Converting Vangaurd mutual fund shares to ETFs

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kirk1299
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Joined: Mon Oct 12, 2020 8:04 pm

Converting Vangaurd mutual fund shares to ETFs

Post by kirk1299 »

I note that Vanguard offers the ability to convert many of their mutual funds to equivalent ETFs, apparently tax free.

I am assuming this is a good idea to do as it eliminates the risk of cap gains distributions in the future.

Is there any downside to this conversion? Have others done it?

They make it clear that you can't go back, as well!
crefwatch
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Location: New Jersey, USA

Re: Converting Vangaurd mutual fund shares to ETFs

Post by crefwatch »

One downside is that it's more complicated to make automatic periodic investments. A plus for open-end fund shares is that you can buy fractions, at any time. Many people pay a lower rate on capital gains than on their regular income, so I don't see a big reason to avoid distributed gains. You could just as well say that accumulated capital gains make it harder for retirees to cash in their fund accumulations. (Of course, there will be accreted capital gains on long-term open-end shares, separate from annual distributions.)
rkhusky
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Re: Converting Vangaurd mutual fund shares to ETFs

Post by rkhusky »

There is little benefit to ETF’s over mutual funds at Vanguard since their ETF’s are share classes of the associated mutual funds. The main advantage, if you can call it that, is the ability to trade midday.
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BL
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Re: Converting Vangaurd mutual fund shares to ETFs

Post by BL »

I would only change to ETFs if I planned to move my taxable account elsewhere.
stilllurking
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Re: Converting Vangaurd mutual fund shares to ETFs

Post by stilllurking »

Probably miniscule but a hair savings in ERs.
Topic Author
kirk1299
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Re: Converting Vangaurd mutual fund shares to ETFs

Post by kirk1299 »

So if, heaven forbid, Vanguard started seeing significant redemptions in its funds, then it would start having to distribute capital gains to both the ETF and mutual fund share classes? This implies to me that it might be safer to own ETFs where there is not a corresponding mutual fund share class, in case this were ever to happen!
sycamore
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Re: Converting Vangaurd mutual fund shares to ETFs

Post by sycamore »

kirk1299 wrote: Fri Oct 16, 2020 3:51 pm So if, heaven forbid, Vanguard started seeing significant redemptions in its funds, then it would start having to distribute capital gains to both the ETF and mutual fund share classes? This implies to me that it might be safer to own ETFs where there is not a corresponding mutual fund share class, in case this were ever to happen!
The above scenario is discussed in a Morningstar article Vanguard's Unique ETF Structure Presents Unique Tax Risks. You can indeed avoid that particular risk by investing in a "standalone" ETF. I think the risk is very unlikely to occur and so not worth me avoiding Vanguard ETFs (that have corresponding mutual fund share classes).
UpperNwGuy
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Re: Converting Vangaurd mutual fund shares to ETFs

Post by UpperNwGuy »

I would never own a Vanguard ETF. If I wanted to own an ETF, I would buy an iShares ETF or a Charles Schwab ETF. Vanguard's philosophy of linking ETFs to mutual funds has the risk that problems on the mutual fund side will bleed over to the ETF side. See above.
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kirk1299
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Re: Converting Vangaurd mutual fund shares to ETFs

Post by kirk1299 »

UpperNwGuy wrote: Fri Oct 16, 2020 5:16 pm I would never own a Vanguard ETF. If I wanted to own an ETF, I would buy an iShares ETF or a Charles Schwab ETF. Vanguard's philosophy of linking ETFs to mutual funds has the risk that problems on the mutual fund side will bleed over to the ETF side. See above.
In that case, you'd never own a Vanguard mutual fund that has an ETF equivalent either, correct? As ultimately both share classes are subject to the same constraints.
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