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If you aren't familiar with the 3 fund portfolio, the summary is that when investing in stocks, you should only be buying total market index funds. The 3 index funds represent: total US, total non-us (i.e. International) and total bonds.

The intent is to get the lowest fees, since that's basically the only part of investing that you have total control over. In reading about this in Elements of Investing, it appeared that Vanguard is usually the lowest fee alternative. But I ran the numbers on the funds suggested at the Bogleheads 3 fund portfolio page on this FINRA fee calculator, and it appears that the iShares ETF beat all the mutual funds every time.

If you aren't investing in Admiral class shares at Vanguard (i.e. over 10k) then you won't beat the ETF. If you do qualify for Admiral Shares, you will slightly beat the ETF fees.

If your money is already at a specific brokerage (Fidelity, Vanguard, Chase, etc) why would you buy that brokerages index mutual fund, as opposed to just investing in the iShares ETF?

  • @CraigW fixed the quote about admiral shares. – Michael Pryor Dec 16 '13 at 20:22
  • I have a friend who has his money at JP Morgan Chase and they suggested to use their index mutual fund. when I looked up the fees, I realized he could save $500 a year by just buying the ETF. I don't get why people would pay more for an index fund -- which is just a commodity. – Michael Pryor Dec 19 '13 at 16:26
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There are a few reasons why an index mutual fund may be preferable to an ETF:

  1. Index mutual funds don't typically have transaction fees and ETFs usually do because ETFs trade like stocks. If you pursue a dollar cost averaging strategy (i.e. buying stocks every two weeks), ETF transaction costs can add up.
  2. Fractional index mutual fund shares can be owned, so you can invest a constant amount in an index mutual fund (which also works well with a dollar cost averaging strategy). You can't buy 18.3 shares of an ETF.
  3. Similar to stocks, ETFs have liquidity risk.
  4. ETFs can trade at a premium or discount to Net Asset Value, similar to a close-ended mutual fund (this means the price of an ETF can stray from the value of its underlying assets).

I looked at the iShare S&P 500 ETF and it has an expense ratio of 0.07%. The Vanguard Admiral S&P 500 index has an expense ratio of 0.05% and the Investor Shares have an expense ratio of 0.17%, do I don't necessarily agree with your statement "admiral class Vanguard shares don't beat the iShares ETF".

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