How the Benefits of Low ETF Expense Ratios Expand Overtime

Recent expense ratio cuts on dozens of Vanguard ETFs highlight our reputation as a provider of low-cost funds. They also represent an opportunity to remind advisors of a critical variable in measuring investment costs—namely that the savings stemming from low expense ratios only grow over time.

Measuring the total cost of ownership (TCO) for an ETF can seem as simple as adding the expense ratio and trading costs (i.e., bid-ask spreads). But that ignores time. In other words, the longer the holding period, the more a relatively low ETF expense ratio becomes a deciding variable in cost.

Spreads are still important, especially for shorter holding periods. But there comes a point when expense ratio becomes more important than spread over the long term. When comparing the TCO of competing ETFs, we call the moment when a low expense ratio becomes more determinative than a tight spread the break-even point.

But when is that point reached? You may be surprised to find that it’s sooner than you think.

Real-World Examples

With that background in mind, let’s compare the TCO on three pairs of fixed income ETFs. Importantly, each of the Vanguard ETFs in the three comparisons had their expense ratios lowered in February.

We’ll include both the entry spread and the exit spread—the costs of a round-trip trade. That’s because if you’re trading in and out of an ETF, you’ll be paying the spread both times.

Again, to illustrate the importance of time in TCO calculations, we’ll compare a trio of bond ETF pairs—one for Treasurys, another for corporate bonds and the third from the municipal bond market.

VGLT vs. TLT

We’ll start by comparing two popular Treasury ETFs—iShares 20+ Year Treasury Bond ETF (TLT) and Vanguard Long-Term Treasury ETF (VGLT), which offers exposure to all the longer end of the Treasurys market spanning from 10-30 years.

The round-trip breakeven here is 15 days. On Feb. 1, 2025, VGLT lowered its expense ratio to just 0.03% (or three basis points (bps)), while TLT costs 15 bps per year. The trading spread on VGLT is 1.8 bps—only 0.6 bps wider than TLT’s spread of 1.2 bps.¹

In other words, if your client is holding VGLT for more than 15 days, VGLT’s TCO (expense ratio plus trading spread) is less than that of TLT. Holding periods of 15 or fewer days favor TLT but, after that, VGLT becomes the less expensive of the two ETFs, and its TCO advantage only grows with time.

Total Cost of Ownership: VGLT vs. TLT

Source: Morningstar, Inc., for both chart and table, as of Jan. 31, 2025.

Sources: Trading-spread data from Bloomberg, as of Jan. 31, 2025; ETF NAV data from FactSet as of Jan. 31, 2025; expense ratio data from Vanguard, as of Feb. 1, 2025.

VCIT vs. LQD

Shifting to the realm of corporate bond ETFs, let’s compare Vanguard’s very liquid and low-cost investment-grade corporate bond ETF, Vanguard Intermediate-Term Corporate Bond ETF (VCIT), and the highest-volume investment-grade credit ETF, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).

VCIT includes intermediate-term bonds between five to 10 years of maturity, and LQD includes bonds with three-plus years of maturity and a tilt toward more liquid bonds. Despite these differences, they’re similar in terms of risk, with both having intermediate durations.

The breakeven in this comparison comes after an eight-day holding period. VCIT’s bid-ask spreads are a tad wider than LQD’s—VCIT’s are 1.26 bps and LQD’s 0.94 bps. But because of VCIT’s recently lower expense ratio of 0.03%, versus 0.14% for LQD, VCIT’s lower TCO kicks in relatively quickly—this time within only eight trading days.²

Total cost of ownership: VCIT vs. LQD

Source: Morningstar, Inc., for both chart and table, as of Jan. 31, 2025.

VTEB vs. MUB

Let’s now turn our focus to a pair of muni bond ETFs—our low-cost, across-the-muni- yield-curve national fund, Vanguard Tax-Exempt Bond ETF (VTEB), and iShares National Muni Bond ETF (MUB), two of the most liquid muni bond ETFs on the market.

The two ETFs are similar in exposure and in their risk profiles.

VTEB has an expense ratio of 0.03% but, this time, MUB’s expense ratio is much closer at 0.05%. Although they both trade with the same spread of one penny, VTEB’s lower share price means it trades at two basis points—wider than MUB’s spread of just above one bps. The round-trip breakeven comes out to be 120 days.³

That’s around four months, and while that may sound like a long time compared to the previous example, it’s also an opportune time to remind investors that investing is a long-term discipline. Moreover, munis are not a sub-asset class where investors tend to rotate in and out, but rather they buy and hold to generate tax-exempt income. The lower expense ratio ensures that you keep more of that income over the long term.

Total Cost of Ownership: VTEB vs. MUB

Source: Morningstar, Inc., for both chart and table, as of Jan. 31, 2025.

Have Low Cost and Liquidity with Vanguard ETFs

As our comparisons show, the advantages of a low expense ratio are magnified over time. Still, as these examples show, investors keen on keeping their trading costs just as low as their holding costs don’t have to compromise. In many cases, they can have both low expense ratios and tight bid-ask spreads.

Vanguard’s lineup of 90 low-cost ETFs is relatively attractive in terms of trading spreads compared with similar strategies offered by competitors. Among those attributes:

• Vanguard ETFs have sufficient liquidity for most investors’ trading needs. Over 90% of Vanguard ETF assets have spreads and average daily volume, or ADV, in the 90th percentile of their respective Morningstar categories. In addition, 29 of our ETFs trade with an ADV over $100 million per day.⁴
• More Vanguard ETFs have low spreads than do iShares and State Street ETFs. Also, 72% of Vanguard ETFs trade with a spread below six bps, compared to only 47% for iShares and 46% for State Street. This means you can have more confidence knowing that an ETF you’re choosing from Vanguard is designed not just to be a great long-term investment but to be liquid, too.⁵
• Industry-leading total cost of ownership. Combine our average spreads of 2.1 bps with our low average expense ratio of 4.5 bps across our ETF lineup, and the total cost of owning a Vanguard ETF is an industry-leading 6.6 bps. You can truly have your low-cost and liquidity, too, with Vanguard ETFs.⁶

¹Notes: Of crucial importance to the VGLT-TLT spread calculation is that the net asset value (NAV) of one VGLT share was $55.60 as of Jan. 31, 2025, while the NAV of one TLT share was $87.84 on the same day. Both products average a time-weighted bid-ask spread of $0.01.

²Morningstar, Inc. as of Jan. 31, 2025.

³Morningstar, Inc., as of Jan. 31, 2025.

⁴Source: Vanguard calculations, based on data from Bloomberg and Morningstar, analyzing Vanguard’s lineup of ETFs, as of Jan. 31, 2025, for bid-ask spreads data, and Feb. 1, 2025, for expense ratio data.

⁵Source: Vanguard calculations, based on data from Bloomberg and Morningstar, analyzing Vanguard’s lineup of ETFs, as of Jan. 31, 2025, for bid-ask spreads data, and Feb. 1, 2025, for expense ratio data.

⁶Source: Vanguard calculations, based on data from Bloomberg and Morningstar, analyzing Vanguard’s lineup of ETFs, as of Jan. 31, 2025, for bid-ask spreads data, and Feb. 1, 2025, for expense ratio data.
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