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What have you heard about ETFs?

There's no shortage of popular beliefs about ETFs (exchange-traded funds). Some are accurate—or close to it—but others could be misleading.

Have you ever wondered …

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REFERENCE CONTENT

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Are ETFs always low-cost?

Are ETFs, or "exchanged-traded funds," always low-cost? Generally speaking, yes—but it's a bit more nuanced than that. Let's take a closer look at the costs to invest in, buy, and own an ETF.

The cost to invest in an ETF is the price of one share, which could vary—from as low as $50 to as high as a few hundred dollars—depending on the ETF. In return, you get an ETF that could hold tens, hundreds, or even thousands of stocks or bonds.

Compare that to investing in individual stocks or bonds on your own: You'd have to buy those shares separately to get an equally diversified portfolio—that would add up fast. Or, compare the price of an ETF to the cost to invest in a mutual fund, which could have a minimum of $1,000 to $3,000 or more. All in all, the cost to invest in an ETF can be much more affordable.

Then there's the cost to buy an ETF—the commission. That's the transaction fee you pay every time you buy or sell.

With ETFs, it's one trade, one commission. Compare that again to buying stocks and bonds separately, paying a commission for every trade—it really does add up quick. Once again, ETFs can be more affordable.

Even better? You won't pay any commissions when you trade Vanguard ETFs® through a Vanguard Brokerage Account.

Finally, there's the cost to own an ETF. It's important to consider each ETF's expense ratio, which represents its operating costs, shown as a percentage of the ETF's average net assets.

You'll often hear that ETFs have lower expense ratios because they're index investments, which means they try to track a specific index, like the S&P 500®. While that's true for most ETFs, not all of them are indexed. Some are actively managed, so you may pay more for a professional fund manager to hand-pick the stocks and bonds that make up the ETF.

Plus, some ETFs can have higher expense ratios, whether they're indexed or actively managed—for example, when investing in a specific industry, such as health care, or internationally, especially in developing countries.

That's why it's too simple to say, "ETFs are always low-cost." And why it's more accurate to compare product-to-product, one ETF to another. And why it's so important to know all the costs involved with ETFs.

To learn more, visit vanguard.com/etfcosts.


You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules on vanguard.com for limits. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

All investing is subject to risk, including the possible loss of the money you invest.

Costs are only one factor to consider when making investment decisions. There may be other material differences between investment products that must be considered prior to investing. For example, investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.

These risks are especially high in emerging markets. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.

© 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

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What's the best-performing ETF?

A common question we get is: "What's the best-performing ETF, or 'exchange-traded fund'?"

It's tempting to pull up a list of ETFs and look at performance figures for the last few months or years. The thing is, historical performance tells you how an ETF did perform; it doesn't tell you how it will perform.

It's like the weather. You can look up what the average temperature has been historically for a certain date—say, next Saturday—but what will actually happen when the weekend comes? Will it be colder or warmer than average? By a little or a lot?

You can't always use past temperatures to predict how hot or cold it will be—just like you can't always use the past performance of an ETF to predict whether that ETF will make or lose money.

Since you can't predict the future—while keeping your goals in mind, try asking, "How do I choose the best ETFs for me?

To make that decision, try not to focus on the performance of individual ETFs. Instead, consider how you'll integrate ETFs into a diversified portfolio. Diversification is the key to balancing how much risk you're willing to take with your money in exchange for the potential reward of seeing that money grow.

And asset allocation is, by far, the most important aspect of diversification. That means choosing a combination of stocks and bonds to help balance the risks that come with each type of investment.

Then you can further diversify by holding a wide variety of stocks and bonds. That way, when one isn't doing so well, the others might help pick up the slack.

Just like mutual funds, ETFs have this type of diversification built in, with tens, hundreds, or even thousands of stocks or bonds in a single ETF.

Next, consider spreading your money across U.S. and international investments.

If you're considering a sector ETF, just be careful. When you only invest in a single industry—such as energy or health care—if something goes wrong in that sector, your portfolio could take a big hit.

Finally, remember: No matter how well-diversified you are, high costs can eat away at your portfolio's performance. So be sure to compare expense ratios across similar ETFs to make sure that every possible dollar stays in your account, working for you.

For help creating a well-diversified, low-cost portfolio, visit vanguard.com/etfchoices.


You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

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. Fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investments in securities issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks can be especially high in emerging markets. Sector ETFs are subject to sector risks and nondiversification risks, which may result in performance fluctuations that are more extreme than fluctuations in the overall stock market. Bond ETFs are subject to interest rate, inflation, and credit risk.

© 2018 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

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Are ETFs index funds?

Are ETFs—or exchange-traded funds—index funds? Most of them are, but not all.

So when you hear someone compare index ETFs with traditional actively managed funds, keep in mind the differences when it comes to goals, risks, and costs.

The goal of an index ETF is to match an index—like the S&P 500®. The manager does that by buying all (or a sample) of the stocks or bonds in the index. In fact, a single index ETF can hold hundreds or thousands of stocks or bonds, making it a highly diversified portfolio. And when the index is up, the ETF performs well. Great!

But what about market risk? When the index is down, the ETF is down too, because it's designed to match the index. The good news is that an index ETF is usually going to be up over the long term.

Meanwhile, the goal of an actively managed fund is to beat an index. To accomplish that, the manager has to do a lot of research before hand-selecting which stocks or bonds to include. That means there's the possibility of higher returns—if the fund outperforms its index. Again, that's great!

But—in addition to market risk—what about manager risk? If the manager doesn't make good stock or bond selections, the fund will underperform its index.

Management differences can affect overall costs too. For example, an index ETF usually has a lower expense ratio, which represents its operating costs. And it's usually lower because—unlike an actively managed fund—an index ETF doesn't have to pay its manager more for all the extra research and expertise.

Plus, an index ETF doesn't trade its stocks or bonds as often, leading to fewer taxable capital gains distributions by the fund—which could mean lower taxes for you.

So remember: Index ETFs have different goals, less risk, and lower costs.

You can choose from a wide variety of Vanguard ETFs®—and all are commission-free through a Vanguard Brokerage Account.

(Vanguard ETF® ticker symbols: VTI, VOO, VWO, VEA, VTV, BND, VUG, VNQ, VIG, VEU, BSV, VO, VB, VYM, VCSH, VGK, VCIT, VGT, BIV, VBR, VV, VXUS, VT, BNDX, VOE, VFH, VHT, VBK, VNQI, VXF, VPL, VOT, VSS, VMBS, VTIP, VDE, VDC, VIS, MGK, VCR, VPU, VAW, BLV, VCLT, VTEB, VOOG, MGV, VGSH, VGIT, VONG, MGC, VONV, VTWO, VOX, VWOB, VIGI, VOOV, IVOO, VYMI, VONE, IVOG, VIOO, VGLT, IVOV, EDV, VTHR, VIOG, VIOV, VTWG, VTWV, VTC)

To learn more, visit vanguard.com/chooseetfs.


You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules at investor.vanguard.com for limits. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

Visit investor.vanguard.com to obtain prospectuses—or, if available, summary prospectuses—for Vanguard ETFs and mutual funds. The prospectus contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

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. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

© 2018 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

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Are ETFs always low-cost?

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What's the best-performing ETF?

What's the best-performing ETF?
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Are ETFs index funds?

Are ETFs index funds?
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Are ETFs just for active traders?

Are ETFs just for active traders?
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Are ETFs just for active traders?

Are ETFs, or "exchange-traded funds," just for active traders?

No. Just because you can buy and sell them day by day and hour by hour doesn't mean you should. ETFs are great long-term, buy-and-hold investments. In fact, research shows that the vast majority of ETF investors hold them for years―rarely trading them during that time.

So how do you buy them?

First, you'll need a brokerage account (like a Vanguard Brokerage Account), just like you'd use for stocks. You can place trades anytime the U.S. markets are open (9:30 a.m. to 4 p.m., Eastern time).

Keep in mind that ETF prices vary throughout the day, just like stock prices. So you may want to avoid buying during the first and last 30 minutes of the trading day (9:30 to 10 a.m. and 3:30 to 4 p.m., Eastern time). That's when the markets could be either reacting to overnight news or experiencing a late-day surge in trading.

You can buy as many ETF Shares as you'd like—even if it's just 1 share. Share prices can range from around $50 to a few hundred dollars depending on the ETF.

When you buy ETFs, you'll need to choose an order type. A "market order" is the fastest. That's because it usually goes through right away, at or near the current market price. If you want more control over the price you pay, consider a "limit order," a "stop order," or a "stop-limit order." You can read more about each one at vanguard.com/ordertypes.

Before you place your trade, make sure you know how much you'll pay in commissions. That's the fee that the broker will charge you for making the purchase. You can always buy Vanguard ETFs® through your Vanguard Brokerage Account, commission-free. (Commission-free trading of Vanguard ETFs applies to trades placed both online and by phone. All ETFs are subject to management fees and expenses; refer to each ETF's prospectus for more information. Account service fees may also apply. All ETF sales are subject to a securities transaction fee.)

Once you own an ETF, it's OK to check it from time to time to see how it's doing. However, try to resist the urge to sell based on short-term price swings. Market-timing is a losing game with few winners. You'll be better off with a simple buy-and-hold strategy.

So remember: ETFs are suitable for any investors who want a diversified, long-term route to achieving their investment goals. Your success ultimately comes down to your asset allocation—having the right mix of stocks and bonds for your time horizon and risk tolerance.

Select from more than 75 Vanguard ETFs that cover nearly all areas of the U.S. and international bond and stock markets.

(Vanguard ETF® ticker symbols: VTI, VOO, VWO, VEA, VTV, BND, VUG, VNQ, VIG, VEU, BSV, VO, VB, VYM, VCSH, VGK, VCIT, VGT, BIV, VBR, VV, VXUS, VT, BNDX, VOE, VFH, VHT, VBK, VNQI, VXF, VPL, VOT, VSS, VMBS, VTIP, VDE, VDC, VIS, MGK, VCR, VPU, VAW, BLV, VCLT, VTEB, VOOG, MGV, VGSH, VGIT, VONG, MGC, VONV, ESGV, BNDW, VSGX, VTWO, VOX, VWOB, VIGI, VOOV, IVOO, VYMI, VONE, IVOG, VIOO, VGLT, IVOV, EDV, VTHR, VIOG, VIOV, VTWG, VTWV, VTC)

You can either create an entire portfolio or fill gaps in your existing portfolio by focusing on specific asset classes or market sectors. To learn more, visit vanguard.com/chooseetfs.


Commission-free trading of Vanguard ETFs applies to trades placed both online and by phone. All ETFs are subject to management fees and expenses; refer to each ETF's prospectus for more information. Account service fees may also apply. All ETF sales are subject to a securities transaction fee.

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

Visit investor.vanguard.com to obtain prospectuses or, if available, summary prospectuses for Vanguard ETFs. The prospectus contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

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. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

© 2018 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

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Are ETFs tax-efficient?

Are ETFs tax-efficient?
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Are ETFs tax-efficient?

Are ETFs, or "exchange-traded funds," tax-efficient?

When it comes to distributing capital gains, yes!

Although ETFs trade like stocks, they can distribute capital gains like mutual funds. So you can have capital gains in some years, even if you don't sell any shares. That's because the ETF manager may need to sell some of the ETF's underlying holdings for a variety of reasons. At the end of the year, any gains from those sales (minus any losses) are then paid out to all of the ETF's shareholders.

But here's why ETFs can be just as tax-friendly as index funds—and way more tax-friendly than actively managed funds.

Most ETFs try to track an index, like the S&P 500. They only add and remove stocks when the index does. Big moves—like when a company is completely removed from an index—happen very rarely. So you'll usually have few, if any, capital gains distributions to report at tax time.

On the other hand, actively managed funds try to beat an index. Their managers may buy and sell investments more often. The more they trade, the more likely they'll accumulate capital gains―and the higher your potential tax liability once those gains are tallied at the end of the year.

Keep in mind that, whether your investments pay capital gains or not, you have a lot of control over how much you'll owe in taxes. No matter if you invest in ETFs, mutual funds, or individual stocks or bonds, you could be better off investing for the long term. That's because the more you trade, the higher your capital gains could be. Capital gains aren't necessarily bad; they mean you've made money! But unless you trade in a tax-deferred account, like an IRA, you'll pay taxes on the gains you've "realized" come April.

The actual rate you'll pay depends on 2 things—how high your tax rate is and how long you've held your shares. If you sell your shares in the first year, your gains will be taxed the same as your regular income. But if you keep your shares longer than a year, you'll pay a much lower rate when you sell.

The key point to remember is that, for the majority of ETFs, capital gains distributions are few and far between—yet another reason you should consider them as part of your long-term, buy-and-hold strategy.

You can select from more than 75 tax-efficient Vanguard ETFs® that cover nearly all areas of the U.S. and international stock and bond markets.

(Vanguard ETF® ticker symbols: VTI, VOO, VWO, VEA, VTV, BND, VUG, VNQ, VIG, VEU, BSV, VO, VB, VYM, VCSH, VGK, VCIT, VGT, BIV, VBR, VV, VXUS, VT, BNDX, VOE, VFH, VHT, VBK, VNQI, VXF, VPL, VOT, VSS, VMBS, VTIP, VDE, VDC, VIS, MGK, VCR, VPU, VAW, BLV, VCLT, VTEB, VOOG, MGV, VGSH, VGIT, VONG, MGC, VONV, VTWO, VOX, VWOB, VIGI, VOOV, IVOO, VYMI, VONE, IVOG, VIOO, VGLT, IVOV, EDV, VTHR, VIOG, VIOV, VTWG, VTWV, VTC)

To learn more, visit vanguard.com/chooseetfs.


You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules at vanguard.com/commissions for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

For more information about Vanguard ETFs, visit vanguard.com/etfprospectus to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider carefully before investing.

All investing is subject to risk, including the possible loss of the money you invest.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

Although our investment professionals are qualified to provide information about Vanguard funds and services, they cannot provide tax advice. If your tax situation is complex or if you are uncertain of the interpretation of a specific tax rule, we recommend that you seek advice from a qualified tax professional.

© 2018 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.