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Vanguard Index funds vs ETFs vs Mutual Funds - How do they stack up? - YouTube
Channel: Jarrad Morrow
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vanguard index funds etfs and mutual
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funds the more you look into it the more
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you realize that they have quite a bit
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in common but are all very different
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i've gotten a ton of questions about the
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differences recently and it's become
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very obvious that there's some confusion
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around what they are and how they work
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makes sense why it's tough to understand
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them though because they are more
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intertwined than a group of swingers yet
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as different as a piece of art by banksy
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and the drawing that i just did 20
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minutes ago speaking of art quick shout
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out to the sponsor of this video
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masterworks more about them later in the
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video the best way to understand this
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whole thing is to show you an overview
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of how they all work together so i drew
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you a picture and broke down each part
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by level feel free to pause the video to
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get a visual or take a screenshot before
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we dive in the whole process starts at
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level one with an index an index is just
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a group of investable assets that
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measures the overall performance of
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those assets combined major indexes are
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the ones that a lot of people have heard
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of the dow jones
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the nasdaq russell 2000 or the s p 500
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for example the s p 500 is made up of
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the 500 largest u.s companies publicly
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traded on the stock market but you
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cannot invest in these indexes directly
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because you'd need some sort of index
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fund to do that but i'm getting ahead of
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myself since we'll talk about that in
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level four at level two we have our
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index providers sometimes referred to as
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benchmark providers think of these
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people as the data collectors of the
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different indexes they take all of the
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data that has to do with these indexes
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put it together and package it in a way
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that's nice neat and presentable the
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five major index providers are the
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center for research and security prices
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standard and poor's morgan stanley
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capital international russell us indexes
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and the dow jones industrial average
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each of these providers will take all of
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this presentable data then create index
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products that they're willing to sell to
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index fund creators like vanguard you
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cannot invest directly with these
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companies so that's why you need a
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vanguard to create an investable product
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for you to put your money into enter in
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vanguard here at level three vanguard is
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the company that creates specific funds
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for you to invest in using the index
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data that one of these index providers
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offers think of vanguard like the
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middleman between you and the index
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provider now we've made it to level four
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where vanguard would decide that they
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wanted to create an index fund that
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tracks a specific index to do that
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vanguard needs to decide on what the
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goal would be for a specific index fund
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if the goal is to track the total u.s
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stock market then they need to figure
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out which one of these five benchmark
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companies offers a product that meets
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the criteria vanguard is looking for for
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this specific index fund that they want
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to create sometimes these different
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index providers offer competing products
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so it's up to vanguard to decide which
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one they want to use for their index
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fund in the case of the vanguard us
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total stock market index fund vtsa x
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it's tracking the crsp u.s total market
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index which is a product offered by the
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center for research and security prices
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when you invest in this type of fund
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your money is being spread among every
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us stock available in my three fund
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portfolio video i go through the
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benefits of index based funds so i'll
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have a link to check out that video down
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in the description and at the end of
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this video as well for the vanguard s p
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500 index fund vfi ax vanguard has
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chosen to track the s p 500 index which
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is a product offered by s p dow jones
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indices if you're getting some value
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from this video please help support my
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dog molly and of course this channel by
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hitting that thumbs up button vanguard
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isn't making a one-time purchase of
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these products from the index providers
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though since stock prices and market
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caps are constantly moving each vanguard
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fund will pay an ongoing licensing fee
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to the index provider to ensure that
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they have the most up-to-date
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information when there are any changes
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within each index a fund is tracking
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vanguard will handle adjusting the fund
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accordingly so you don't have to do
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anything for example netflix was in the
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top 10 of the vanguard s p 500 index one
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for a little while now since the stock
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price had plummeted over time it fell
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out of that top ten now the index
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provider communicated that info to
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vanguard so they could make this
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adjustment within their index funds
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before we move on to how mutual funds
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and etfs play into this we need to talk
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about some serious business so listen up
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outside of my studio here this is
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literally the only piece of decor that i
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have in my house
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do you know what that is for those of
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you who don't know what it is you're
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living under a rock it is a replica
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painting from my favorite artist banksy
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the reason this is the only piece of
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decor i have in my house is simple the
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more art that you have hanging up the
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more holes that are in your walls and
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those holes eventually need patched up
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now unless you live in a church a holy
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house isn't that fun because it causes a
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ton of damage investing in authentic art
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can also be out of reach unless you're
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super wealthy which i am not and that's
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why i own this replica this is why
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masterworks has made it possible for
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average investors like us to start
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diversifying our money into art by
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giving us access to a platform for
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buying and selling fractional shares in
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high-end contemporary blue chip art
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don't know what contemporary blue chip
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art is think picasso banksy monet and
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the soup guy andy warhol in 2017 alone
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they sold three paintings each returning
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over 30
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net irr to investors still not impressed
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contemporary art prices outperformed s p
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500 total returns by 164 percent for the
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past 26 years there is a waiting list to
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sign up but i talked to masterworks and
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because they know that we're friends
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they said that if you use my link in the
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description of this video to sign up
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they'll let you skip the waitlist and
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start investing today so get down there
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click that link and thanks again to
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masterworks for sponsoring this video i
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just threw a whole bunch of info at you
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so let's recap before moving on to
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mutual funds and etfs at level one we
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have the overall index like the s p 500
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the nasdaq and the dow jones then at
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level two we have the index slash
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benchmark providers that create
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different products that track these
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indexes at level three and four we have
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vanguard who will license these index
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tracking products from one of these
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index providers to create their index
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funds level 5 is going to be made up of
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both mutual funds and or etfs once
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vanguard has decided on an index fund
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they can choose to either wrap that fund
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up within a mutual fund or etf structure
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for investors to purchase these two
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structures behave differently which
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we'll cover in a minute but it's good to
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note that both can be made up of the
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same index fund this is why i say to
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think about a mutual fund in etf as two
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different types of rappers to go around
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the same piece of candy or in this case
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index fund we're going to do a quick
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breakdown separately then we'll compare
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both of them next to each other based on
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expense minimums tax efficiency and a
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ton of other factors that will help give
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you a better understanding a mutual fund
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wrapper is an investable asset that
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allows you to spread your money among
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many different stocks bonds or any other
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asset it chooses there is a big
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difference between actively managed
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mutual funds and index-based mutual
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funds sometimes referred to as passively
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managed mutual funds vanguard offers
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three different types of mutual fund
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structures institutional shares admiral
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shares and investor shares the
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institutional shares are usually going
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to be used by large employer programs
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like a 401k
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hsa or 403 b because the minimum amount
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to invest is higher a higher minimum to
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invest i'm talking in the 5 million or
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even 5 billion range the next type of
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mutual fund to share class they offer
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that is available to you as an
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individual investor is called investor
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shares these investor share mutual funds
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are going to be where a lot of their
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actively managed funds exist actively
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managed mutual funds are where fund
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managers are actively choosing which
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stocks to buy and sell on a regular
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basis they are not investing like an
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index fund is so do not get these two
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mixed up i am not a big fan of actively
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managed funds but if you enjoy high fees
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as well as increasing your odds of
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underperforming the market
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then have at it the third type of mutual
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fund vanguard offers is their admiral
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shares this mutual fund wrapper is where
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most of their index funds are going to
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exist the admiral shares usually offer
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the lowest fee options an exchange
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traded fund is the second rapper that
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can be placed around an index fund to be
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bought and sold by average investors
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like us as with mutual funds when you
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invest in an etf your money is being
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spread among all of the different stocks
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bonds or other assets held within that
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etf some vanguard mutual funds also have
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matching etfs for example the vanguard
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total stock market index fund has a
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mutual fund slash admiral share version
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which is vt sax and it also has an etf
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version which is vti exact same index
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fund but with a different rapper and i'm
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not talking about snoop dogg same thing
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with the s p 500 index fund where the
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mutual fund slash admiral share version
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is vfiax
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and the etf version is voo not all
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vanguard mutual funds have a matching
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etf and not all vanguard etfs have a
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matching mutual fund but pretty much all
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of their index funds have both a mutual
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fund and etf version now let's compare
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the vanguard mutual fund and etf rappers
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to show you where the differences are
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remember that we're comparing these two
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wrappers that index funds come in the
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vanguard mutual funds can only be bought
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and sold at the end of each trading day
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so if you place a trade to buy or sell a
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mutual fund anytime before 4 p.m eastern
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standard time then the transaction won't
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actually go through until the stock
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market has closed for the day etfs can
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be bought and sold anytime while the
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stock market is open and just like if
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you were buying and selling an
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individual stock vanguard mutual funds
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come with an investment minimum which is
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around three thousand dollars while
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there isn't a minimum needed to invest
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in their etfs vanguard mutual funds can
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be purchased on their investment
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platform for free now if you want to
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purchase these funds on another platform
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like fidelity then they'll charge you a
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transaction fee between 50 and 75
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dollars you can purchase the vanguard
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etfs on any platform like fidelity
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charles schwab robin hood or my favorite
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m1 finance with no added fees do not i
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repeat do not buy vanguard mutual funds
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on any platform except vanguard because
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it's not worth paying the extra fee now
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if you insist on buying vanguard funds
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on a different platform than just buy
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the comparable etf if it's available you
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are able to transfer vanguard mutual
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funds to other brokerages like fidelity
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and they will not charge you a fee same
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with vanguard etfs there are no fees if
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you own vanguard mutual funds on the
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vanguard platform and they have a
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corresponding etf then you can actually
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exchange them for the etf version if
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you'd like and it will not be a taxable
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event but you cannot turn the etf back
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into the mutual fund version so keep
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that in mind the cost for a mutual fund
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is generally a little higher than an etf
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now if we're talking about the index
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funded version of both then the price is
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going to be very close with the vanguard
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mutual funds you are able to purchase
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fractional shares with the vanguard etfs
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you cannot purchase fractional shares on
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the vanguard platform but you can buy
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fractional shares of etfs on most of the
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newer platforms like m1 finance
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generally etfs are more tax efficient
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because they distribute less and
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sometimes zero capital gains compared to
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a mutual fund vanguard is a little
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different in this area because of a
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special patent that they have that's
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only valid until 2023. this patent
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allows their mutual funds with a
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corresponding etf to be more tax
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efficient than a normal mutual fund you
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buy from another provider here's how
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bloomberg described the process vanguard
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attaches a more tax efficient etf to an
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existing mutual fund then the etf
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siphons appreciated stocks out of the
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mutual fund without incurring taxes so
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the vanguard mutual fund vtsax is more
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tax efficient because it has a matching
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etf which is vti if you want more info
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on other vanguard investment topics then
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i'll have that playlist linked to your
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left make sure to hit that thumbs up
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button before you go and support this
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video's sponsor masterworks down in the
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description below as well i'll see in
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the next one friends done
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