MF to ETF Conversion [Mutual Fund to Exchange-Traded Fund]

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Oak&Elm
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MF to ETF Conversion [Mutual Fund to Exchange-Traded Fund]

Post by Oak&Elm » Sat Nov 04, 2017 3:59 pm

Just realized I should have purchased ETF's in my non-tax advantaged account instead of Mutual Funds. After reading Wiki it looks like I can convert my 2 funds, VTSAX to VTI, and VTIAX to VXUS, without creating a taxable event. This is good news if it's true, anyone else made this conversion? I really want to be sure, this would be a substantial taxable event if I'm wrong. It is my understanding this only works with Vanguard funds.

PFInterest
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Re: MF to ETF Conversion

Post by PFInterest » Sat Nov 04, 2017 4:02 pm

whats wrong with MFs?

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Oak&Elm
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Re: MF to ETF Conversion

Post by Oak&Elm » Sat Nov 04, 2017 4:11 pm

The consensus is ETF's are more tax friendly, in a non-tax advantage account.

nalor511
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Re: MF to ETF Conversion

Post by nalor511 » Sat Nov 04, 2017 4:38 pm

Vanguard's ETFs are not more tax friendly in a taxable account than their mutual funds - the ETF and Mutual Fund are just different share classes of the same funds. They're literally the same thing in a different container. If you're not talking about Vanguard, then maybe.

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jhfenton
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Re: MF to ETF Conversion

Post by jhfenton » Sat Nov 04, 2017 8:17 pm

As others have said, Vanguard index mutual funds with ETF share classes are exactly as tax-efficient as the ETFs.

That said, I use Vanguard ETFs in a taxable account because ETF shares are more portable than Admiral Shares, and although you can convert Admiral Shares to ETFs, when you do so, you end up with tax lots that all have fractional shares. It's not a big deal, but it makes things a bit messier when you go to pick lots to sell later. But this is more of an aesthetic preference than anything else, and might not be worth making the exchange now that you've already started out with the mutual funds.

If you do convert, it is not a taxable event. Just call them up. Tell them what you want. Listen to the spiel. Watch your mutual fund shares disappear overnight. Watch your ETF shares appear the second morning. :beer

One note: They convert NAV to NAV, not mutual fund NAV to ETF share price, so it might look like you have a few dollars more or less in VXUS depending on whether it is trading at a premium or discount that day, but you will own exactly the same underlying value of securities. (It won't make much difference with VTI, because it never has much of a premium or discount.)

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JoMoney
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Re: MF to ETF Conversion

Post by JoMoney » Sat Nov 04, 2017 8:25 pm

jhfenton wrote:
Sat Nov 04, 2017 8:17 pm
...
One note: They convert NAV to NAV, not mutual fund NAV to ETF share price, so it might look like you have a few dollars more or less in VXUS depending on whether it is trading at a premium or discount that day...
Is this actually documented anywhere? I've looked before and could never find anything specifying that's how it worked. Now that I think about it, i guess it makes sense that it would have to work that way, since the mutual fund can only be valued after market close when the ETF wouldn't be trading.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

SlowMovingInvestor
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Re: MF to ETF Conversion

Post by SlowMovingInvestor » Sat Nov 04, 2017 8:32 pm

JoMoney wrote:
Sat Nov 04, 2017 8:25 pm
jhfenton wrote:
Sat Nov 04, 2017 8:17 pm
...
One note: They convert NAV to NAV, not mutual fund NAV to ETF share price, so it might look like you have a few dollars more or less in VXUS depending on whether it is trading at a premium or discount that day...
Is this actually documented anywhere? I've looked before and could never find anything specifying that's how it worked. Now that I think about it, i guess it makes sense that it would have to work that way, since the mutual fund can only be valued after market close when the ETF wouldn't be trading.
I made some conversions recently, and I think they take the NAV at 4 PM of the mutual fund, transfer it to the equivalent NAV for the ETF at that time. Note that the ETF trades in extended hours, and forex (for foreign ETFs) trades around the clock, but I think the 4 PM cut off time is what they use. A Vanguard rep read a whole bunch of boilerplate to me when I said I wanted to change MFs to ETFs (and I think she may have mentioned the NAV conversion too).

I did get some extra $$ from my international conversions. It was a large holding, so even a small %age was a few hundred dollars.

DSInvestor
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Re: MF to ETF Conversion

Post by DSInvestor » Sat Nov 04, 2017 8:37 pm

VTSAX (Total Stock Market) and VTIAX (Total International Stock Market) are both excellent tax efficient choices for your taxable account. I do not see a need to convert to ETF shares for tax efficiency reasons. Vanguard Admiral shares and ETF shares tend to have the same low expense ratio, same tax efficiency. One advantage of mutual fund shares is the option to automate transactions (e.g. purchase $1000 on the 1st day of the month.

One reason to convert may be if you wanted to move to another brokerage firm where you would not be able to get Vanguard index fund admiral shares. In this case, conversion to ETF shares would allow portability to other firms.
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Oak&Elm
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Re: MF to ETF Conversion [Mutual Fund to Exchange-Traded Fund]

Post by Oak&Elm » Sun Nov 05, 2017 4:44 am

Thank you for the education, I greatly appreciate the level of knowledge on this site. I will stick with my mutual index funds, I do think if I were to start from scratch I would go with the ETF's, maybe at some point there will be an opportunity to switch.

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pokebowl
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Re: MF to ETF Conversion

Post by pokebowl » Sun Nov 05, 2017 6:25 am

DSInvestor wrote:
Sat Nov 04, 2017 8:37 pm
VTSAX (Total Stock Market) and VTIAX (Total International Stock Market) are both excellent tax efficient choices for your taxable account. I do not see a need to convert to ETF shares for tax efficiency reasons. Vanguard Admiral shares and ETF shares tend to have the same low expense ratio, same tax efficiency. One advantage of mutual fund shares is the option to automate transactions (e.g. purchase $1000 on the 1st day of the month.

One reason to convert may be if you wanted to move to another brokerage firm where you would not be able to get Vanguard index fund admiral shares. In this case, conversion to ETF shares would allow portability to other firms.
This is pretty much my game plan with holding total world (VTWSX) in taxable. It allows me the main benefits of its corresponding ETF VT in terms of tax efficiency and allows me to automate investments and invest all the money at once. The option to convert to an ETF and move the funds if necessary is also a nice bonus. One thing I believe should be brought up is while you can convert from MF to ETF and not incur a taxable event, the same doesnt work the other way around and it may make sense for those like the OP who are not sure which to choose from, to choose the MF first. :beer
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jhfenton
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Re: MF to ETF Conversion

Post by jhfenton » Sun Nov 05, 2017 6:42 am

SlowMovingInvestor wrote:
Sat Nov 04, 2017 8:32 pm
I made some conversions recently, and I think they take the NAV at 4 PM of the mutual fund, transfer it to the equivalent NAV for the ETF at that time. Note that the ETF trades in extended hours, and forex (for foreign ETFs) trades around the clock, but I think the 4 PM cut off time is what they use. A Vanguard rep read a whole bunch of boilerplate to me when I said I wanted to change MFs to ETFs (and I think she may have mentioned the NAV conversion too).

I did get some extra $$ from my international conversions. It was a large holding, so even a small %age was a few hundred dollars.
I've done quite a few conversions, including two last week. They use posted end of day NAV for both securities. (The ETF NAV is not the market price and is not normally a price you can buy at.) The ETF market price is not part of the calculation.

As an example, one of my conversions last week was 2300.000 shares of VFSVX to VSS on 11/1. The closing price of VFSVX posted later that evening (after 6 PM) was $44.48. 2300.000 x $44.48 = $102,304.00. (If it doesn't come out even, they round to the penny.) The NAV for VSS at end of day (posted by Vanguard after 6 PM) was $116.60. $102,304.00 / $116.60 = 877.393 (rounded to nearest thousandth). I did all this math on Wednesday evening, and sure enough, on Friday morning 877.393 shares of VSS were in my account. (For referenced, VSS closed on 11/1 at $116.88. That price appears nowhere in the calculation.)

For an international ETF like VSS, Vanguard does make fair value adjustments based on market prices and currency prices at the end of the regular market session at 4 PM, as you say. Most of the underlying markets for securities in VSS closed hours earlier, but they consider subsequent price changes in VSS itself and currency changes through 4 PM. But they make the exact same adjustments in the calculated NAV for VSS and for VFSVX. Within a penny rounding error, the NAVs for VSS and VFSVX perform exactly the same every day, while VSS only loosely tracks the performance of VFSVX, typically trading at a 25-50 bp premium, but occasionally varying from a tiny discount to a full 100 bp premium.

Summary: Within a penny rounding error on the NAVs for a mutual fund and its ETF share class, you will get the same number of shares of the ETF no matter what day you make a conversion. So don't sweat it.

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