Vanguard Mutual Funds vs. Vanguard ETFs: What's the Difference?

Vanguard has become a popular choice for investors thanks to its long list of low-cost mutual funds. Vanguard has also added a full menu of exchange-traded funds (ETFs) to its lineup, making the company one of the leading providers for both investment products.

Most Vanguard index mutual funds have a corresponding ETF. Both products are similar in management style and returns, but there are differences that can make each product more appropriate to different investors. Vanguard's products also carry expense ratio differences between mutual fund/ETF pairs that must be examined to make the best choice.

The mutual fund versus ETF debate for Vanguard products in part comes down to how much is being invested. Most Vanguard mutual funds come with $3,000 minimum initial investments, but some can be initiated with a $1,000 investment. Initial investments of $10,000 or more are eligible for the company's lower-cost Admiral share class. These are essentially the same products as the investor-class shares, but they come with cheaper expense ratios. The Admiral class shares tend to outperform their investor class share counterparts.

ETFs carry more flexibility; they trade like stocks and can be bought and sold throughout the day. In many cases, ETFs carry lower expense ratios than their mutual fund counterparts, but they must be traded in a brokerage account. ETF trades could come with brokerage commission fees. Investors must decide between a buy-and-hold strategy or a trading strategy to determine which product may be more advantageous.

The most significant difference between mutual funds and ETFs is the tradeability of shares. Mutual fund shares price only once per day, at the end of the trading day. Investors can place trade orders throughout the day, but the transaction is only completed at the end of the trading day.

The popular Vanguard 500 Index Fund and the Vanguard S&P 500 ETF provide good examples of the cost and trading differences that come with mutual funds and ETFs. Most mutual funds and ETFs in the Vanguard lineup follow a similar pattern.

Both ETFs and mutual funds are treated the same by the IRS in that investors pay capital gains taxes and taxes on dividend income. However, with generally fewer taxable events in ETFs, tax liability will typically be lower. ETF expense ratios are also typically lower than mutual fund fees. Although there are some options for mutual funds that don't require you to invest a lot of money at once, many mutual funds have higher initial investment requirements than ETFs.

[Important: The decision between a Vanguard mutual fund or a Vanguard ETF comes down to trading flexibility and the amount to be invested.]

The Vanguard portfolio of investment choices as a whole is generally considered among the lowest cost and highest rated in the investment marketplace, and these products can make ideal choices for long- and short-term investors.

• Both products are similar in management style and returns, but there are differences that can make each product more appropriate to different investors.
• ETFs carry more flexibility; they trade like stocks and can be bought and sold throughout the day.
• Mutual fund shares price only once per day, at the end of the trading day.