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Brokerage firms moving to fractional shares: Move from index funds to ETFs

Posted: Tue Jan 12, 2021 9:16 pm
by ThisJustIn
Brokerage firms are moving to allowing fractional shares: Fidelity has done it already, Vanguard will do it soon so that they are not behind competition. Other firms / apps did so long ago, e.g. M1Finance, Robinhood (which I don't use).

My 3-fund portfolio is invested using index funds: Taxable account is in Vanguard (which doesn't allow fractional shares yet). Once Vanguard allows fractional shares, I'm planning to move from index funds (e.g. VTSAX, VTIAX, VWITX) to the corresponding ETFs (e.g. VTI, VXUS, VTEB) for various reasons: including tax efficiency of ETFs, slightly lower ER.

The question is: If I exchange an index fund (e.g. VTSAX) with the corresponding ETF (e.g. VTI), is it considered an in-kind transfer (meaning, it doesn't trigger a taxable event), or is this same-class conversion (from mutual fund to ETF) not considered an in-kind transfer?

Re: Brokerage firms moving to fractional shares: Move from index funds to ETFs

Posted: Tue Jan 12, 2021 9:20 pm
by Makefile
You have to go through contacting Vanguard to convert mutual fund shares to ETFs. You cannot simply sell the mutual funds and buy ETFs, that would be taxable.

Re: Brokerage firms moving to fractional shares: Move from index funds to ETFs

Posted: Tue Jan 12, 2021 9:42 pm
by runninginvestor
ThisJustIn wrote: Tue Jan 12, 2021 9:16 pm Brokerage firms are moving to allowing fractional shares: Fidelity has done it already, Vanguard will do it soon so that they are not behind competition. Other firms / apps did so long ago, e.g. M1Finance, Robinhood (which I don't use).

My 3-fund portfolio is invested using index funds: Taxable account is in Vanguard (which doesn't allow fractional shares yet). Once Vanguard allows fractional shares, I'm planning to move from index funds (e.g. VTSAX, VTIAX, VWITX) to the corresponding ETFs (e.g. VTI, VXUS, VTEB) for various reasons: including tax efficiency of ETFs, slightly lower ER.

The question is: If I exchange an index fund (e.g. VTSAX) with the corresponding ETF (e.g. VTI), is it considered an in-kind transfer (meaning, it doesn't trigger a taxable event), or is this same-class conversion (from mutual fund to ETF) not considered an in-kind transfer?
You can convert from the investor/admiral share class to the ETF share class if there is one (VTSAX/VTI , VFIAX/VOO, as examples). If held at Vanguard you can do this for free. Is not a taxable event if you call them to convert share classes. Don't sell and buy, or exchange, or it will be a taxable event.

(Source) https://investor.vanguard.com/etf/faqs

Re: Brokerage firms moving to fractional shares: Move from index funds to ETFs

Posted: Tue Jan 12, 2021 9:58 pm
by dru808
ThisJustIn wrote: Tue Jan 12, 2021 9:16 pm Brokerage firms are moving to allowing fractional shares: Fidelity has done it already, Vanguard will do it soon so that they are not behind competition. Other firms / apps did so long ago, e.g. M1Finance, Robinhood (which I don't use).

My 3-fund portfolio is invested using index funds: Taxable account is in Vanguard (which doesn't allow fractional shares yet). Once Vanguard allows fractional shares, I'm planning to move from index funds (e.g. VTSAX, VTIAX, VWITX) to the corresponding ETFs (e.g. VTI, VXUS, VTEB) for various reasons: including tax efficiency of ETFs, slightly lower ER.

The question is: If I exchange an index fund (e.g. VTSAX) with the corresponding ETF (e.g. VTI), is it considered an in-kind transfer (meaning, it doesn't trigger a taxable event), or is this same-class conversion (from mutual fund to ETF) not considered an in-kind transfer?
When will vanguard allow fractional shares of etf’s?

Re: Brokerage firms moving to fractional shares: Move from index funds to ETFs

Posted: Tue Jan 12, 2021 10:09 pm
by totality
ThisJustIn wrote: Tue Jan 12, 2021 9:16 pm My 3-fund portfolio is invested using index funds: Taxable account is in Vanguard (which doesn't allow fractional shares yet). Once Vanguard allows fractional shares, I'm planning to move from index funds (e.g. VTSAX, VTIAX, VWITX) to the corresponding ETFs (e.g. VTI, VXUS, VTEB) for various reasons: including tax efficiency of ETFs, slightly lower ER.

The question is: If I exchange an index fund (e.g. VTSAX) with the corresponding ETF (e.g. VTI), is it considered an in-kind transfer (meaning, it doesn't trigger a taxable event), or is this same-class conversion (from mutual fund to ETF) not considered an in-kind transfer?
FYI, due to Vanguard's unique "ETF as share class" fund structure, Vanguard mutual funds which have an ETF class are just as tax efficient as the ETF. So, eg, there's no tax advantage to holding VTI instead of VTSAX.

To your question: It's my understanding that if you call Vanguard and ask them to convert your mutual fund shares to ETF shares, it can be done without triggering taxes. You can't convert the other way, so be sure of your decision.