Most ETFs try to match an index—like the S&P 500—but not all. So when you hear someone compare index ETFs with traditional actively managed funds, it’s important to know the differences.
Learn more about how each type of fund responds to market risk, when manager risk becomes a factor, and how management differences can affect your overall costs—including your taxes.
When you’re ready to choose ETFs to invest in, consider Vanguard ETFs®, which are always commission-free* when you buy them through a Vanguard Brokerage Account.
Visit vanguard.com/chooseetfs for details.
Are ETFs—or exchange-traded funds—index funds? Most of them are, but not all.
So when you hear someone compare index ETFs with traditional actively managed funds, keep in mind the differences when it comes to goals, risks, and costs.
The goal of an index ETF is to match an index—like the S&P 500®. The manager does that by buying all (or a sample) of the stocks or bonds in the index. In fact, a single index ETF can hold hundreds or thousands of stocks or bonds, making it a highly diversified portfolio. And when the index is up, the ETF performs well. Great!
But what about market risk? When the index is down, the ETF is down too, because it’s designed to match the index. The good news is that an index ETF is usually going to be up over the long term.
Meanwhile, the goal of an actively managed fund is to beat an index. To accomplish that, the manager has to do a lot of research before hand-selecting which stocks or bonds to include. That means there’s the possibility of higher returns—if the fund outperforms its index. Again, that’s great!
But—in addition to market risk—what about manager risk? If the manager doesn’t make good stock or bond selections, the fund will underperform its index.
Management differences can affect overall costs too. For example, an index ETF usually has a lower expense ratio, which represents its operating costs. And it’s usually lower because—unlike an actively managed fund—an index ETF doesn’t have to pay its manager more for all the extra research and expertise.
Plus, an index ETF doesn’t trade its stocks or bonds as often, leading to fewer taxable capital gains distributions by the fund—which could mean lower taxes for you.
So remember: Index ETFs have different goals, less risk, and lower costs.
You can choose from a wide variety of Vanguard ETFs®—and all are commission-free through a Vanguard Brokerage Account.
(Vanguard ETF® ticker symbols appear on screen: VTI, VOO, VWO, VEA, VTV, BND, VUG, VNQ, VIG, VEU, BSV, VO, VB, VYM, VCSH, VGK, VCIT, VGT, BIV, VBR, VV, VXUS, VT, BNDX, VOE, VFH, VHT, VBK, VNQI, VXF, VPL, VOT, VSS, VMBS, VTIP, VDE, VDC, VIS, MGK, VCR, VPU, VAW, BLV, VCLT, VTEB, VOOG, MGV, VGSH, VGIT, VONG, MGC, VONV, VTWO, VOX, VWOB, VIGI, VOOV, IVOO, VYMI, VONE, IVOG, VIOO, VGLT, IVOV, EDV, VTHR, VIOG, VIOV, VTWG, VTWV, VTC)
To learn more, visit vanguard.com/chooseetfs.
*See the Vanguard Brokerage Services commission and fee schedules for details, including limits and exclusions. Trading limits, fund expenses, and minimum investments may also apply.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules at investor.vanguard.com for limits. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
Visit investor.vanguard.com to obtain prospectuses—or, if available, summary prospectuses—for Vanguard ETFs and mutual funds. The prospectus contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
© 2018 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.