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Updated with more expense ratio gaps. 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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Confirmed: Vanguard ETFs Now Permanently Cheaper Than Admiral Shares from My Money Blog.


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