VFINX vs. VOO

[skhoury]

Hello all,

I'm new the forum - happy to have found a place to ask questions! I'd like to start investing in an index that tracks the S&P 500. It seems Vanguard has been around for quite sometime and they have a solid reputation. They have two products that index the S&P 500. One is a fund (VFINX) and the other is an ETF (VOO).

I have no idea which one to buy into. I know the fees are slightly higher on the fund and the buy in amount is a minimum of $3k. The ETF is a bit cheaper and has no minimum amount (other than 1 share).

Other than those differences - what are the pros/cons of each and which do you all recommend I buy into?

Thanks!

[bjl584]

I'd first like to know why you want to buy an index fund that tracks the S&P 500. What is your strategy for doing so? There is nothing inherently wrong with doing so, I would just like to know how you arrived at the position to track the S&P.

[skhoury]

That's a great question - I'd like to start investing outside of my 401K. I don't have the time or patience to study and pick individual stocks. I like the idea of mutual funds or ETFs but feel that indexes are simplified and certainly cheaper.

I guess I'm looking for a sort of 'auto-pilot' investment option that will build a good amount of value several years from now. I'm looking at this as a more long term investment rather than short term, so I'm willing to accept the risks of an up/down S&P. Indexes are cheap enough and seem to make the most sense.

Does that make sense?

[disneysteve]

Does that make sense?

Yes, to a point. One investing concept you'll often hear about is asset allocation. That is the percentage of your portfolio that is invested in each asset class or market sector, things such as growth and value stocks, large and small companies, stocks vs. bonds, commodities, precious metals, real estate, etc. There are many ways to slice and dice it.

So while all you said is true, I think Brian's question was more about why you are going with an S&P 500 fund. Does that fit well into your desired asset allocation? You have a 401k already. How is that invested?

As for your original question regarding MF vs. ETF, there are pros and cons to each.

MF allows automatic investing plan and you can buy fractional shares. So you may decide to invest $100/month into the fund. You can set it up to be done automatically from your bank account (I do that myself). Since an ETF trades like a stock, you can't do that and you can't buy fractional shares. You can manually add about $100/month but the exact amount will depend on the share price at that moment.

ETFs are more tax-efficient. You have more control over when a taxable event gets triggered. This is particularly useful in a taxable account.

Traditionally, ETFs had a commission to buy and sell but that is gradually disappearing. I believe the Vanguard funds are commission-free but I'm not 100% positive of that.

MFs allow you to automatically reinvest dividends and capital gains. ETFs do not.

[jpg7n16]

I guess I'm looking for a sort of 'auto-pilot' investment option that will build a good amount of value several years from now. I'm looking at this as a more long term investment rather than short term, so I'm willing to accept the risks of an up/down S&P. Indexes are cheap enough and seem to make the most sense.

Does that make sense?

Have you considered a target date fund? Vanguard's target date funds utilize index funds.

https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList

Worth watching the 4 minute video on the right hand side.

[skhoury]

To be honest, I simply chose the S&P because it seemed to be the most popular. I didn't have any other particular reason. With regard to my 401K and Target Date Retirement funds, I'm currently using a 2045 TDR fund in my 401k and the same thing in my Rollover IRA.

So, I just figured I would take a different approach for my normal investment account.

You're right in that I can auto-invest with the fund and not the ETF. They did tell me however that the dividends are automatically re-invested with both products. There isn't any fees either way assuming I buy either of the products direct from Vanguard.

Are taxes an issue if I plan on buying and holding for the long run? Don't taxes only come into the picture (with either product) if I'm actively trading them often?

[cooliemae]

Are taxes an issue if I plan on buying and holding for the long run? Don't taxes only come into the picture (with either product) if I'm actively trading them often?

There can be a big difference on short term versus long term capital gains taxes. Short term gains will be taxed at the ordinary income levels which could be as high as 35%, while Long term gains will be taxed at 15%. However, in 2013 the long term tax rate is set to increase to 20%. So in short investing for the long term will generally be cheaper than the short.

[jteezie]

Depends how much you are planning to invest and how often.

The ETF (VOO) has lower expenses generally (unless the fund is doing some sort of active strategy). In this case it's just an Index strategy so the expenses will be low because you don't need to pay for a fulltime portfolio manager to manage the fund. If you plan to do a big lump sum contribution, you should buy the ETF and pay a 1 time commission for your purchase. It is just cheaper. However, I would recommend SPY instead of VOO because they are exactly the same fund strategy (S&P500), but SPY is much much bigger, meaning it is cheaper because the cost of managing the fund is split across a lot more people.

The Mutual fund VFINX (characterized by 5 characters) is better if you plan to contribute money in regularly (like monthly). If you were to contribute monthly under the ETF, you would have to pay a commission each time. The mutual fund doesn't have this cost, however you will pay slightly higher management expenses.

Of course this cost structure will change depending on how much money you have altogether. At some point paying 100 commission's on ETF's might be cheaper than paying a higher management fee on a mutual fund.

I recommend avoiding the target date retirement funds because they tend to be more expensive than other funds due to a thing called "indirect fees." These target date funds pretty much buy shares of other index funds and thus also have expenses from the underlying funds. But these fee's are pass down through the price, and you never know about them. Also, I don't think you need a target date fund because you already have other money in the 401k.

[bjl584]

To be honest, I simply chose the S&P because it seemed to be the most popular. I didn't have any other particular reason. With regard to my 401K and Target Date Retirement funds, I'm currently using a 2045 TDR fund in my 401k and the same thing in my Rollover IRA.

So, I just figured I would take a different approach for my normal investment account.

You're right in that I can auto-invest with the fund and not the ETF. They did tell me however that the dividends are automatically re-invested with both products. There isn't any fees either way assuming I buy either of the products direct from Vanguard.

Are taxes an issue if I plan on buying and holding for the long run? Don't taxes only come into the picture (with either product) if I'm actively trading them often?

Picking things out of the air is a good way to lose your hard earned money. I would suggest either speaking with a financial advisor or researching some targeted funds as others have suggested.

[disneysteve]

Are taxes an issue if I plan on buying and holding for the long run? Don't taxes only come into the picture (with either product) if I'm actively trading them often?

Nope. The mutual fund generates taxable income every year if held in a taxable account.

If you plan to do a big lump sum contribution, you should buy the ETF and pay a 1 time commission for your purchase.

The Mutual fund VFINX (characterized by 5 characters) is better if you plan to contribute money in regularly (like monthly). If you were to contribute monthly under the ETF, you would have to pay a commission each time.

Vanguard does not charge a commission for trading their ETFs.

[Slug]

Vanguard does not charge a commission for trading their ETFs.

Schwab and Fidelity offer the same deal, and most Schwab ETF's beat Vanguard on fees.

Also Ameritrade offers 100 commission-free ETF's.