Vanguard funds – Admiral shares, Investor shares, ETFs (and Institutional shares)

When we started to get serious about going down the path of FIRE about 6 years ago we realized pretty quickly that investing in Vanguard index funds was the way to go.

But invest in WHAT exactly?

Terms such as VTSAX, VBTLX, admiral shares, investor shares were thrown around and, to the uninitiated, this might be information overload when all we are looking for is a simple guideline on what is what.

This won’t be a crash course in what is a Mutual Fund or ETF (exchange traded funds). Neither this is going to be a debate over index funds v/s ETFs. Vanguard provides a detailed analysis in the differences and similarities between ETFs and mutual funds. 

To put it very simply, to the average personal (individual) investors – meaning regular Joe and Jill such as you and me – Vanguard offers 2 share classes (or variants) of passive, index funds and often times an ETF for the same underlying benchmark or sector that fund is tracking.

We’ll look at the different options to invest in the S&P 500 through Vanguard.

The lowest cost option is the Admiral shares. But their minimum investment is typically $10,000.
Vanguard 500 Index Fund Admiral Shares is the name of the fund. VFIAX is the ticker.
Fun fact: All mutual funds tickers end in an “X”.

Investor shares have a higher ER, at least twice of the Admiral shares, and their minimum investment is typically $3,000.
Vanguard 500 Index Fund Investor Shares is the Investor share fund for tracking the same S&P500 (you can reach it by clicking on the Investor share hyperlink given on the Admiral shares’ page on the Vanguard site highlighted in green in the above screenshot); VFINX is the ticker.

If you don’t have $3,000 lying around, Vanguard has an option for you.
The Vanguard S&P 500 ETF; ticker VOO.
The ER for this is 0.04%, same as the Admiral fund.
Notice that the ticker doesn’t end in an “X” as ETFs are akin to stocks.

Since the ETFs are essentially treated as stocks, there is a bid/ask spread and premium/discount.

Also, Investor shares can be easily converted to Admiral shares once you meet the minimum threshold. Vanguard takes care of that. As far as I know, to move ETFs over Admiral shares you’ll have to sell your ETF and buy Admiral shares. If you have a taxable account you will have tax implications when you sell your ETFs.

NOTE: I’m not a tax expert and you should consult a tax professional if you have questions. Materials presented here are for informational purpose only.

Vanguard also has funds to track the same underlying S&P 500 for its institutional investors.
ER are lower than Admiral shares and look at the minimum – $100M!! These are, as the name suggests, for institutional (pensions; insurance companies, hedge funds and such) investors.
Vanguard Institutional Index Fund Institutional Plus Shares; VIIIX

Now there you have it: Go forth and invest!

Fees and commissions matter (even that run into the 3rd decimal place)

The other day I met an affable Financial Planner who’s looking to go to the same grad school as I had been to. We were talking and at some point the topic of fees arose in our discussion. This FP wasn’t pushy or trying to oversell the value of planning for the future but was still a bit coy about really admitting how fees add up. And rightly so, because her livelihood depends on the fees! This is the operating model of any FP, they make money off the fees they charge to maintain your money. I have nothing against her but this got me thinking how fees add up, even little marginal ones such as 0.061%.

Let me illustrate this point by taking a look at my 401(k) investments and then compare it with the what-if scenario of putting the exact same amount in Vanguard index funds. I have to start off by acknowledging that I’m lucky to have a 401(k) plan that has low fees. Lower than a lot of other places. This article says that the average expense ratios for equity mutual funds in 401(k) plans is 0.48%.

 

Before I started to look around I didn’t really think the average would be so low. Nonetheless we’ll run with this. In the table below you’ll see the actual breakdown of my investments in my company’s 401(k) plan.

 

I have money in a bond fund, a targeted date fund, a large cap fund, a mid/small cap fund, an international fund, and in my company’s stock. All funds are Vanguard institutional funds and the operating expense ratios of all the funds are very low. Kudos to my employer!

Side note: We can debate the efficacy of using 5 different funds to hold the money, but let’s keep that for another day!

What skews the perfectly low ERs are the Administrative Expense of 0.08% that our 401(k) administrator, in this case Aon Hewitt, systematically charges across the board.

My weighted average ER comes out to 0.111%. Not bad at all for being 4 times lower than the average! But still higher if not for the dang administrative expenses.

Now let’s assume that I take this money out today and roll-over into an IRA, and invest in similar Vanguard funds.

I have made a couple of adjustments, while keeping the weights of the bond, large cap, and international funds the same.

  • Kept the same weight for the mid/small cap from the 401(k) and rolled into the VIMAX Midcap fund in the IRA.
  • Rolled the ESOP and target date fund from the 401(k) into VSMAX Small cap fund in the IRA

With these changes, my new weighted average ER comes down to 0.05%. Compared to the 401(k), that’s a difference of 0.061%.

Again: We can debate the detriments of not just using VBTLX and VTSAX, another day ….

This change would result in almost $7k in extra money over a period of 20 years, at 6% annualized return. Plug in your numbers here. I’ve deliberately left the future contribution cell blank to have apples to apples comparison.

Dear readers, would love to know how your 401(k) plan expenses compare.

The CFI …falacy?

Mr. Cubert at Abandoned Cubicle, who is a very talented, determined, and resourceful fellow (and a fellow Midwesterner!), has this strange article out there, extolling the virtues of Cash Flow Indexing. In a nutshell, CFI determines which loans to pay off first, freeing up, well, you guessed it: Cash Flows. It does not take into account the interest rates or the term of the loan. Mr. Cubert does a great job explaining why this works for him. I’d suggest you read his article first. This post, if not a refutation, is certainly an addendum to his!

One thing that is ignored in the CFI method is how not paying down your highest rate loans first, makes you pay MORE INTERST, in the long run and the short run. There’s no going around this fact. You are freeing up CFs at the expense of paying more in interest.

Here is a Google doc (which you can download and play around) I created, a pretty simple one at that, which shows the affect of paying more – extra towards the principal – on 2 hypothetical loans: a 15-year $150k mortgage at 4%, and a 5-year $20k car loan at 0.9%. To make for an easier comparison, we’ll assume both of these loans are taken out at the same

The CFI of the mortgage is 135, while the car loan is 59. According to CFI principle, the car loan is an “inefficient” loan and should be paid off early.

An extra payment of $1,333.79 every month will wipe off the car loan in one year, saving interest payments to the tune of $66.19. Whereas the same extra payment when applied to the mortgage would save interest payment of $296.72 over one year. The CFI method would certainly free up the monthly payments that was going towards the car in year. That is indisputable. What is also indisputable is that you are paying more by following CFI.

One thing that I still agree with Mr. Cubert is here: technically smarter move would be to put any extra income towards higher yielding investments, as opposed to paying off the mortgage. But this is a long-term cash flow play for us. At early retirement, we plan to avoid as many recurring monthly payments as possible. Which is cash flow smart.” We hope (and planning) to be mortgage free in the next 4 years.

I should stress another point here. I will take a 0% loan any day, even if I had the money to pay it in full and not take out the loan. Heck, we have checking accounts paying 1.55% now! With inflation, which is around the 2.5% mark now, any loan below that mark is essentially lending you money and paying you interest on that loan!!

In the first worksheet I’ve provided the year 1 numbers. The second worksheet has the whole life amortization schedule for the mortgage. You can plug in your own monthly extra payments to see how soon you can pay off your loan and how much interest you save.