5

I have a Roth IRA with Vanguard, and I saw this question: What is the difference between shares and ETF? about the differences between Admiral Share funds and ETFs. I've also seen stuff talking about how ETFs are more tax-efficient because when investors move in and out of the fund, those transactions happen in the secondary market and the fund manager doesn't need to buy/sell shares to redeem shares of the fund, which creates capital gains.

So based on that, is there any reason to prefer ETFs to Admiral Shares funds in an IRA? For example Vanguard's healthcare fund, which has an ETF and an Admiral Shares fund. I don't pay commissions when I buy/sell Vanguard ETFs in my Roth IRA, but it's nice to be able to buy in dollar amounts (fractional shares) of a mutual fund, which I can't do with an ETF. I also have enough my account that I won't pay the $20 annual fee they charge for a Roth IRA Brokerage account (which I need to open to be able to trade ETFs).

Anything else I didn't think of? There won't be any tax consequences because it's a Roth right?

8

The mutual fund will price at day's end, while the ETF trades during the day, like a stock. If you decide at 10am, that some event will occur during the day that will send the market up, the ETF is preferable.

Aside from that, the expenses are identical, a low .14%. No real difference especially in a Roth.

  • Ok awesome. I don't really care about the intraday movements because I don't plan to trade in my IRA every day. I mght rebalance every month/quarter or so but I still don't see myself making alot of trades. – Michael A Dec 23 '13 at 17:31
1

ETFs purchases are subject to a bid/ask spread, which is the difference between the highest available purchase offer ("bid") and the lowest available sell offer ("ask"). You can read more about this concept here.

This cost doesn't exist for mutual funds, which are priced once per day, and buyers and sellers all use the same price for transactions that day.

ETFs allow you to trade any time that the market is open. If you're investing for the long term (which means you're not trying to time your buy/sell orders to a particular time of day), and the pricing is otherwise equal between the ETF and the mutual fund (which they are in the case of Vanguard's ETFs and Admiral Shares mutual funds), I would go with the mutual fund because it eliminates any cost associated with bid/ask spread.

1

In a taxable account, there is no distinguishable difference in tax-efficiency between an ETF vs. Open-end fund following the same passive strategy or index.

With respect to the VG Healthcare Fund, check if the mutual fund is an active strategy and the ETF is indexed. They might be different.

Otherwise, there are convenient mutual fund options like the automatic investment/exchange plan and reinvestment of distributions that aren't feasible with the ETF. Try to avoid fractional shares of an exchange traded security.

Assuming you follow all the rules, you will never owe taxes on your Roth (after-tax) contribution amounts or the earnings they generate, nor are your Roth balances subject to Required Minimum Distributions at age 70 1/2.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.