When to choose Vanguard etf or mutual fund (VTI vs VTSAX)

by linlaoda

There have been many posts on this in the past, but I hope to give my look on when to choose one over the other

The most important factors are:

  1. Automatic investment convenience: If you want to be able to automatically invest a certain amount of money every month, you should choose mutual funds. Currently Vanguard does not support this with ETFs (But I bet it will be available in the future, maybe)
  2. Intra-day trading: If you want to be able to buy and sell shares within the trading session, you should choose ETFs. Or if you wanted to do any sort of transactions that you’d be able to do with a stock (short, limit order, etc) then you should also choose the ETF. The mutual fund only buys the shares at end of market close (closing price = buying/selling price). A corollary: if you want to purposely not allow yourself to buy or sell shares within a trading session, buy the mutual fund!

Common misconceptions

  1. Dividend reinvestment: Pretty much the same! At Vanguard you can set your ETF’s to automatically reinvest dividends and it will even purchase partial shares. (in fact, you can automatically reinvest dividends at probably every major brokerage firm)
  2. expense ratios: Should be exactly the same (basically 0 or 0.05%) since both are passively managed funds.
  3. Taxes and Capital gains: VTI is not more tax efficient than VTSAX (usually mutual funds distribute capital gains). I don’t know the specifics but it’s something about Vanguard being able to distribute mutual fund capital gains as ETF or something (www.bogleheads.org/wiki/ETFs_vs_mutual_funds)

;tldr the main factors in determining VTI or VTSAX for the ordinary investor is automatic investment and intraday trading. It depends which one is most important to you.

Disclaimer: Consult your financial professional before making any investment decision.