Vanguard Exchange-Traded Funds (ETFs)

A collection of index-based traded securities managed and issued by Vanguard Group

What are Vanguard Exchange-Traded Funds (ETFs)?

Vanguard Exchange-Traded Funds (ETFs) are a collection of index-based traded securities managed and issued by Vanguard Group. The ETFs give investors the chance to buy and sell shares as a single security.

 

Vanguard Exchange-Traded Funds (ETFs)

 

In their current form, the trading volume of Vanguard ETFs tracks the index returns. Currently, Vanguard holds more than 50 ETFs, which are traded like any other equity instrument. Tracking of the index in Vanguard ETFs facilitates a low expense ratio, flexibility of intraday trading, and tax efficiency, as well as diversification.

 

Summary

  • Vanguard Exchange-Traded Funds (ETFs) are a group of securities issued by Vanguard Group that uses an index to track the margin between the net asset value and share prices.
  • Vanguard ETFs enhance trading of securities at any time of the trading day to maintain a low expense ratio.
  • Vanguard ETFs share some similarities with traditional stocks and mutual funds, which make them attractive investments to investors.

 

Vanguard ETFs Explained

Vanguard ETFs are low-cost funds that allow investors to purchase shares of an entire portfolio as a single security. While maintaining the benefit of the low expense ratio and more control for the individual investor, Vanguard ETFs allow the buying and selling of securities at any time during the trading day.

Presently, Vanguard is rated as the second-largest issuer of ETFs, helping expose more investors to the market in a single and easy-trade investment method. Also, the stock and bond pre-selection structure allows other stocks or bonds to perform well even if one stock or bond performs dismally.

The company follows a passive management approach, which facilitates its ETFs to track the benchmark index, leading to less risk and continuous maintenance. The unique features of ETFs help balance the rule of supply and demand and maintain the values of the shares close to the net asset value. The Vanguard Group implements the following mechanisms:

  • Group investors can return the shares due in kind – that is, they can redeem 50,000 shares or more for an equal number of shares in the market.
  • Individual investors can purchase the underlying assets and supply an equal number of shares to the market. Alternatively, they can repurchase shares in the market and sell an equal amount of underlying stock to the market.

Although the concepts maintain the difference between the net asset value and share prices on the lower end, they do not eliminate them entirely. The observed difference is known as tracking errors. The largest Vanguard ETFs incur small tracking errors, unlike the exotic ones, which report more than 1%. Despite the Vanguard ETFs’ inherent tracking errors, they continue to grow in popularity.

 

Mechanics of Exchange-Traded Funds

ETFs are traded securities like other shares of common stock. A detailed history shows that, although the current forms of ETFs are presently traded on the New York Stock Exchange (NYSE), the first generation was traded on the American Stock Exchange (AMEX).

Each share of an ETF is a claim on a holding company with a specific number of shares. For example, the Vanguard Group trust holds the securities in SPDR S&P 500. The Vanguard trust creates shares by depositing securities with trustees and receiving an exchange-traded fund in return.

One outstanding feature of ETFs is that they can be traded at any time during the trading day. The share prices may deviate from the current net asset value of securities. As such, authorized financial institutions provide liquidity to the ETF’s shares as a measure to restrict the divergence of share prices.

ETF shares are bought through brokerage companies, which charge an additional fee in the form of commission. Therefore, the shares can be purchased on margin and later sold short. In addition to the opportunity to trade intraday, such features make ETFs stand out from traditional mutual and funds.

 

Vanguard ETFs vs. Vanguard Mutual Funds

The level of investment provides the backdrop on which Vanguard products compare between ETFs and mutual funds. In addition, the company issues three classes of shares – Institutional Shares, Investor Shares, and Admiral Shares – with each class differing in expense ratio.

Vanguard ETFs are comparatively more flexible and are traded like normal stocks. Also, they can be traded throughout the trading day. There were a total of 74 Vanguard ETFs as of February 7, 2020, with $43 and $307 being the range of its market price per share. The company trades its shares through a brokerage account from where it gets commission fees.

Several factors arise when the investor is considering investing between ETFs and mutual funds. The first is to determine the most profitable product using a trading strategy or a buy-and-hold approach. Overall, the investor who seeks to reduce the minimum investment capital and wants more control over the transaction process may find ETFs more suitable than a mutual fund.

Drawing from the above features, the most underlying difference between Vanguard ETFs and Vanguard mutual funds is how shares are purchased and sold. Investors can trade mutual fund shares only once at the end of a trading day. In other words, holders are only allowed to place trade requests during the entire day, but can only settle the transaction at the end of the day.

 

Vanguard ETFs vs. Stocks and Mutual Funds

Vanguard ETFs share similar, as well as distinguishing, features with traditional stocks and mutual funds. Vanguard ETFs allow its holders to trade shares throughout the trading day, unlike normal stocks and mutual funds, which only allow investors to buy or sell shares at their net asset value at the end of the day. Occasionally, the latter can be bought directly from Vanguard’s fund complex without incurring any commission.

In addition, stocks and mutual funds cannot be purchased on margin or sold short. Such distinct features set the appropriate stage for different types of investors. For example, Vanguard ETFs are suitable for investors who are focused on short-term liquidity and purchase shares in large volumes. On the other hand, stocks and mutual funds are appropriate for investors who place less value on liquidity and tend to buy small volumes of shares.

Nevertheless, Vanguard ETFs share some features with stocks and mutual funds. First, stocks and mutual funds, as with Vanguard ETFs, bear trading costs that lower investor returns.

Also, Vanguard ETFs can track a specified market index using trading volume, which makes them similar to equity funds such as stock and mutual funds. Stocks and mutual funds are subject to longstanding tracking errors in equating the index’s pretax return. It is similar to the observed difference of Vanguard ETFs, which is manifested in the difference between the net asset value and share prices.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • American Stock Exchange (AMEX)
  • Management Expense Ratio (MER)
  • Open-End vs. Closed-End Mutual Funds
  • Investing: A Beginner’s Guide

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