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Commission-Free ETFs: Vanguard Back on Top

Tuesday, May 4, 2010   

I recently wrote about the significance of commission-free ETF offerings at Schwab and Fidelity.  For investors who make small, regular contributions to their accounts, ETF commissions had previously been a deal-breaker, making index funds the default choice for building a long-term investment plan.  In the wake of these announcements, it seemed as though Vanguard, the historical leader in low-cost investment products, had fallen behind the competition.  Well, don’t call it a comeback, but today’s unveiling of commission-free ETF trades and other significant cost reductions clearly re-establishes Vanguard as the low-cost investing leader.  In addition to receiving commission-free trades on 46 ETFs, Vanguard brokerage customers can now take advantage of $7 trades on other equity products, including non-Vanguard ETFs.  Voyager Select customers with over $500k in Vanguard funds will enjoy $2 equity trades.

For index investors who had previously been on the fence about transitioning to ETFs, this development could push them over the edge.  ETFs generally have lower expense ratios than comparable index funds because they trade through brokers on an exchange, alleviating some of the administrative requirements borne by mutual fund companies.  When executing trades, ETF investors must consider the cost of the bid-ask spread, but without commissions, many buy-hold-rebalance investors will enjoy lower overall costs of ownership with a portfolio of low-cost ETFs.  To compare the costs of owning a Vanguard index fund versus a Vanguard ETF, check out this comparison tool.

If you’re thinking about making the switch from index funds to ETFs, be sure to consider the added burden of ETF trade execution.  An ETF’s market price can deviate significantly from the underlying value of its holdings, so it’s a good idea to compare an ETF’s Intraday Indicative Value (IIV) to its market price before executing a trade.  You should also avoid making trades during especially volatile times, like the first and last 30 minutes of the trading day.  Finally, and most importantly, don’t let the ETF trading process distract you from a disciplined, long-term investing approach, as indexing advocates Jack Bogle and Warren Buffett have warned.  If investors can integrate commission-free ETFs into their asset allocation plans without skipping a beat, today’s announcement from Vanguard is an extremely positive development.

As you can see below, I’ve updated my chart of commission-free ETFs, organized by asset class.

Asset ClassVanguard
Index
Fund
Schwab
$0 Commission
ETF
iShares
$0 Commission
ETF
(w/Fidelity)
Vanguard
$0 Commission
ETF
Other
ETF
US Equity - Total Stock MarketVTSMXSCHBIWVVTITMW
US Equity - Small Cap ValueVISVXSCHV+SCHAIJS, IWNVBRDSV
Int'l Equity - All-World ex-USVFWIXSCHF+SCHEEFA+EEMVEUGWL
Int'l Equity - Small CapVFSVXSCHCSCZVSSGWX
Int'l Equity - ValueVTRIXEFV
Bonds - Total Bond MarketVBMFXAGGBNDLAG
Bonds - TIPSVIPSXSCHPTIPIPE
Bonds - MunicipalsVWITXMUBTFI
Real Estate (REITs)VGSIXVNQRWR

*Note: I am not employed by Vanguard or compensated by them in any way.  All of the portfolio recommendations on Invest-it-Yourself.com include Vanguard index funds and ETFs because, in my opinion, these investments form the best foundation for a long-term asset allocation plan.  For more information, see the Why Vanguard page.

Reminder:  Need an opinion on a risk-appropriate asset allocation? Get a free portfolio recommendation today!

Posted by George | Index Funds & ETFs | Comments (0)
 

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