converting Fund to ETF in taxable account

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Petra
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converting Fund to ETF in taxable account

Post by Petra » Wed Mar 13, 2019 9:21 am

As I understand it, a mutual fund such as VTSAX Total US Index can be converted to its equivalent ETF (in this case VTI). I also understand this cannot be done the other way around (ETF to Mutual Fund).

According to a Vanguard rep, if you do such a conversion to Mutual Funds purchased after 2012, the new cost basis becomes the end of day price of the ETF on the day you originated the buy for the MF.

Since the cost of an ETF can vary from the mutual fund, should one be careful they are not "losing" any $ when you convert?
Are there any potential reasons one should not convert to the ETF (such as more complicated accounting, extra paperwork or additional cost)?
Any firsthand experience out there of anyone who has done this?

I prefer ETF, but want to know what I'm getting into before I convert. TIA!

bloom2708
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Re: converting Fund to ETF in taxable account

Post by bloom2708 » Wed Mar 13, 2019 11:05 am

Why do you prefer the ETF version? Why is the mutual fund version not working?

I know ETFs (just saying ETF) is cool/kitschy right now.

In practice, for buy/hold/total market investing I don't like the ETF versions. It is marketing to get you to both exchange and trade more.

What do you do with your Exchange Traded Fund? Exchange it and trade it! Often. No thanks.

The tiny cost difference isn't worth it. You have to buy whole shares and you have to think about bid/ask spreads. The Vanguard versions have the same tax efficiency. I'll stick with the mutual fund versions.
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Earl Lemongrab
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Re: converting Fund to ETF in taxable account

Post by Earl Lemongrab » Wed Mar 13, 2019 4:11 pm

bloom2708 wrote:
Wed Mar 13, 2019 11:05 am
In practice, for buy/hold/total market investing I don't like the ETF versions. It is marketing to get you to both exchange and trade more.
So Vanguard wanted you to trade more? Why?
What do you do with your Exchange Traded Fund? Exchange it and trade it! Often. No thanks.
Nothing about ETFs forces one to trade often. The fact that you can trade during the day isn't really an inticement for most.

bloom2708
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Re: converting Fund to ETF in taxable account

Post by bloom2708 » Wed Mar 13, 2019 4:48 pm

Earl Lemongrab wrote:
Wed Mar 13, 2019 4:11 pm
So Vanguard wanted you to trade more? Why?
Fees. You might buy an individual stock. You might buy a fund with an origination fee. You might buy a non-Vanguard fund.

Trading is what makes "the system" money. Maybe not for specific funds.

I may be wrong. Often am. What was the reason behind the formation of the ETF type of object? To trade more stock like. Trade during the day.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words. Whole food, plant based. Bing it.

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Earl Lemongrab
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Re: converting Fund to ETF in taxable account

Post by Earl Lemongrab » Wed Mar 13, 2019 5:17 pm

bloom2708 wrote:
Wed Mar 13, 2019 4:48 pm
Earl Lemongrab wrote:
Wed Mar 13, 2019 4:11 pm
So Vanguard wanted you to trade more? Why?
Fees. You might buy an individual stock. You might buy a fund with an origination fee. You might buy a non-Vanguard fund.

Trading is what makes "the system" money. Maybe not for specific funds.

I may be wrong. Often am. What was the reason behind the formation of the ETF type of object? To trade more stock like. Trade during the day.
The reason for ETFs from Vanguard was to provide a product that people already demonstrated an interest in based on other companies' products. It's amazing how many here see hidden traps around every little change.

radiowave
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Re: converting Fund to ETF in taxable account

Post by radiowave » Wed Mar 13, 2019 5:25 pm

Petra wrote:
Wed Mar 13, 2019 9:21 am
As I understand it, a mutual fund such as VTSAX Total US Index can be converted to its equivalent ETF (in this case VTI). I also understand this cannot be done the other way around (ETF to Mutual Fund).

According to a Vanguard rep, if you do such a conversion to Mutual Funds purchased after 2012, the new cost basis becomes the end of day price of the ETF on the day you originated the buy for the MF.

Since the cost of an ETF can vary from the mutual fund, should one be careful they are not "losing" any $ when you convert?
Are there any potential reasons one should not convert to the ETF (such as more complicated accounting, extra paperwork or additional cost)?
Any firsthand experience out there of anyone who has done this?


I prefer ETF, but want to know what I'm getting into before I convert. TIA!
One reason to stick with mutual funds is to have ability to automatically purchase or sell funds, e.g. buy shares each month.

I did a VTSAX to VTI conversion a couple years ago and moved it from Vanguard to Merrill Edge. I wound up closing the ME account however but it was an easy transfer of the ETF and seemed to work just as well at ME compared to VG. You should be able to move any ETF across different brokers so that is an advantage.
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Earl Lemongrab
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Re: converting Fund to ETF in taxable account

Post by Earl Lemongrab » Wed Mar 13, 2019 5:29 pm

radiowave wrote:
Wed Mar 13, 2019 5:25 pm
I did a VTSAX to VTI conversion a couple years ago and moved it from Vanguard to Merrill Edge. I wound up closing the ME account however but it was an easy transfer of the ETF and seemed to work just as well at ME compared to VG. You should be able to move any ETF across different brokers so that is an advantage.
For me it's a huge advantage. I have no interest in Vanguard as a custodian. I just want their products. I can generate thousands per year in bonuses with those ETFs.

radiowave
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Re: converting Fund to ETF in taxable account

Post by radiowave » Wed Mar 13, 2019 5:34 pm

OP, one additional note, the conversion of a Vanguard mutual fund to it's constituent ETF is NOT a taxable event. Selling a VG ETF and purchasing the equivalent VG mutual fund IS a taxable event.
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3-20Characters
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Re: converting Fund to ETF in taxable account

Post by 3-20Characters » Wed Mar 13, 2019 5:43 pm

Some people prefer mutual funds, others ETFs. If you hold mutual funds at vanguard in taxable and prefer ETFs, conversion is a great option to have. I prefer mutual funds and have zero plans to move my accounts at this time, so I see no reason to covert to ETFs, nor to covert my account to a brokerage account. Different strokes...

Thesaints
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Re: converting Fund to ETF in taxable account

Post by Thesaints » Wed Mar 13, 2019 6:28 pm

If the exchange is not a taxable event, the OP’s cost basis should not change.

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Earl Lemongrab
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Re: converting Fund to ETF in taxable account

Post by Earl Lemongrab » Thu Mar 14, 2019 1:16 pm

Thesaints wrote:
Wed Mar 13, 2019 6:28 pm
If the exchange is not a taxable event, the OP’s cost basis should not change.
Yes, but there have been reports of problems in that area. Make sure you record the cost basis information before conversion.

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