An ETF (exchange-traded fund) is an investment that's built like a mutual fund—investing in potentially hundreds, sometimes thousands, of individual securities—but trades on an exchange throughout the day like a stock.
Understanding investment types
What's an ETF?
7 minute read
ETFs provide an opportunity to:
Diversify your holdings
Similar to index mutual funds, an ETF could contain hundreds—sometimes thousands—of stocks or bonds, spreading out your risk exposure compared to owning just a handful of individual stocks bonds.
Enjoy lower investment minimums
An ETF's minimum is the price of a single share, which could be as little as $50, depending on the ETF. A mutual fund may require $1,000, $3,000, or more to get started.*
Have more transparent pricing
ETFs provide real-time pricing, so you can see their prices change throughout the trading day. Mutual funds aren't priced until the trading day is over, so you don't know your price until after you've placed your trade.
Dive deeper into ETF & mutual fund similarities & differences
Are there any tax advantages to owning an ETF?
Similar to conventional index mutual funds, most ETFs try to track an index, such as the S&P 500. An index ETF only buys and sells stocks when its benchmark index does. Big investment moves—like when a company is removed from the index completely—happen very rarely.
In addition, ETF managers can use capital losses to offset capital gains within the fund, further reducing (or possibly eliminating) the taxable capital gains that get passed on to fund shareholders at the end of each year.
Do ETFs have capital gains and dividend distributions? If so, can I reinvest them?
Just like mutual funds, ETFs distribute capital gains (usually in December each year) and dividends (monthly or quarterly, depending on the ETF). Even though capital gains for index ETFs are rare, you may face capital gains taxes even if you haven't sold any shares.
If you own your ETFs in a Vanguard Brokerage Account, you can reinvest capital gains and dividends.
Can I convert my conventional Vanguard mutual fund shares to Vanguard ETF Shares?
Yes. Most funds that offer ETF Shares will allow you to convert from conventional shares of the same fund to ETF Shares. (Four of our bond ETFs—Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—don't allow for conversions.)
Conversions are allowed from both Investor and Admiral™ Shares and are tax-free if you own your mutual fund and ETF Shares through Vanguard.
Keep in mind that you can't convert ETF Shares back to conventional shares. If you decide in the future to sell your Vanguard ETF Shares and repurchase conventional shares, that transaction could be taxable.
If you have a brokerage account at Vanguard, there's no charge to convert conventional shares to ETF Shares. If you own your Vanguard mutual fund shares through another broker, keep in mind that some brokers may not be able to convert fractional shares, which could result in a modest taxable gain for you. Other brokers may also charge a fee for a conversion. Contact your broker for more information.
Can I buy ETFs from other companies through Vanguard?
Yes. All Vanguard clients have access to ETFs and mutual funds from other companies, as well as individual stocks, bonds, and CDs (certificates of deposit). And you'll pay $0 commission to trade ETFs and stocks online.
An ETF (exchange-traded fund) is an investment that's built like a mutual fund—investing in potentially hundreds, sometimes thousands, of individual securities—but trades on an exchange throughout the day like a stock.
Similar to index mutual funds, an ETF could contain hundreds—sometimes thousands—of stocks or bonds, spreading out your risk exposure compared to owning just a handful of individual stocks bonds.
An ETF's minimum is the price of a single share, which could be as little as $50, depending on the ETF. A mutual fund may require $1,000, $3,000, or more to get started.*
ETFs provide real-time pricing, so you can see their prices change throughout the trading day. Mutual funds aren’t priced until the trading day is over, so you don't know your price until after you've placed your trade.
Dive deeper into ETF & mutual fund similarities & differences
Similar to conventional index mutual funds, most ETFs try to track an index, such as the S&P 500. An index ETF only buys and sells stocks when its benchmark index does. Big investment moves—like when a company is removed from the index completely—happen very rarely.
In addition, ETF managers can use capital losses to offset capital gains within the fund, further reducing (or possibly eliminating) the taxable capital gains that get passed on to fund shareholders at the end of each year.
Just like mutual funds, ETFs distribute capital gains (usually in December each year) and dividends (monthly or quarterly, depending on the ETF). Even though capital gains for index ETFs are rare, you may face capital gains taxes even if you haven't sold any shares.
If you own your ETFs in a Vanguard Brokerage Account, you can reinvest capital gains and dividends.
Yes. Most funds that offer ETF Shares will allow you to convert from conventional shares of the same fund to ETF Shares. (Four of our bond ETFs—Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—don't allow for conversions.)
Conversions are allowed from both Investor and Admiral™ Shares and are tax-free if you own your mutual fund and ETF Shares through Vanguard.
Keep in mind that you can't convert ETF Shares back to conventional shares. If you decide in the future to sell your Vanguard ETF Shares and repurchase conventional shares, that transaction could be taxable.
If you have a brokerage account at Vanguard, there's no charge to convert conventional shares to ETF Shares. If you own your Vanguard mutual fund shares through another broker, keep in mind that some brokers may not be able to convert fractional shares, which could result in a modest taxable gain for you. Other brokers may also charge a fee for a conversion. Contact your broker for more information.
Yes. All Vanguard clients have access to ETFs and mutual funds from other companies, as well as individual stocks, bonds, and CDs (certificates of deposit). And you'll pay $0 commission to trade ETFs and stocks online.
Trading & Pricing
You can place any type of trade that you would with stocks, including:
- Limit orders, which ensure that you get a price in the range you set—the maximum you're willing to pay or the minimum you're willing to accept.
- Market orders, which are likely to execute immediately at the best available price, but you have less control over the price you pay or receive.
- Stop orders, which combine multiple steps: First, you set a trigger price. When the price of the ETF moves past your trigger price, a market order is immediately created.
- Stop-limit orders, which also combine multiple steps: Like a stop order, you first set a trigger price. But when the price of the ETF moves past your trigger price, a limit order is immediately created.
Understand order types & how they work
You can also buy on margin or sell short, but you'll need to be preapproved for these types of transactions based on your level of experience.
The market price of an ETF is determined by the prices of the stocks and bonds held by the ETF as well as market supply and demand.
The market price can change throughout the trading day and may be above or below the total value of the stocks and bonds the ETF invests in. Though the difference is usually small, it could be significant when the market is particularly volatile.
The market price of an ETF is driven in part by supply and demand. Depending on these market forces, the market price may be above or below the NAV of the fund, which is known as a premium or discount.
For historical information on the daily closing market price and NAV for a specific Vanguard ETF, look for the Price & Performance tab on the ETF's profile page.
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*Vanguard Target Retirement Funds and Vanguard STAR® Fund have a $1,000 minimum. Most other Vanguard funds have a $3,000 minimum. Some Vanguard funds have higher minimums to protect the funds from short-term trading activity. Fund-specific details are provided in each fund profile.
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.