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I recently began investing and planning for retirement. I opened up a Roth IRA through Vanguard and bought about $2,000 of Vanguard Target Retirement 2045 Fund (VTIVX). I'd like to invest in real estate through REITs.

I saw both of these REITs through my reading: Vanguard REIT Index Inv (VGSIX) and Vanguard REIT ETF (VNQ). I keep hearing ETFs are the way to go due to their low expense ratio. Beyond that, I don't know the difference between the two. Can someone explain what those differences are and the advantage of each? I plan to have about 20% of the REIT in my Roth (at least for this tax year).

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I'd start by reading the answer to What is the difference between shares and ETF?

A look at the Yahoo pages for Vanguard REIT Index Inv (VGSIX) and Vanguard REIT Index ETF (VNQ) show different annual expenses, 0.10% for the ETF, 0.24% for the fund. But, the ETF will have the trading cost of a stock purchase, say $10, which for small purchases will add up. (Think "it's a 1% cost to buy $1000, but then I save $1.40/yr on fees.) For a $2000 purchase, the $10 commission is 0.5%, so it partially depends on the scale of your investing.

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Worth to mention that trading costs are one-time (need to keep in mind the selling fee as well though), but the expenses of the fund are annual. so the $10 commission should be amortized over the holding period for the comparison to be true. – littleadv Dec 21 '12 at 0:40
@littleadv - I tried, but maybe didn't hit that point hard enough - "1% cost to buy $1000, but then I save $1.40/yr on fees." - i.e. a one time cost, but lower annual fees. Great point, the commission should really be doubled for buy/sell. You are welcome/invited to edit my answer to help clarify what I missed. – JoeTaxpayer Dec 21 '12 at 2:49

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