Learn how ETFs can work with your portfolio

Vanguard investing experts Rich Powers and Josh Hirt review several features of ETFs.

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Talli Sperry: So this one actually I’m going to kick to you, Josh, and that’s from Doris in Sarasota, Florida who’s asking, “Why do investors choose ETFs over individual stocks?” And I think this connects to Rich’s point about pricing throughout the day. And then she also asks, “Why do they choose them over mutual funds?”

Josh Hirt: Yes, good question. I think it is a good natural extension of sort of the points that Rich made in terms of mutual funds versus ETFs. When I think about why one might choose to invest in an ETF or a mutual fund over an individual security, most likely the reason that they are looking for there is to get the advantages of, one, professional management and, two, diversification. So rather than choosing the securities on their own, being susceptible to the risks that are inherent in that individual security, the risks that are inherent in that sector of the security, they are then opting for a more portfolio-level approach, where they are having a professional manager choosing those securities for them, and they’re taking advantage of diversification across sectors and across a number of different names.

So, in terms of the choice between ETF or mutual fund, I think this ties in really nicely with Rich’s points in that there could certainly be a number of factors that are going to influence this decision, but primarily it would be one who was looking to actually have access and use that trading flexibility that ETFs offer relative to the mutual funds that, while you can transact during the day, you’re going to be receiving the end-of-day price. ETFs allow that greater flexibility to really take out views on the market intraday, in the moment.

Some other things that could potentially lead in increasing that decision, I think Rich mentioned, also, this could be a decision doing your strategies. For the investor who is looking for an indexing strategy over an actively managed strategy, ETFs do offer—they’re predominantly index based, and they do offer some nuanced indexes that they follow that might not be available in the mutual fund market. And it also could just be an accessibility thing. Due to the fact that ETFs are transacted through a brokerage account, the brokerage account generally offers a broader array of access to investors than may potentially be available on a mutual fund platform. So it could just be as simple as someone looking for the same type of exposure, and it happens to be that they’re able to access the ETF relative to the mutual fund.

Rich Powers: One other point, I would add there too, is that the ETF might have an advantage in that generally the price to get into an ETF, or the entry point in terms of the dollars you need to come up with, is the price of the ETF itself, right? And so, you have a brokerage account; the ETF is priced at $100 as its NAV; you have to come up with $100 and you’re able to buy a share of that ETF. Most mutual funds have some other type of minimum investment whether it be $1,000 or $3,000, and so for that early investor who doesn’t necessarily meet those minimums, an ETF could be a good vehicle for them to get that diversification that they know that they want.

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