If you just recently opened your Vanguard account – first of all, well done – you may have come across Vanguard’s so-called Admiral Shares. I, too, have been building up my portfolio with Vanguard’s low-fee ETFs for a while now and wondered whether it is worth making the switch over to Admiral Shares. So, I did a little research and compiled the key differences as well as advantages and disadvantages right here!
Are Vanguard Admiral Shares worth it? Vanguard Admiral Shares are simply a different class of shares that Vanguard offers. On average, the do have a lower expense ratio than their Investor Shares class. However, the minimum investment amount for Admiral Shares is also significantly higher than for Investor Shares. Thus, due to their lower expense ratio and auto-investment option, Vanguard Admiral Shares are worth the initial high minimum investment.
But let’s have a more detailed look at the difference between Vanguard’s share classes and how they could benefit your portfolio! In this post I will mainly focus on whether Admiral Shares are worth it for index fund investors.
So, what’s the actual difference between an ETF like VTI and its Admiral Shares counterpart VTSAX? The main difference is that Admiral Shares of ETFs are mutual funds. This several advantages and disadvantages as we will see further down below. However, the main difference between the ETF and the Admiral Shares is how they are traded.
ETFs are exchange-traded funds. This means you will be buying from and selling shares to other buyers on the market or within the same fund. Admiral Shares are mutual funds which you invest in through a broker.
Vanguard offers different share classes for most of their funds. According to them the higher you go up the asset class ladder, the more you will save on fees. Here’s an example of the average fees for different share classes:
Expense ratios for Investor shares range anywhere from 0.09% up to 1.8% with an average of 0.27%. If we take a look at the higher share class – Admiral Shares – we can see that average drop to just 0.14%. That’s almost half that of the regular share class!
However, this mainly applies to actively managed funds. When comparing the Admiral Shares class of an ETF to the Investor Share class the difference becomes minute in many cases. Sometimes, the Admiral Shares will even have a higher expense ratio than the ETF with the exact same holding. Such is the case with VTI and VTSAX.
Many “personal finance gurus” such as J.L. Collins have been promoting the Admiral Shares class for a long time, stressing their benefits over regular funds. But what exactly are the benefits of Vanguard Admiral Shares? I’ve listed the most important ones you should perhaps pay attention to right here:
All Vanguard Admiral Shares will the option to automatically invest a certain amount each month. You can even set up an automatic transfer from your bank account to your Vanguard brokerage account and have that amount invested into the Admiral Shares of your choosing. This option is unavailable within Vanguard for other share classes and for exchange-traded funds (ETFs).
The benefits to this are numerous. Foremost, it will allow you to set your investments towards financial independence on auto-pilot and not worry about them at all. This will likely make it easier to stick to your investment plan in the long run.
One of the biggest advantages of Admiral Shares is the option to buy fractional shares. When investing in an ETF on the other hand you would only be able to purchase individual shares at a fixed price. This has several benefits:
For instance, if you plan on dollar-cost averaging $12,000 over the next 12 months you would ideally like to invest $1,000 each month. With Vanguard Admiral Shares, no problem! With an ETF it’s a bit more tricky. Some months you may only be able to invest $700, $800, or $900 depending on the current share price of the fund.
No Overhead in the Bid/Ask Spread
Since ETF – and for that matter most other stocks – are traded on an exchange you will always have slight discrepancies between the bid and ask of a fund. This is what is called the spread. The ask can simply be considered the lowest price that sellers are willing to accept and the bid, the highest price buyers are willing to pay.
Admiral Shares are mutual funds. As they are bought directly from Vanguard and there are no other buyers or sellers involved, Vanguard is simply going to allow you to invest the exact amount at the end of the trading day. No order types. No exchanging. No spread.
Of course, as with most things in life, there are positives and negatives. Here are some of the disadvantages of Vanguard’s Admiral Shares:
High Minimum Investment
Most Admiral Shares will have significantly higher minimum investments than their ETF counterparts. For index funds the minimum investment is just the price of a share. Take Vanguard’s Total Stock Market ETF (VTI) currently priced around $150/share. A pretty low minimum. The minimum investment for the Admiral Shares version of the Total Stock Market VTSAX is currently at $3,000.
An option to consider if your portfolio has not reached $3,000 yet is to invest in Vanguard’s Target Date or Life Strategy funds until your portfolio value exceeds the required minimum. Their minimum investment is just $ 1,000 and you will enjoy most of the advantages of the Admiral Shares.
Higher Expense Ratio
Believe it or not, some Admiral Shares even have a higher expense ratio than index funds with the same holdings. This is sort of counter-intuitive, especially since Vanguard advertises their Admiral Shares as being so much more cost-effective than other share classes. Here’s the difference between the ETF (VTI) and the Admiral Shares (VTSAX):
The ETFs expense ratio at 0.03% is actually 0.01% lower than the Admiral Shares expense ratio.
Now, whether this is really something that will have a huge impact on your overall portfolio and your journey to financial independence is questionable. In fact, 0.01% is just about $100 per year on 1 Million.
One other minor downside is that it is a bit more difficult to make use of tax-loss harvesting with Admiral Shares. ETFs can simply be sold and re-bought throughout the trading day without almost any price difference. With Admiral Shares you would have to wait until the end of the trading day to re-buy those investment you sold for tax-loss harvesting purposes.
Incidentally, converting your existing shares to Admiral Shares is entirely tax-free. However, this only applies if you convert within the same fund. So, for instance, VTI to VTSAX would be tax-free. VGI to VTSAX would not be.
As we’ve seen there are many advantages to buying the Admiral Shares version of ETFs. One of the biggest being the option to automatically invest a fixed amount each month. This can be done by automatically investing directly from your bank account and by purchasing fractional shares.
I have also talked about some of the drawbacks of Admiral Shares such as their higher minimum investment. In some cases Admiral Shares even have higher fees than ETFs!
So, are the benefit of Admiral Shares worth the higher minimum investment and potentially higher fees? As usual, this comes down to personal preference. The slight difference in fees should not cause you any sleepless nights.
Personally, I prefer having the option of automatically investing a fixed amount each month. If I am paying $100 a year on an account of 1 Million for that service, so be it.
What’s your personal preference? Are Admiral Shares worth it to you?