cash broke. On the bright side, I am fantastically asset rich. In 7 years, I will own my invest home 700K and my primary home 650K outright. My wife and I have nearly a million saved in 401K/IRA/ROTH too. Current net worth 1.9 million. The difference is mortgage debt and credit card debt at 0%. So how does this relate to M1? Well they claim to be offering borrowing at 4.25%. If I can’t manage to save enough to pay off the 25K in zero percent debt, I would definitely take out one of their 4.25% (I know it’s not fixed, but not worried about the FED raising rates anytime soon) loans. Wish there was a bit more detail on them. My question to you is, would you think they will allow me to use my retirement savings as collateral against the 4.25% loan? BTW, if you are wondering if we currently meet our budgets? This is not the case. Wife took a little too long to return to the workforce after caring for our kid and we are close to getting another $1,250 a month in income when my last car loan (also at 0%) is paid off and we won’t need our caretaker in the Fall (new school for kid with longer hours).
Can you think of a smarter way for us to pay off the credit card debt that is penalty free? Can’t hit the retirement accounts and HELOC or Home Equity Loan is expensive.
Info on my kid here (who is doing great by the way). https://www.northjersey.com/story/news/essex/glen-ridge/2016/05/26/community-aids-glen-ridge-boy-fighting-cancer/94727726/
Thanks Jon
Hi Stuart,
I’m terribly sorry to hear about your situation. My thoughts are with your son and your family this morning. I think what you are asking about is securities-based lending, which is similar to a margin loan but you don’t have to buy stocks with the proceeds. Usually, Interactive Brokers has the lowest rates on margin loans, and I know they have a debit card product that lets you access cash funds at the margin rate. They may also just have a straight cash option, I’m not sure. More info here:
https://www.interactivebrokers.com/en/index.php?f=18069
https://www.interactivebrokers.com/en/index.php?f=26451
Thanks Jon.
Just trying to get out of the hole the most frugal way. You’ve saved us countless dollars forever. Our retirement goals involve Costa Rica, so we need not worry so much. But hating being in my current position. Whoever thought a 100K rainy day fund could go poof?
Why not sell the 700K investment property? I understand that’s not an ideal solution, but your situation is not ideal either. Priorities change and caring for sick family members will require anyone to readjust their financial planning.
Compared to Vanguard, Fidelity has lower fees on almost all of their mutual fund products. I love the competitions 🙂
Thanks for this Jonathan.
And here I thought that Admiral was “special”…silly me.
PS: I used to be such a big Vanguard fanboy. Guess all good things…
With ETFs, you will have a buy/sell spread. Looking at VXUS, it is a penny difference; which based on the price is 1.8bps. Comparing the VWO, the buy/sell spread is about 2.4bp.
For the long term investor the cost of that bid/ask spread gets spread out over many years. So .02% becomes .002% or less.
I believe ETFs also have “DRIP drag.” (This is slightly hypothetical because I’ve never owned Vanguard ETFs.) Mutual funds allow automatic reinvestment on the day after the dividend record date. My reading of Vanguard’s distribution schedule for VXUS is that dividends are paid two days after the record date. The delay is longer if either of those days is a holiday or weekend. If we assume a total average annual yield (dividends plus capital appreciation before inflation) of 7%, 1 day out of the market is 0.019%. I believe if you add in the weekend extensions it goes up to ~.025%. But then we have to remember that only the dividend is out of the market, so then we would multiply by the dividend rate (2.9% for VXUS), which puts the DRIP drag down to 0.0007% of the total investment.
There’s also a slight drag from not being able to purchase fractional shares of ETFs. I would put that more as an inconvenience though. (I like being able to directly invest dollar amounts into funds.)
The DRIP drag would disappear for retirees who are not reinvesting dividends.
Bottom line, these extra expenses of ETFs are smaller than the already small difference in cost between ETFs and Admiral funds.
Any idea what this could mean for the future of Vanguard’s ownership? I know Vanguard is unique in that the firm is owned by the owners of its mutual funds. Does this also apply to ETFs?
Vanguard doesn’t have outside shareholders that siphon profit out of the company for themselves, so I think that applies to the ETFs as well. But the executives do get to pay themselves in amounts that are not disclosed to us mutual fund “shareholders”. They also get to spend as much money on marketing as they want. Vanguard is not perfect, it’s just starting out with less incentive to do things against the interest of their clients. We still need to hold them accountable, though, in my opinion.
I once heard American democracy described as “the worst form of government ever…except for all the others”. I reluctantly put Vanguard in the same category.
So how are you/we (the clients) to hold them accountable when you/we are all planning to leave Vanguard to invest w/ different firms? Then what happens once your money is transferred to new brokerage then when you have to move/sell to another brokerage thus causing expensive taxes (assuming in taxable account). We shouldn’t be too quick to save a few basis points (if even that much) that we forget the bigger picture. “Don’t let the tail wag the dog or penny wise pound foolish” they say.
It’s quite easy to move brokerage firms and keep track of your original cost basis.
One of the most common ways to hold a company accountable is the ability to move your business elsewhere. You could also vote as a shareholder, but we are not shareholders of Vanguard.
Just FYI, Vanguard has NOT converted all the “old” mutual fund accounts to the “new” brokerage accounts. They have tried, and converted many accounts, and pestered, and done the hard sell, but there are plenty of us old-fashioned hold outs who refused to convert. There are several good reasons to keep the old account arrangement, and several good reasons to click the “convert” button. Just wanted to make sure you knew that you can optionally keep the non-brokerage accounts, at least for now.
Thanks, I thought I had saw them make a hard deadline.
Jonathan, can you do a post update when you convert my Admiral Shares to ETFs?
I meant YOUR!
Don’t know why vanguard would care if you hold the funds elsewhere- wouldn’t they prefer it? Less costs for them.
That’s true, and probably part of the reason for this move. But to me it weakens the brand loyalty. I liked having my account at Vanguard where I felt I could get access to the best products and service, formerly their Admiral Shares and customer service reps with the best knowledge of Vanguard products. Now it’s more of a commodity product. Admiral shares are second class, the customer service reps seem to be very new.
If you base a brand ONLY on having the lowest costs, then that’s eventually going to be a hard thing to keep going. It makes me much more likely to shop around, especially if I’m already holding my assets at Fidelity or Schwab.
Very interesting and informative article.
My Roth IRA is with Vanguard consisting of three mutual funds. While one does have an ETF equivalent, the other two do not. Whenever I’ve seen the two mutual funds mentioned it has been complimentary. I do not feel the urge to convert the one to the ETF version of the Admiral Fund to save a few pennies but be pound foolish in having to constantly remember to manually purchase shares when my semi-monthly IRA contribution is made.
As for my taxable investments, I have a couple mutual funds that I’ve had for many years, but my recent investments have been in ETFs via Betterment and M1 Finance.
This may be off-topic but I’ve recently been put off mutual funds because of negligence by the company. One mutual fund company, when I sold shares to invest elsewhere, I learned that they didn’t track cost basis from shares purchased over a decade ago. Naturally, this made tax reporting a major PITA since I no longer have documentation on my purchases from so long ago.
Vanguard has stopped calculating cost basis on one of the mutual funds in my IRA, but that won’t hurt me, per se.
My fear is that if I purchase shares in ETFs over many years via Betterment or M1 Finance, the broker will stop tracking my cost basis, thus making my life a living hell at tax time when I withdraw funds.
Cost basis tracking is required by law now for all stocks bought after 2011 and mutual funds bought after 2012:
https://en.wikipedia.org/wiki/Cost_basis#Reporting
Thanks for the article. I was wondering if there is an ETF version of Target Retirement Funds? Please advise.
No, there isn’t an ETF version of their Target Retirement Funds, but a lot of people wish there was…
You preempted my question! Over the last few months I bit the bullet and decided to convert my Roth IRA to target-date funds. Why are there no target-date ETFs?
I’m not exactly sure, because iShares does have a line of target-date ETFs. I believe the main reason is that the vast majority of target-date owners are inside 401ks and 403bs, and those usually require mutual funds. There is just less demand for it in ETF form. However, I would think there would still be *enough* demand out there, so…. I don’t know.
I’ve had Admiral funds for a while, but considering converting to the corresponding ETFs. When rebalancing and purchasing ETF funds in the future, does one have to pay the SEC transaction fee? I don’t think it’s that large, but just wanted to be aware of any costs that ETFs have that there wouldn’t be when holding in the corresponding index funds.
I’m sticking with Admiral Funds. Too many advantages (which Jonathan described) to give up for one or two basis points.
May I offer a conspiracy theory? Vanguard’s patent for the ETF/mutual fund share class relationship that benefits the tax efficiency of its mutual funds expires in four or five years. Maybe they’re trying to switch users to their ETFs before this neat feature of their mutual funds becomes irrelevant?
As I think about it more, I am considering converting the majority of my admiral shares that I will probably hold for a long time (big unrealized gains too), and then maybe hold a small portion of mutual funds for my new purchases. Honestly, my main worry is that Vanguard will mess up the tax lots. They have not been great in that department for me.
As to the ETF patent, I don’t know if it will be irrelevant, it’s just that others will be able to copy it right?