Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

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UncleLeo
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Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

Post by UncleLeo »

In preparation for a brokerage transfer out of Vanguard, I'm about to convert a large sum of mutual funds to the ETF version.
Since the value of a share of mutual fund is calculated after the close of each trading day but ETFs are only traded during the trading day, it occurred to me that there might be a discrepancy if a conversion is made during a volatile day in the market. On large sums this matters.
For example, as we speak VTI is up 1.38% for the day, but VTSAX is at yesterday's closing price.
So If Vanguard does the conversion now, I will get fewer VTI shares compared to if the market was flat-ish, even though the whole idea of the conversion is 1:1 on dollar value regardless of market fluctuations. On the other hand, if they would do the conversion when the new VTSAX price is known (after the closing today) how would they buy VTI - as they can't trade it after the close?

So, is the conversion guaranteed to be 1:1? if so, how?
alex_686
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Re: Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

Post by alex_686 »

NAVs are stuck every night for both mutual fund and ETF shares. Conversation is done at that price. The accounting can’t work any other way.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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UncleLeo
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Re: Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

Post by UncleLeo »

alex_686 wrote: Fri Jun 02, 2023 11:09 am NAVs are stuck every night for both mutual fund and ETF shares. Conversation is done at that price. The accounting can’t work any other way.
But, the ETFs are actual shares that need to be bought from someone, no? They can't be bought at night when the NAV is set, and at next day's market open the price might be different.

I'm probably missing something and would be happy to understand the mechanics of the conversion, but for my peace of mind, we're basically saying here that there's no way of "losing money" in a mutual fund->ETF conversion due to intra-day market fluctuations - is that correct?
alex_686
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Re: Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

Post by alex_686 »

UncleLeo wrote: Fri Jun 02, 2023 11:49 am
alex_686 wrote: Fri Jun 02, 2023 11:09 am NAVs are stuck every night for both mutual fund and ETF shares. Conversation is done at that price. The accounting can’t work any other way.
But, the ETFs are actual shares that need to be bought from someone, no? They can't be bought at night when the NAV is set, and at next day's market open the price might be different.

I'm probably missing something and would be happy to understand the mechanics of the conversion, but for my peace of mind, we're basically saying here that there's no way of "losing money" in a mutual fund->ETF conversion due to intra-day market fluctuations - is that correct?
ETFs are open ended funds just like mutual funds, so shares are constantly being created and destroyed. For ETFs the normal process is indirect, going through a Authorized Participant (AP). Normal does not mean itvis the only way. Vanguard’s conversion process is unique but not exceptional. The accounting is similar to the method that mutual fund shares are created and destroyed.

No, there is no way the system can be gamed to either create or destroy value from thin air.

I can point you to a excellent book if you want to get into the weeds.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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UncleLeo
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Re: Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

Post by UncleLeo »

Thank you for the explanation.
alex_686 wrote: Fri Jun 02, 2023 12:06 pm I can point you to a excellent book if you want to get into the weeds.
I would love that!
alex_686
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Re: Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

Post by alex_686 »

UncleLeo wrote: Fri Jun 02, 2023 12:29 pm Thank you for the explanation.
alex_686 wrote: Fri Jun 02, 2023 12:06 pm I can point you to a excellent book if you want to get into the weeds.
I would love that!
This is pointing to the free kindle version. You can find PDFs of it on the web.

https://www.amazon.com/gp/aw/d/B00Y3JNK ... 172&sr=8-1
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
PizzaEater
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Re: Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

Post by PizzaEater »

For normal people, the typical way to acquire shares of VTI is to buy them on the open market. Vanguard doesn't buy shares of VTI for you on the open market when you convert from VTSAX to VTI.

At the end of the day, VTSAX will have a closing NAV price. VTI will have a closing NAV price. Note that VTI's closing NAV price does not necessarily equal the closing share price (although it will be close). What Vanguard does in effect is sell your VTSAX at its closing NAV and buy VTI at its closing NAV. That's just the visible effect; Vanguard doesn't actually do this. Because VTSAX and VTI are different share classes of the same fund, Vanguard can simply move numbers around on its accounting sheet. They don't need to buy or sell anything.
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Re: Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

Post by stan1 »

UncleLeo wrote: Fri Jun 02, 2023 11:49 am
But, the ETFs are actual shares that need to be bought from someone, no? They can't be bought at night when the NAV is set, and at next day's market open the price might be different.

I'm probably missing something and would be happy to understand the mechanics of the conversion, but for my peace of mind, we're basically saying here that there's no way of "losing money" in a mutual fund->ETF conversion due to intra-day market fluctuations - is that correct?
This is a non-taxable conversion between share classes, not a sell of the mutual fund shares and a buy of the ETF shares. Vanguard does not have to go through the open market to get those ETF shares for you. I'm not sure if we know the detailed mechanics of how it works. My guess is that Vanguard effectively creates new ETF shares from the mutual fund shares since it must be a conversion to avoid realizing a capital gain. So you can think of it almost like a stock split or other corporate action in terms of the mechanics.
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Re: Mutual fund to ETF conversation at Vanguard - how is the share value being calculated?

Post by arcticpineapplecorp. »

alex_686 wrote: Fri Jun 02, 2023 1:24 pm
UncleLeo wrote: Fri Jun 02, 2023 12:29 pm Thank you for the explanation.
alex_686 wrote: Fri Jun 02, 2023 12:06 pm I can point you to a excellent book if you want to get into the weeds.
I would love that!
This is pointing to the free kindle version. You can find PDFs of it on the web.

https://www.amazon.com/gp/aw/d/B00Y3JNK ... 172&sr=8-1
thanks for that. look forward to reading that and learning more.
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