Converting Mutuals to ETF'S

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LifeIsGood
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Converting Mutuals to ETF'S

Post by LifeIsGood »

I was reading an article in the WSJ yesterday about how most classes of ETF's outperformed their mutual fund counterparts. It also appears that the conversion (eg VTSAX -> VTI) is not a taxable event.
Before I make the leap, are there any disadvantages to doing a conversion other than the ETF shares cannot be converted back to mutual fund status?
exodusNH
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Re: Converting Mutuals to ETF'S

Post by exodusNH »

LifeIsGood wrote: Tue Feb 07, 2023 5:46 am I was reading an article in the WSJ yesterday about how most classes of ETF's outperformed their mutual fund counterparts. It also appears that the conversion (eg VTSAX -> VTI) is not a taxable event.
Before I make the leap, are there any disadvantages to doing a conversion other than the ETF shares cannot be converted back to mutual fund status?
You can only do this if you hold the mutual funds at Vanguard.

All uncovered shares are converted into a single average-cost ETF lot.

At Vanguard (and Fidelity and Schwab AFAIK), you lose the ability to do automatic investments.

The performance differences aren't really significant. Backtesting isn't entirely reliable as VTSAX's ER hasn't been the same value as Vanguard has been dropping it.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Over a shorter period of time, where VTSAX's ER was lower, you can see it slightly outperforms even though its ER was higher than the ETF.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
MrJedi
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Re: Converting Mutuals to ETF'S

Post by MrJedi »

LifeIsGood wrote: Tue Feb 07, 2023 5:46 am I was reading an article in the WSJ yesterday about how most classes of ETF's outperformed their mutual fund counterparts. It also appears that the conversion (eg VTSAX -> VTI) is not a taxable event.
Before I make the leap, are there any disadvantages to doing a conversion other than the ETF shares cannot be converted back to mutual fund status?
That article was focused on tax efficiency, which is true due to the way ETFs are structured. However it is worth pointing out that many Vanguard mutual funds have equivalent tax efficiency to the corresponding ETF (e.g. VTSAX and VTI), due to a special hybrid structure that they have. This is actually the same reason you can convert MF to ETF there with no taxable event. In that case, that tax efficiency reason goes away. I would focus on which trading mechanic you prefer.
sycamore
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Re: Converting Mutuals to ETF'S

Post by sycamore »

LifeIsGood wrote: Tue Feb 07, 2023 5:46 am Before I make the leap, are there any disadvantages to doing a conversion other than the ETF shares cannot be converted back to mutual fund status?
Some investors prefer the way mutual funds are priced -- net asset value at the end of the day. If you're not used to intraday market pricing of ETFs you may not like it.

One very minor disadvantage is that if you ever transfer your ETF to another brokerage, the ACATS process only allows for whole share transfers, and any fractional shares ate sold prior to transfer. Just another taxable thing to keep track of if it's in a taxable account.
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Re: Converting Mutuals to ETF'S

Post by livesoft »

My sole investment in a taxable account at Vanguard is Vanguard Large-cap Index mutual fund. The shares I own were last purchased in 2009. I do not reinvest the dividends. I also own the Vanguard Large-cap Index ETF at another broker. At the present time I see no reason to convert the mutual fund shares of VCLAX VLCAX into ETF shares VV.

The OP and others may wish to test the waters of ETFs if they have not already done so and buy a few shares to see if they like ETFs. So go buy 1, 10, 31, a few shares of VTI and see what you think. Hold those share through at least one quarterly dividend payout. Anyways, buying VTI is an easily reversible action because the shares of VTI can be readily sold.
Last edited by livesoft on Tue Feb 07, 2023 3:17 pm, edited 1 time in total.
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Apathizer
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Re: Converting Mutuals to ETF'S

Post by Apathizer »

As others have said the performance difference between mutual funds and their ETF counterparts is so negligible I wouldn't worry about switching between the two. For someone just starting out I think ETFs are the way to go, but mutual funds are still fine especially in a taxable account it's probably not worth it to go through the trouble of switching.
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Pete12
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Re: Converting Mutuals to ETF'S

Post by Pete12 »

sycamore wrote: Tue Feb 07, 2023 6:50 am Some investors prefer the way mutual funds are priced -- net asset value at the end of the day. If you're not used to intraday market pricing of ETFs you may not like it.
This applies to me and is why I buy mutual funds instead of ETFs. I just don’t feel comfortable buying ETFs during the day and competing against the robots. Probably overthinking it, but I like knowing the price is locked in at the end of the day and that’s the price you’ll get.

Best of luck,
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UpperNwGuy
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Re: Converting Mutuals to ETF'S

Post by UpperNwGuy »

Pete12 wrote: Tue Feb 07, 2023 7:35 am
sycamore wrote: Tue Feb 07, 2023 6:50 am Some investors prefer the way mutual funds are priced -- net asset value at the end of the day. If you're not used to intraday market pricing of ETFs you may not like it.
This applies to me and is why I buy mutual funds instead of ETFs. I just don’t feel comfortable buying ETFs during the day and competing against the robots. Probably overthinking it, but I like knowing the price is locked in at the end of the day and that’s the price you’ll get.
I am the exact opposite. I always hated having to place my order for mutual fund shares before closing and then see the market do crazy things in the last few minutes of trading. I converted to ETFs, and now there are no surprises when I buy shares. I don't understand the part about competing with robots. I use market orders because I only own large, broad-based index ETFs, but you always have the option of using a limit order if fear of robots makes you uncomfortable.
Apathizer
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Re: Converting Mutuals to ETF'S

Post by Apathizer »

UpperNwGuy wrote: Tue Feb 07, 2023 7:45 am
Pete12 wrote: Tue Feb 07, 2023 7:35 am
sycamore wrote: Tue Feb 07, 2023 6:50 am Some investors prefer the way mutual funds are priced -- net asset value at the end of the day. If you're not used to intraday market pricing of ETFs you may not like it.
This applies to me and is why I buy mutual funds instead of ETFs. I just don’t feel comfortable buying ETFs during the day and competing against the robots. Probably overthinking it, but I like knowing the price is locked in at the end of the day and that’s the price you’ll get.
I am the exact opposite. I always hated having to place my order for mutual fund shares before closing and then see the market do crazy things in the last few minutes of trading. I converted to ETFs, and now there are no surprises when I buy shares. I don't understand the part about competing with robots. I use market orders because I only own large, broad-based index ETFs, but you always have the option of using a limit order if fear of robots makes you uncomfortable.
I actually think that's a psychological disadvantage with ETFs. Generally daily price fluctuations are best ignored. Sure it feels better to sell when the market is up, but day to day that doesn't make much practical difference.

One thing I do prefer about mutual funds is that you can transfer directly between them if it's the same company. To me it's kind of annoying with ETFs when you want to rebalance, you have to sell shares then wait two days before you can buy shares in another fund. But again of course in the long-term that makes little difference.
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livesoft
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Re: Converting Mutuals to ETF'S

Post by livesoft »

Apathizer wrote: Tue Feb 07, 2023 8:07 am One thing I do prefer about mutual funds is that you can transfer directly between them if it's the same company. To me it's kind of annoying with ETFs when you want to rebalance, you have to sell shares then wait two days before you can buy shares in another fund. But again of course in the long-term that makes little difference.

This is why folks might want to try out ETFs first. For one thing the part about waiting 2 days is FALSE. One can sell shares of an ETF and immediately use the money to buy shares of something else in the same account.

If one wants to buy or sell ETF shares at a future unknown price with no bid/ask spread just like they do with a mutual fund, then one can submit an order after the market close and the shares will be bought at the next opening cross when the market opens at a fair price determined by other buyers and sellers at that future time.

However, if one wants to transfer money from selling shares to an external checking account, then it is TRUE that a mutual fund sale will settle at T+1 while ETF shares settle at T+2. This does mean that one has to wait one more day after selling ETF shares than they do after selling mutual fund shares before they can ACH transfer the money to their checking account.
Last edited by livesoft on Tue Feb 07, 2023 8:22 am, edited 1 time in total.
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b4nash
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Re: Converting Mutuals to ETF'S

Post by b4nash »

Automatic investing with mutual funds wins out for me.
exodusNH
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Re: Converting Mutuals to ETF'S

Post by exodusNH »

Apathizer wrote: Tue Feb 07, 2023 8:07 am One thing I do prefer about mutual funds is that you can transfer directly between them if it's the same company. To me it's kind of annoying with ETFs when you want to rebalance, you have to sell shares then wait two days before you can buy shares in another fund. But again of course in the long-term that makes little difference.
That's actually not the case. Even Vanguard lets you buy with unsettled funds. Where you run into a problem is if you sell A to buy B and then sell B to buy C before T+2.
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Re: Converting Mutuals to ETF'S

Post by Apathizer »

exodusNH wrote: Tue Feb 07, 2023 8:41 am
Apathizer wrote: Tue Feb 07, 2023 8:07 am One thing I do prefer about mutual funds is that you can transfer directly between them if it's the same company. To me it's kind of annoying with ETFs when you want to rebalance, you have to sell shares then wait two days before you can buy shares in another fund. But again of course in the long-term that makes little difference.
That's actually not the case. Even Vanguard lets you buy with unsettled funds. Where you run into a problem is if you sell A to buy B and then sell B to buy C before T+2.
Whenever I've started to buy with unsettled funds I get a warning it might violate trading laws or something, so I don't bother. Waiting 2 days isn't a big deal anyway.
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exodusNH
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Re: Converting Mutuals to ETF'S

Post by exodusNH »

Apathizer wrote: Tue Feb 07, 2023 9:11 am
exodusNH wrote: Tue Feb 07, 2023 8:41 am
Apathizer wrote: Tue Feb 07, 2023 8:07 am One thing I do prefer about mutual funds is that you can transfer directly between them if it's the same company. To me it's kind of annoying with ETFs when you want to rebalance, you have to sell shares then wait two days before you can buy shares in another fund. But again of course in the long-term that makes little difference.
That's actually not the case. Even Vanguard lets you buy with unsettled funds. Where you run into a problem is if you sell A to buy B and then sell B to buy C before T+2.
Whenever I've started to buy with unsettled funds I get a warning it might violate trading laws or something, so I don't bother. Waiting 2 days isn't a big deal anyway.
Yes, but it's not a problem. Where you get slapped is if you sell B before it's settled.
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Re: Converting Mutuals to ETF'S

Post by UpperNwGuy »

Apathizer wrote: Tue Feb 07, 2023 9:11 am
exodusNH wrote: Tue Feb 07, 2023 8:41 am
Apathizer wrote: Tue Feb 07, 2023 8:07 am One thing I do prefer about mutual funds is that you can transfer directly between them if it's the same company. To me it's kind of annoying with ETFs when you want to rebalance, you have to sell shares then wait two days before you can buy shares in another fund. But again of course in the long-term that makes little difference.
That's actually not the case. Even Vanguard lets you buy with unsettled funds. Where you run into a problem is if you sell A to buy B and then sell B to buy C before T+2.
Whenever I've started to buy with unsettled funds I get a warning it might violate trading laws or something, so I don't bother. Waiting 2 days isn't a big deal anyway.
Yes, I get those warnings, too, but the word is might, not will. When I rebalance or tax loss harvest, I sell one ETF and buy the other ETF within a minute or two of each other. It works at Vanguard, Fidelity, Schwab, and other brokerages.
Apathizer
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Re: Converting Mutuals to ETF'S

Post by Apathizer »

UpperNwGuy wrote: Tue Feb 07, 2023 1:30 pm
Apathizer wrote: Tue Feb 07, 2023 9:11 am
exodusNH wrote: Tue Feb 07, 2023 8:41 am
Apathizer wrote: Tue Feb 07, 2023 8:07 am One thing I do prefer about mutual funds is that you can transfer directly between them if it's the same company. To me it's kind of annoying with ETFs when you want to rebalance, you have to sell shares then wait two days before you can buy shares in another fund. But again of course in the long-term that makes little difference.
That's actually not the case. Even Vanguard lets you buy with unsettled funds. Where you run into a problem is if you sell A to buy B and then sell B to buy C before T+2.
Whenever I've started to buy with unsettled funds I get a warning it might violate trading laws or something, so I don't bother. Waiting 2 days isn't a big deal anyway.
Yes, I get those warnings, too, but the word is might, not will. When I rebalance or tax loss harvest, I sell one ETF and buy the other ETF within a minute or two of each other. It works at Vanguard, Fidelity, Schwab, and other brokerages.
Ah, good to know, thanks.
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Re: Converting Mutuals to ETF'S

Post by Parkinglotracer »

Just converted ETF shares I had in two inherited Vanguard IRAs to Mutual Funds yesterday so I can schedule auto RMDs w/ Vanguard. Sadly one Can’t do auto RMDs with ETFs with Vanguard.
Living Free
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Re: Converting Mutuals to ETF'S

Post by Living Free »

Parkinglotracer wrote: Tue Feb 07, 2023 5:49 pm Just converted ETF shares I had in two inherited Vanguard IRAs to Mutual Funds yesterday so I can schedule auto RMDs w/ Vanguard. Sadly one Can’t do auto RMDs with ETFs with Vanguard.
Were you able to do that as a conversion? Or did you just sell the ETFs and buy the mutual funds shortly afterwards?
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Re: Converting Mutuals to ETF'S

Post by placeholder »

I think that if I were holding at vanguard I'd just use the funds but since I haven't been there since 2008 or so due to transfer bonus collecting etfs have been a terrific help.
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Re: Converting Mutuals to ETF'S

Post by placeholder »

exodusNH wrote: Tue Feb 07, 2023 5:56 am
All uncovered shares are converted into a single average-cost ETF lot.
Are they still noncovered shares?
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Re: Converting Mutuals to ETF'S

Post by exodusNH »

placeholder wrote: Tue Feb 07, 2023 9:33 pm
exodusNH wrote: Tue Feb 07, 2023 5:56 am
All uncovered shares are converted into a single average-cost ETF lot.
Are they still noncovered shares?
From what's been posted here, you have a single uncovered lot that is locked at average cost.
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Re: Converting Mutuals to ETF'S

Post by placeholder »

exodusNH wrote: Tue Feb 07, 2023 11:20 pm From what's been posted here, you have a single uncovered lot that is locked at average cost.
That only matters slightly as you are responsible for providing cost basis for non covered shares.
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Re: Converting Mutuals to ETF'S

Post by Parkinglotracer »

Living Free wrote: Tue Feb 07, 2023 7:21 pm
Parkinglotracer wrote: Tue Feb 07, 2023 5:49 pm Just converted ETF shares I had in two inherited Vanguard IRAs to Mutual Funds yesterday so I can schedule auto RMDs w/ Vanguard. Sadly one Can’t do auto RMDs with ETFs with Vanguard.
Were you able to do that as a conversion? Or did you just sell the ETFs and buy the mutual funds shortly afterwards?
I had heard one can do conversions but did not try that. If it was a large portion of my investments I would have looked into that in order to not be out of the market for a time. I sold VTI and VXUS in the AM and bought the equivalent mutual funds the same day. I hold treasuries for The bond portion of my portfolios.

If vanguard can decide procedurally what price they convert an ETF to a mutual fund at, then I would think they could do auto Investments and RMDs into / out of ETFs. They must be busy worrying about other services to investors and that is ok with me. I just wanted to solve the challenge I had (remembering to do rmds) as I missed the one year I converted to a brokerage account and had to write the IRS mea culpa letters.
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Re: Converting Mutuals to ETF'S

Post by Gaston »

If you plan to convert a MF held in a taxable account, I suggest that you:

1. In the MF, confirm you have the tax basis set as you want it (HIFO, Spec ID, etc).

2. In the MF, print your full cost basis transaction history.

3. Do the conversion.

4. In the ETF, check that all your tax lots converted over correctly.

I’ve never had a problem with a conversion at Vanguard, but if one crops up, it’s best to deal with it promptly.
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LifeIsGood
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Re: Converting Mutuals to ETF'S

Post by LifeIsGood »

Thanks everyone for weighing in. I guess I picked a poor example (VTSAX & VTI) since their expense ratios and 10 yr performance are so close. The WSJ article showed Int. Equity mutual fund posttax returns on average were .33% lower than the comparable ETF's. Growth funds also trailed ETF's by .2%. I would think that over a long period of time those differences would be non-trivial.
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Re: Converting Mutuals to ETF'S

Post by exodusNH »

LifeIsGood wrote: Wed Feb 08, 2023 5:29 am Thanks everyone for weighing in. I guess I picked a poor example (VTSAX & VTI) since their expense ratios and 10 yr performance are so close. The WSJ article showed Int. Equity mutual fund posttax returns on average were .33% lower than the comparable ETF's. Growth funds also trailed ETF's by .2%. I would think that over a long period of time those differences would be non-trivial.
Without knowing the underlying funds, it's really hard to compare.

Most passive index funds have relatively low turnover, reducing capital gains distributions.

Dividends for a given set of companies is going to be identical for mutual funds and ETFs.

They may have been looking at active mutual funds vs ETFs. Those really aren't comparable. And while there are active ETFs available, there aren't that many in the scheme of things. Further, active funds' choices of benchmarks can be creative. There's an American Funds fund that benchmarks itself against the S&P 500, but only contains 175 companies and holds up to 20% of companies not in the US or in the S&P 500. You really can't compare it against VOO.
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Re: Converting Mutuals to ETF'S

Post by sycamore »

LifeIsGood wrote: Wed Feb 08, 2023 5:29 am ... The WSJ article showed Int. Equity mutual fund posttax returns on average were .33% lower than the comparable ETF's. Growth funds also trailed ETF's by .2%.
Are those for Vanguard mutual fund versus corresponding Vanguard ETF? Or just "average" across fund families? If the latter, I'd say the article is no big deal -- I can choose between VG mutual fund or VG ETF with negligible difference.

Any example comparisons from the article?
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Re: Converting Mutuals to ETF'S

Post by UpperNwGuy »

LifeIsGood wrote: Wed Feb 08, 2023 5:29 am Thanks everyone for weighing in. I guess I picked a poor example (VTSAX & VTI) since their expense ratios and 10 yr performance are so close. The WSJ article showed Int. Equity mutual fund posttax returns on average were .33% lower than the comparable ETF's. Growth funds also trailed ETF's by .2%. I would think that over a long period of time those differences would be non-trivial.
Of course the expense ratios and performance are close. That's because VTSAX and VTI are two share classes of the same fund. The WSJ article is comparing ETFs and mutual funds that are not share classes of the same fund.
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Re: Converting Mutuals to ETF'S

Post by LifeIsGood »

The WSJ article was comparing averages across fund families.
sycamore wrote: Wed Feb 08, 2023 6:58 am
LifeIsGood wrote: Wed Feb 08, 2023 5:29 am ... The WSJ article showed Int. Equity mutual fund posttax returns on average were .33% lower than the comparable ETF's. Growth funds also trailed ETF's by .2%.
Are those for Vanguard mutual fund versus corresponding Vanguard ETF? Or just "average" across fund families? If the latter, I'd say the article is no big deal -- I can choose between VG mutual fund or VG ETF with negligible difference.

Any example comparisons from the article?
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Re: Converting Mutuals to ETF'S

Post by Living Free »

Parkinglotracer wrote: Wed Feb 08, 2023 3:58 am
Living Free wrote: Tue Feb 07, 2023 7:21 pm
Parkinglotracer wrote: Tue Feb 07, 2023 5:49 pm Just converted ETF shares I had in two inherited Vanguard IRAs to Mutual Funds yesterday so I can schedule auto RMDs w/ Vanguard. Sadly one Can’t do auto RMDs with ETFs with Vanguard.
Were you able to do that as a conversion? Or did you just sell the ETFs and buy the mutual funds shortly afterwards?
I had heard one can do conversions but did not try that. If it was a large portion of my investments I would have looked into that in order to not be out of the market for a time. I sold VTI and VXUS in the AM and bought the equivalent mutual funds the same day. I hold treasuries for The bond portion of my portfolios.

If vanguard can decide procedurally what price they convert an ETF to a mutual fund at, then I would think they could do auto Investments and RMDs into / out of ETFs. They must be busy worrying about other services to investors and that is ok with me. I just wanted to solve the challenge I had (remembering to do rmds) as I missed the one year I converted to a brokerage account and had to write the IRS mea culpa letters.
Gotcha. I just converted my mutual funds in my taxable brokerage account to ETFs, but from what I understand vanguard does not do the conversion the other direction.
I suppose in a tax advantaged account there’s no tax concern w selling at a gain. But I would get nervous when selling the ETFs that the price would increase during the day and the mutual fund purchase would go through at a higher price (could be very painful if even a half percent on a big sum). So I hope the markets went down after you sold your ETFs so that you bought the mutual funds at a lower price at the end of the day :happy

I’ve thought that if I were going to convert an ETF to a mutual fund I’d be so worried about a price change that I’d probably do it at around 3:58pm to hopefully minimize the price difference.
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Re: Converting Mutuals to ETF'S

Post by Parkinglotracer »

Exactly - sold our about 100K of ETFs at opening price and bought mutual fund at close of that same business day. Crossed my mind market would have record day. Luckily market was down a few points. Better be lucky than good as we used to say in military. I usually do exchanges in kind when possible.
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Re: Converting Mutuals to ETF'S

Post by ps56k »

I have a really basic question - since I have several of the usual Vanguard mutual funds - TAXABLE accounts -

At the end of the year, we get hit with some large Cap Gains, that get re-invested....
So - the market value is now increased with these gains.... but you have Cap Gains taxes now to be paid -

If these Vanguard mutual funds get converted to Vanguard ETFs - in a TAXABLE account -
how are these valued, at say the end of the year - vs the mutual funds ?

Which, if either, is "worth more" taking into account any Cap Gains and taxes paid in that year ?
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Re: Converting Mutuals to ETF'S

Post by exodusNH »

ps56k wrote: Mon Aug 07, 2023 4:32 pm I have a really basic question - since I have several of the usual Vanguard mutual funds - TAXABLE accounts -

At the end of the year, we get hit with some large Cap Gains, that get re-invested....
So - the market value is now increased with these gains.... but you have Cap Gains taxes now to be paid -

If these Vanguard mutual funds get converted to Vanguard ETFs - in a TAXABLE account -
how are these valued, at say the end of the year - vs the mutual funds ?

Which, if either, is "worth more" taking into account any Cap Gains and taxes paid in that year ?
If the mutual funds you hold have ETF share classes, they will pay out the same capital gains as the ETF, which is generally close to $0.

None of Vanguard's actively managed mutual funds have an ETF share class. These will tend to distribute more capital gains because of the trading activity.
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Re: Converting Mutuals to ETF'S

Post by placeholder »

ps56k wrote: Mon Aug 07, 2023 4:32 pm I have a really basic question - since I have several of the usual Vanguard mutual funds - TAXABLE accounts -
For this sort of question that's too vague you need to list the specific funds.
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