But what makes ETFs attractive to everyday investors? In addition to their investment flexibility and generally low costs, we believe there are 3 main reasons investors are choosing ETFs.
1. Democratization of indexing
Before the introduction of ETFs, if you were looking for an indexing strategy, your only option was to invest in a mutual fund. But unless you were investing directly with a firm like Vanguard, that option may not have been available. If it was, it may have come with a hefty transaction cost. Now you have access to index mutual funds by buying virtually any ETF through a brokerage account.
The tradability of ETFs on exchanges has liberated access and broadened investors’ options for index investments. Along the way, it’s also propelled the popularity of indexing and ETFs and, importantly, helped drive down the average cost of investing.
Bear in mind, though, that when you buy or sell an ETF, you can incur a trading cost. Some brokerage firms offer a low flat fee, while others offer commission-free trading for select ETFs. At Vanguard, you can trade Vanguard ETFs® commission-free through your Vanguard Brokerage Account.*
2. Low hurdle to start investing
The excitement about ETFs isn’t just about accessibility; it’s also about the flexibility to invest as little or as much as you want. You can buy an ETF for the price of 1 share, potentially as low as $50. Mutual funds, however, require a minimum initial investment, which is often $3,000 or more. Some Vanguard mutual funds can be opened with as little as $1,000.**
As you can see, it doesn’t take much to get started. By investing in manageable increments―for instance, $100 in a stock ETF and $100 in a bond ETF―you can achieve a diversified, dual-asset-class portfolio. Although simple, this approach can be a great way to build a portfolio that’s appropriate for your goals.
3. More control over prices
Since ETFs trade throughout the day like stocks, you have more opportunity to determine the price you pay. Mutual funds, on the other hand, are priced once a day, after the market has closed. While no price is guaranteed, you can use a limit order to set a price at which you’re willing to buy or sell an ETF.
Broadly diversified portfolios still matter
With all the bells and whistles ETFs appear to have—accessibility, low minimums, and more price control—what matters most to your investing success is your ability to stick with a low-cost, broadly diversified strategy. To be fair, the biggest advantages of ETFs—diversification and low costs—can be found in mutual funds too.
So as long as you focus on your long-term goals and invest broadly with low-cost ETFs or mutual funds, you’re on your way to being a successful investor. That was true when the first U.S. ETF traded 25 years ago, and it’s still true today.
*Trading limits, fund expenses, and minimum investments may apply. See the Vanguard Brokerage Services commission and fee schedules for limits.
**The minimum initial investment for Vanguard Target Retirement Funds and Vanguard STAR® Fund is $1,000. A $3,000 minimum applies to most other mutual funds. Fund-specific details are provided in each fund profile.
Vanguard ETF Shares are not redeemable with the issuing fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
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.