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I’m having some difficulty figuring out which route would minimize the annual fees I pay. Vanguard offers an index fund that tracks the S&P 500 with an expense ratio of 0.25%. Then, there’s this app, Robin Hood, that would allow be to buy shares of an S&P 500 ETF, namely the iShares Core S & P 500 ETF (symbol: IVV). On the iShares website, they say the expense ratio for that ETF is 0.07%.

My confusion is about the term “expense ratio”. Is the second path (buying the iShares ETF through Robin Hood) indeed the cheaper path? (Robin Hood advertises no trading fees)? What other fees am I failing to consider in either path?

Thanks, - Dave

JoeTaxpayer
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Dave
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2 Answers2

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There are many factors to consider.

Vanguard offers Admiral shares of their S&P 500 VFIAX with a minimum investment of $10000 which has a .05% expense ratio, or you can buy VOO, an ETF with a .05% expense ratio. VFINX can be bought with a minimum investment of $3000, with an expense ratio of .17%, but you can get that discounted if you use electronic statement delivery through Vanguard, at which point your expense ratio is pretty close to the admiral shares. If you are using some provider other than Vanguard, you may also pay trading fees to buy Vanguard funds. You also have to wait until the end of the day prices for trades, so you won't have the protection of stop-loss orders if you want to trade in a volatile market.

If you are buying from another broker, you will often pay fees to buy and sell ETFs, but if you have a Vanguard account you can buy Vanguard ETFs (like VOO - their S&P ETF with a .05% expense ratio) without paying a fee. Even with a Vanguard account, you can only buy whole shares of VOO, so you can only invest in increments of ~$186 (the current price at the time of writing).

So to summarize, you can invest better granular amounts with a mutual fund, but you have a large minimum investment if you want the lowest expense ratios, with only day ending prices to trade on. You can buy the ETFs directly, but you have to factor in exchange fees to your expense calculations if you are paying those fees. If you are paying those fees, then your incentive is to make larger and less frequent investments, and even if you aren't paying those fees, you can't necessarily trade even-dollar amounts.

NL - SE listen to your users
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The expense ratio is a measure of "annual fee that all funds or ETFs charge their shareholders." These are the expenses associated with owning the ETF or mutual fund for a year. However, there are also the costs of buying and selling the funds/ETFs.

For both mutual funds and etfs there are the fees that the broker (company helping you buy the fund/etf) charges you for the purchase. As @Nathan mentions, sometimes brokers will allow you to trade certain funds/etfs without a broker fee. This is very nice and worth trying to find, but if you make infrequent large purchases these (~$7/trade?) fees might not be that big of a deal.

Mutual funds can also have load fees when you buy or more frequently sell them sometimes up to 5%!! I'm guessing the Vanguard fund you mention doesn't have load fees but these uncommon fees are a terrible deal and worth checking for.

While not a fee directly, etfs also have a bid/ask spread adding a generally small cost to each purchase. This amount is extremely tiny (less than one tenth of one percent) for a highly traded fund like IVV, but can be significant for less commonly traded etfs.

In this case the expense ratio and broker fees are likely only two things to really worry about.

rhaskett
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