Vanguard ETFs Now Permanently Cheaper Than Admiral Shares?

vglogo After posting about Vanguard’s most recent expense ratio drops on selected ETFs, I had skipped over the part that said this::

The growing size and scale of our funds have helped fuel operational efficiencies that lower our costs to serve clients, particularly ETF shareholders. As a result, the ETF share class of these ten funds is now lower than their Admiral™ share class counterparts.

For example:

Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) at 0.11%
Vanguard Total International Stock ETF (VXUS) at 0.09%
Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX) at 0.14%
Vanguard FTSE Emerging Markets ETF (VWO) at 0.12%

I thought it was just a matter of the reporting dates being staggered and the Admiral Shares expense ratio would soon be updated back to being identical. This was just temporary… right? No.

Allan Roth reports in this ETF.com article with an interview with a Vanguard spokesperson confirming that the expense ratios of ETFs and Admiral Shares will no longer automatically be matched up:

What’s largely driving these changes is the increasing adoption of ETFs by Vanguard investors as their index vehicle of choice, which has enabled us to pass along the cost savings of scale,” Woerth said. “To put some numbers around it, even though ETFs make up only about 20% of our assets, they’ve garnered more than 35% of Vanguard’s net cash flow over the past three years.”

Another reason is that the mutual fund structure requires more administrative paperwork than ETFs and thus inherently cost more to run. Given how easy it is to buy ETFs from any brokerage account, I don’t see how the gap won’t continue to widen.

Should I convert my Admiral Shares to ETFs? Vanguard lets you convert most Vanguard mutual funds held at Vanguard to their ETF version (if it exists) on a tax-free basis. Allan Roth goes on to discuss this question as well. You should first set your tax lot tracking to “SpecID” if you want the cost basis to carry over to every specific share (otherwise they would use average cost basis on all of them).

I always liked the “slow food” feel of mutual fund investing. Your trade doesn’t execute until the end of the day. The price is set exactly at net asset value (NAV). There are no high frequency traders involved.

I won’t do it right away, but I will probably eventually convert my Admiral Shares to ETFs. Vanguard is basically telling me that mutual funds are old technology, and they won’t be spending any more resources on future updates. In the last few years, they have already finished converting all of their old mutual fund accounts into brokerage accounts. I guess every basis point counts these days.

Vanguard should be careful though. If all my holdings are ETFs, it will be quite easy for me to move my assets to any other brokerage that offers better technology features and/or customer service. It was always easy to set an automatic purchase schedule with mutual funds at Vanguard, for example I could set it to invest exactly $500 each month. Vanguard doesn’t let you do that with ETFs, but other places do. I’ve been a long-time proponent of opening accounts directly at Vanguard, but I’ve been keeping an eye on M1 Finance, which offers fractional shares, free ETF trades, and customized DIY asset allocation with zero management fees. It looks like I’ll be trying them out soon.

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Vanguard ETFs Now Permanently Cheaper Than Admiral Shares? from My Money Blog.