Vanguard Etf Investing: Why Automatic Investments Aren't Possible

Vanguard is a company that was founded by Jack Bogle, who pioneered indexed mutual funds. The company offers automatic investments, which can be set up to make regular contributions to taxable or retirement accounts. However, automatic investments are only available for Vanguard Mutual Funds and not for Vanguard ETFs. This is because ETFs fluctuate constantly throughout the trading day, and so it is thought that individual investors should control the transaction timing on ETFs. While Vanguard does not currently offer auto-investment for ETFs, some other companies do, including M1 Finance, E*trade, Fidelity, and Robinhood.

Fluctuating ETF prices throughout the trading day

Exchange-traded funds (ETFs) are a collection of hundreds or thousands of stocks or bonds, managed by experts, in a single fund that trades on major stock exchanges. ETFs are known for their diversification, low costs, and the ability to trade shares live during the trading day.

ETFs are subject to market volatility, and their prices can fluctuate throughout the trading day. These fluctuations can be influenced by various factors, including supply and demand, news and events, economic conditions, and the performance of the underlying assets in the ETF. As a result, the thinking is that the individual investor should control transaction timing on ETFs.

While automatic investing in ETFs is not available on Vanguard, it is offered by some other brokers, such as M1 Finance, Robinhood, E*Trade, and Interactive Brokers. These platforms allow investors to set up recurring purchases of ETFs at specified intervals, such as weekly, bi-weekly, or monthly.

It is important to note that automatic investing in Vanguard Mutual Funds is available. Investors can set up automatic investments by enrolling to deposit a specific amount from their bank account regularly. However, this feature is not currently extended to ETFs.

The inability to automatically invest in ETFs on Vanguard may be due to the company's focus on keeping costs low and its exit from the retail brokerage business. Additionally, the nature of ETFs, with their fluctuating prices, makes it challenging to automate investments without considering the timing and potential impact on the market.

Fractional shares

Vanguard allows investors to buy fractional shares of Vanguard ETFs. This means that if you want to purchase fractional shares of Vanguard ETFs, you can do so through a Vanguard brokerage account. However, Vanguard does not offer fractional-share investing in stocks or non-Vanguard ETFs.

Some investors have reported difficulties buying fractional shares of ETFs on the Vanguard website. One user reported that they were unable to buy a fractional share of an ETF worth $80 per share with $241. However, other users have reported being able to buy fractional shares of Vanguard ETFs. One user suggested that this feature is only available for modernized brokerage accounts.

Vanguard is not the only broker that allows investors to buy fractional shares. Other brokers that offer this service include Fidelity, Interactive Brokers, Robinhood, and SoFi Active Investing.

Liquidity problems

During times of high market volatility, the bid-ask spread could be more than $0.01, and an ETF could become illiquid. This poses a risk for automatic investment, as investors could inadvertently buy into an illiquid ETF, or buy at a time when the ETF is at a premium, and so automatic investment in ETFs could result in investors taking an immediate loss.

The complexity and potential for loss means that Vanguard does not allow automatic investment in ETFs, and investors must manually control the timing of their transactions.

Timing of automatic purchases

Automatic investing is a way to streamline your finances and remove the challenge of deciding when to invest. It's a way to make consistent contributions to your accounts by automating recurring bank transfers into taxable or retirement accounts. Automatic investing can help you save more and stay on track to reach your financial goals. It also eliminates the stress of deciding when or how often to invest, giving you peace of mind that your investments are scheduled and timely.

Automatic investments can be set up to occur at different frequencies, such as every week, every two weeks, twice a month, every month, or every year. You can choose the date you wish to begin your automatic investments, and this can be aligned with your paycheck cycles. For example, the 1st and 15th of the month are common dates for automatic investments.

Vanguard will try to purchase ETF shares in bulk for everyone enrolled in scheduled investments for that particular day. In theory, the cost basis per share should be the same for each person. However, they have the right to purchase shares without putting everyone in this investment pool, so the cost basis could be different for one person versus another. The timing of automatic purchases for Vanguard ETFs is currently in the pre-release phase, with some features not yet available.

Other investment platforms, such as Fidelity, M1 Finance, and Robinhood, also offer automatic investing in ETFs, although there may be fees involved. It is important to note that automatic investing in ETFs may not be available on all platforms and may be limited to certain types of accounts, such as retirement accounts.

Vanguard's compensation

While Vanguard offers automatic investments, they are only available for Vanguard Mutual Funds. This is because ETF prices fluctuate constantly throughout the trading day, so it is thought that the individual investor should control the transaction timing on ETFs.

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