Are bond ETFs cheaper than funds?

February 15, 2008

Last year I sold shares of the Vanguard High-Yield Corporate Fund and reinvested the cash in Vanguard Total Bond Market Index Fund, which has an expense ratio of 0.20 percent. Now Vanguard is offering ETF shares for the latter fund, and those have an even lower expense ratio. Since minimizing expenses is a key way to boost fund returns, should I switch to the ETFs?

Last year I sold shares of the Vanguard High-Yield Corporate Fund and reinvested the cash in Vanguard Total Bond Market Index Fund, which has an expense ratio of 0.20 percent. Now Vanguard is offering ETF shares for the latter fund, and those have an even lower expense ratio. Since minimizing expenses is a key way to boost fund returns, should I switch to the ETFs?

Probably not. If you tend to trade fixed-income investments rather than hold them long term, you'll likely increase your costs rather than reduce them by switching to the ETFs. The difference in the expense ratios between your current fund and the new ETFs is just 0.09 percentage points, and the brokerage commission you'd pay each time you buy or sell ETF shares could easily wipe out any savings the lower expense ratio would garner.