Thanks, I went and bought the Vanguard BND ETF. Fidelity charged $20
commission . I am curious what is the difference between this and the
Vanguard Bond Index Fund which has a $75 fee?
A couple of others have commented, but I'll do what I can,
perhaps more than you're asking for:
There are basically three types of mutual funds (in terms of
how one buys or sells them): Open ended funds, closed ended
funds and ETFs. The mechanics of how the shares in those
funds are created/destroyed and how one buys those shares all
differ.
An open-ended fund (which is what most folks mean when they
just say "mutual fund" without being more specific) is managed
such that new shares are created or destroyed at the end of
each trading day. When you buy shares in an open-ended fund,
the fund company goes and figures out at the end of the day
just what each share is worth (NAV) and then takes your cash
and issues you new shares based on that value. Similarly,
when you sell out of one of thse, the same thing happens -
they figure out how much each share is worth, give you your
cash and the shares cease to exist. This is done by the
fund company itself and it works the same whether you buy
the shares directly from the company or if you buy them in
a brokerage account through which the same transaction takes
place.
So here's the thing about buying regular Vanguard open-ended
fund shares - if you buy them directly from Vanguard, there is
no fee - no commission, no transaction cost, nothing. But
if you buy them within a brokerage account (like, say, at
Fidelity), since Vanguard doesn't pay Fidelity anything to
facilitate those transactions, Fidelity will charge you a
transaction fee. In this case, $75 per purchase but they
don't charge you for sales. Fidelity has many funds
available which they call "NTF" - no-transaction-fee - funds.
They don't charge a fee to you for buying or selling, but
they do get paid by the fund companies for making the funds
available that way to you. Vanguard (and a few other companies)
won't pay the brokerages, so their funds are not NTF.
Now, ETFs are generally *not* bought or sold directly between
the individual and the fund company. Instead, ETF shares
trade on regular stock exchanges just like normal stock. When
you buy ETF shares, you may be buying them directly from another
individual. Or, you may be buying them from a third-party
financial institution which bought them from the fund company
itself. That third party company is called an "authorized
participant" and what happens is that if you buy your shares
from the authorized participant rather than from some other
individual who happened to already own them, the authorized
participant goes and creates the shares of the ETF in
a deal with the ETF sponsor. (The mechanics aren't quite
that important here).
Since you don't buy ETF shares from the fund company but
rather from a third party, and those shares trade between
you and that third party on regular stock exchanges, when
you buy or sell them, you pay your brokerage's regular
stock transaction commission.
Anyway, that's generally the difference, and why you paid
a $20 commission rather than zero or a $75 fee. Note that
you'll also pay $20 (or whatever you commission rate is)
to sell those shares eventually. You would not have such
a commission to sell the open-ended shares because of the
way Fidelity prices this service. Other brokerages do
charge for both purchases and sales of non-NTF funds.
When I said "it's the same fund" by the way, that's
specific to the Vanguard open-ended funds and their
corresponding ETFs. Most ETFs are entities unto themselves
but Vanguard's is a little different - theirs are a
separate share class of the same fund. In Vanguard's
case you are getting *exactly* the same underlying
portfolio. If you'd bought, say, iShares Barclays
Aggregate Fund (AGG), you'd also have been buying an
index fund which tracks the same Barclays (formerly Lehman)
Aggregate. But it's an entirely separate fund and
portfolio and there is no open-ended fund share class.
Vanguard is the only company which has ETFs and open
ended shares of the same fund rather than just similar
funds.
(I mentioned closed-end funds - they are a different beast
from either of the above, but FWIW, they are generally
bought and sold on the stock exchanges more like ETFs than
like open-ended funds)
