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Waiting period between buying/selling ETF/MF?

Posted: Sat Feb 23, 2019 1:18 am
by birdec
A few questions about rebalancing between mutual funds and ETFs:

1. How quickly after placing a sell order on a mutual fund can you place a buy order on an ETF? Same day or wait until funds show up as settled? Assume sell/buy proceeds equal each other and that you’ll hold the ETF for a several months.

2. Same question but now ETF —> mutual fund. How quickly after placing an ETF sell order can you place a MF buy order? Same day or wait until funds have settled? Assume you’ve held the ETF for a long time.

Re: Waiting period between buying/selling ETF/MF?

Posted: Sat Feb 23, 2019 1:20 am
by shiftleft
Would this depend on the brokerage as well? Assuming you’re asking about Vanguard.

Re: Waiting period between buying/selling ETF/MF?

Posted: Sat Feb 23, 2019 1:21 am
by AlohaJoe
Brokerages allow you to buy immediately after the sell, without waiting. In practice, I've had a few times where it takes 30 seconds or so for "funds available" to get updated after the order execution for the sale.

Re: Waiting period between buying/selling ETF/MF?

Posted: Sat Feb 23, 2019 1:28 am
by birdec
shiftleft wrote:
Sat Feb 23, 2019 1:20 am
Would this depend on the brokerage as well? Assuming you’re asking about Vanguard.
This is at Schwab

Re: Waiting period between buying/selling ETF/MF?

Posted: Sat Feb 23, 2019 6:18 am
by livesoft
1. If one places an order to sell a mutual fund, the NAV that the fund is sold at will not be known until after the next market close and thus the amount of cash that one gets after placing the order will not be known until after the next market close. Unless one is using a margin account, then I don't see how one can immediately buy an ETF until the mutual fund trade executes. That means one cannot use the cash to buy an ETF until the next market open or several hours (or days if end of week) later. [Remember: Placing an order is not the same as selling/buying. The order has to execute which could occur even days later.]

However, one can exchange a mutual fund to another mutual fund with an order. That is because both the sell and the buy occur after the market closes at unknown NAVs.

Note that in the above, there is no wait for the trades to "settle." That's because a mutual fund trade settles the day after a mutual fund trade executes anyways.

2. If one sells an ETF, then Vanguard will let one place a Vanguard mutual fund order with the cash right away. The ETF trade settles in 2 days, so in effect, Vanguard will loan you the money for one day silently. I don't know if Vanguard will do the same for a non-Vanguard mutual fund. To some extent this is something called "free riding", so I also wonder if Vanguard will continue to let their clients abuse this privilege.

3. Schwab can be different. A good way to find out is to make some test trades and report back to bogleheads.org.

Re: Waiting period between buying/selling ETF/MF?

Posted: Fri Mar 08, 2019 3:01 am
by shiftleft
I know this question was for Schwab, but I tried this on Vanguard and wanted to report in case someone asks the question in the future.

I wanted to exchange Vanguard Total Bond Mutual Fund shares into ETF shares. To do this, I placed an order to sell the MF shares. This executed at closing and the funds were available the next day. I could then purchase the ETF shares. So there's a day wait if you want to sell MF to buy ETF.

Re: Waiting period between buying/selling ETF/MF?

Posted: Fri Mar 08, 2019 6:59 am
by livesoft
shiftleft wrote:
Fri Mar 08, 2019 3:01 am
I know this question was for Schwab, but I tried this on Vanguard and wanted to report in case someone asks the question in the future.

I wanted to exchange Vanguard Total Bond Mutual Fund shares into ETF shares. To do this, I placed an order to sell the MF shares. This executed at closing and the funds were available the next day. I could then purchase the ETF shares. So there's a day wait if you want to sell MF to buy ETF.
Thank you. This is an example of my #1 above.

Re: Waiting period between buying/selling ETF/MF?

Posted: Wed Mar 13, 2019 9:04 pm
by mikeyzito22
livesoft wrote:
Sat Feb 23, 2019 6:18 am
2. If one sells an ETF, then Vanguard will let one place a Vanguard mutual fund order with the cash right away. The ETF trade settles in 2 days, so in effect, Vanguard will loan you the money for one day silently. I don't know if Vanguard will do the same for a non-Vanguard mutual fund. To some extent this is something called "free riding", so I also wonder if Vanguard will continue to let their clients abuse this privilege.
Yes, I tried something like this one and a half days ago. Livesoft is right that they will essentially lend you the money. However, if you look at your personal performance tables that day on Vanguard, it won't actually show the withdrawal but will show the purchase (because the ETF sale hasn't settled). So your personal performance tanks for a day by the purchase amount and then is right back up...I'm hoping (because this is about to settle). Does anyone have any experience with that effect of making the trade immediately?

Re: Waiting period between buying/selling ETF/MF?

Posted: Wed Mar 13, 2019 9:29 pm
by pdavi21
Immediately, if they loan you the money.

Theorhetically, if you can cover the trade with other holdings, you should be able to buy an ETF on T, sell MF on T+1, and have both settle on T+2.
Going backwards, you would have to sell the ETF at least immediately before buying the MF. Even then, you may have to wait until T+2 to buy the MF if they won't loan the money or you have too many trading violations.

Re: Waiting period between buying/selling ETF/MF?

Posted: Thu Mar 14, 2019 7:15 am
by jhfenton
shiftleft wrote:
Fri Mar 08, 2019 3:01 am
I know this question was for Schwab, but I tried this on Vanguard and wanted to report in case someone asks the question in the future.

I wanted to exchange Vanguard Total Bond Mutual Fund shares into ETF shares. To do this, I placed an order to sell the MF shares. This executed at closing and the funds were available the next day. I could then purchase the ETF shares. So there's a day wait if you want to sell MF to buy ETF.
There is no need to wait a day at Vanguard. In fact, you can place the ETF purchase before you place the sale of Total Bond and then place the mutual fund sell order for the exact amount you need. I do this all the time to rebalance from bond mutual funds to equity ETFs. ETFs settle T+2, while mutual funds settle T+1, so you will actually end up with a day of money market interest on the amount of the transaction as it sits in cash for a day. This works in retirement accounts as well as taxable accounts.
pdavi21 wrote:
Wed Mar 13, 2019 9:29 pm
Theorhetically, if you can cover the trade with other holdings, you should be able to buy an ETF on T, sell MF on T+1, and have both settle on T+2.
Going backwards, you would have to sell the ETF at least immediately before buying the MF. Even then, you may have to wait until T+2 to buy the MF if they won't loan the money or you have too many trading violations.
You're right. You can even wait a day to sell the mutual fund. I did it once by accident. I recorded the mutual fund sale order in my spreadsheet, but I never actually entered it on Vanguard. I received an email on the morning of T+1 that I didn't have enough money in my account to pay for a trade. But there were no consequences, because I sold the mutual fund shares necessary that day (T+1) and everything settled together on T+2.