Systemic fungal endophytes (Clavicipitaceae) of grasses reproduce sexually when the fungus forms stromata and contagious ascospores, or asexually by vertical transmission of hyphae into seeds and seedlings. Vertical transmission is predicted to favor reduced virulence compared with horizontal transmission in systems with both types of transmission. Here, variation in vertical and horizontal transmission and its potential heritability in a host grass-endophyte interaction, Elymus hystrix infected with Epichloë elymi, were examined in natural populations and two common garden experiments using field-collected host tillers and seed progeny of maternal plants with known infection phenotypes. Transmission mode exhibited year-to-year variation in field and common garden environments. In the common garden there were consistent differences among maternal plant families in stroma production and significant correlations between stroma production in the common garden and in natural populations. Transmission mode differed among maternal families, spanning a continuum from pure vertical transmission to a high proportion of stroma production and horizontal transmission potential. Vertical transmission to seeds occurred at high rates in all maternal families regardless of their stroma production. Observed patterns of variation indicate that endophyte transmission mode and correlated changes in virulence can respond to selection by biotic and abiotic factors.