I have talked a lot about VTSAX as a viable investment option and an alternative to VTI. During the past weeks I noticed that I was unsure as well about the actual structure of VTSAX since there is a lot of misleading information out there. So I wondered, is VTSAX an index fund, an ETF or a mutual fund? Or maybe none of the above…
Is VTSAX a mutual fund? The short answer is: VTSAX is a no-load passively managed mutual fund. This means it is managed by the issuing company, in this case, Vanguard, and shares are sold directly to investors without a commission. The confusion can occur since VTSAX has extremely low fees (0.04%) that are more common in ETFs.
So, now that you’ve got the basic answer to your question, why not have a closer look at what makes mutual funds uniquely appealing to some investors.
What is a mutual fund anyway?
Essentially, a mutual fund is a financial vehicle that pools money from many investors, uses that money to buy securities and distributes any returns back to the investors. Typically, mutual funds are actively managed, meaning, the fund manager decides which stocks to buy and sell at any given time. This way he hopes to outperform the market (a fallacy for 99% of all funds).
VTSAX, however, is a passively managed fund. There is no manager picking and selling stocks. Instead VTSAX tracks the total stock market index which includes around 3,600 companies of the U.S. stock market.
…and what’s the difference between a mutual fund like VTSAX and an ETF like VTI?
Perhaps the way to understand what a mutual fund actually is and how it works is by comparing it to an exchange-traded fund or ETF.
VTSAX and VTI are like cousins.
And in the end, it probably does not matter much which of these two you decide to place your fortunes with. The only real difference is the structure on paper and the way in which they are traded. I found this wonderful Venn diagram on Ally’s website which quite clearly shows the differences between the two:
Mutual funds like VTSAX are only bought and sold once a day. This does not mean that you have to wait for a specific time of day to place your trade, but all trades will only be executed once a day. In contrast to this, ETFs are actively traded throughout the day like stocks.
The same way that VTSAX is only traded once a day, it is also only priced once a day. Meaning, the price you pay for VTSAX will always be the end-of-day price. With ETFs prices fluctuate throughout the day. These two facts combined make ETFs generally more appealing for investors looking to maximize tax-loss harvesting.
Typically, mutual funds will be actively managed, but as we’ve seen this is not the case with VTSAX. In this regard, VTSAX behaves exactly like an index fund.
And lastly, mutual funds tend to be less tax-efficient than ETFs due to the buying and selling of shares at the end of each day. ETFs are able to curb the capital gains tax since shares are mostly just exchanged between buyers and sellers, allowing the index fund to maintain a stable base of assets.
Is VTSAX a no-load mutual fund?
Now that we have established that VTSAX is indeed a mutual fund – although be one that behaves and is managed more like an index fund – we’ll see if VTSAX also can be considered a no-load fund.
No-load mutual funds are funds that can be bought and sold directly from the issuing company with commission and fees and without any intermediary, like a broker. VTSAX fulfills all these requirements and can be considered a no-load mutual fund.
You can buy VTSAX directly from the issuing company – Vanguard – and there are no fees associated with the purchasing or selling of shares. However, VTSAX has an expense ratio of 0.04% which is charged for the maintenance and administration of the fund itself. This is incredibly low for a mutual fund(!).
There is, also, a $3,000 minimum investment. After you have fulfilled this requirement once, either by investing a lump sum or by converting your existing holdings of VTI – you will be able to invest subsequently with a minimum of $1.
As we have seen VTSAX is a passively managed, no-load mutual fund.
But what implications does this have for you and me as a private investor striving to maximize our returns? Should you convert all your VTI holdings to VTSAX?
For retail investors the official structure of the financial product only plays a secondary role. First and foremost, it matters what the investment process looks like and which you feel more comfortable with. I’ve recently written an article about Vanguard’s Admiral Shares which goes into a bit more detail and discusses whether they are worth the additional 0.01% in fees.
Other than that, the only real issue that should concern you is tradability. Performance will obviously be equal given that VTSAX and her correspondent ETF version VTI hold pretty much the exact same stocks. The only thing you will notice in your personal investment is the option to only buy shares once a day. Furthermore, you also have the additional feature of automating your investments on a monthly basis.