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There are two ETFs that both track the Russell 2000 (at least according to everything I've read), which are

IWM (iShares)
VTWO (Vanguard)

The Vanguard ETF has a lower expense ratio. As such, could someone explain why someone would pick IWM over VTWO if that person were looking to buy a Russell 2000 ETF?

  • 2
    If your broker offers iShares funds with no commission, but charges a commission for Vanguard funds, that would be one reason. – The Photon Dec 5 '17 at 4:17
  • @ThePhoton Commissions are usually pretty low though, so even if the Vanguard ETF has a slightly higher commission, it may be worth it to get the lower expense ratio, depending on how much is being bought, how long it's going to be held, etc. – blm Dec 5 '17 at 22:19
  • @blm, fair enough. But I once bought VOO in my Fidelity account thinking the commission wouldn't be any more than the usual $7.95 at the time. Nope. Something like $20. That's equal to a full year's fees on $10k in IWM at 0.2% – The Photon Dec 5 '17 at 22:47
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The main advantage of IWM over VTWO is greater liquidity.

At the moment, Yahoo Finance is showing average daily trading volume (in the last 3 months) 91,651 shares for VTWO and 24,218,219 for IWM.

Another advantage of IWM is the availability and liquidity of options - it is among the top ETFs by options volume. VTWO technically does have options available, but the range of expirations and strikes is much narrower, while the bid-ask spreads are extremely wide.

As a result, IWM can be preferred over VTWO if you trade more frequently and/or with bigger size, or if you want to use options (e.g. sell covered calls against your position). Additionally, some prefer IWM out of habit, for the mere reason that IWM has been around since 2000, but VTWO only since 2010.

If you are a small investor looking to buy and hold for long term, you might prefer Vanguard for its lower expense ratio. Generally, the longer you intend to hold the position, the more expense ratio matters. The shorter your time horizon, the more you should focus on liquidity and transaction costs.

  • These are assets I plan to keep in my IRA, so yes buy and hold for a long time. So your points about trading more frequently and options don't seem to apply to me. However you didn't mention dividend yield. That seems to be higher for IWM, unless I'm reading things wrong. Is that a consideration? – Dave Dec 5 '17 at 14:46
  • @Dave note that dividends reduce the value of the fund by an equal amount, so dividend yield should not be used to compare the performance of two funds. they are essentially "withdrawals" that are taxed differently, so they should only be considered if you want to have cash flows at different tax rates (at the cost of reducing your investment size). – D Stanley Dec 5 '17 at 15:20
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Expanding upon the comment by @ThePhoton

  1. "If your broker offers iShares funds with no commission, but charges a commission for Vanguard funds", and
  2. you buy in small lots via dollar cost averaging (DCA), and
  3. you like your broker's web interface instead of Vanguard's...

you would choose IWM instead.

  • I use Charles Schwab for my IRA, which si where I'm buying (or considering buying) these things. What's "DCA" in your "you buy in small lots via DCA" answer? – Dave Dec 5 '17 at 14:48
  • @Dave dollar cost averaging. (I just edited my answer to expand the acronym). – RonJohn Dec 5 '17 at 15:15
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Vanguard has its benefits, but other than their claim of low expense ratio, I could not find a true independent study to verify the claim that it helps investor.

The best thing in an ETF is its liquidity ( even for long term investor)

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