Tax Loss Harvesting from ETF to Mutual Fund

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
scrp21
Posts: 17
Joined: Thu Oct 04, 2018 4:36 pm

Tax Loss Harvesting from ETF to Mutual Fund

Post by scrp21 » Wed Oct 31, 2018 12:54 am

If tax loss harvesting by selling an ETF and buying a similar (non-identical) mutual fund, what is the best strategy around the timing of the sale and purchase? Since ETFs trade intraday and mutual funds trade at the end of the day, would selling and buying just before the close of the market get the best match between the price of the ETF and mutual fund? I am worried about selling the ETF and then missing out on potential gains in the mutual fund because of the lag between sale and purchase. Of course, the mutual fund also could go down in value and become cheaper to buy. I don't see how you can reduce this uncertainty when transferring from ETF to mutual fund.

User avatar
oldzey
Posts: 1106
Joined: Sun Apr 13, 2014 8:38 pm
Location: Land of Lincoln

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by oldzey » Wed Oct 31, 2018 2:13 am

"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

ivk5
Posts: 479
Joined: Thu Sep 22, 2016 9:05 am

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by ivk5 » Wed Oct 31, 2018 2:46 am

You also have a settlement timing issue to consider, since the ETF sale settles T+2 and the MF purchase may settle T+1 (depending on fund and brokerage platform). Options are to use other cash (eg Emergency Fund) to float yourself a 1-day bridge loan, buy a fund that also settles T+2, be out of the market for a day, or incur a margin interest charge if you’re in a margin account I suppose.

rkhusky
Posts: 5909
Joined: Thu Aug 18, 2011 8:09 pm

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by rkhusky » Wed Oct 31, 2018 6:30 am

scrp21 wrote:
Wed Oct 31, 2018 12:54 am
If tax loss harvesting by selling an ETF and buying a similar (non-identical) mutual fund,
Note that the correct terminology is "substantially identical", not "identical".

livesoft
Posts: 62938
Joined: Thu Mar 01, 2007 8:00 pm

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by livesoft » Wed Oct 31, 2018 6:52 am

oldzey wrote:
Wed Oct 31, 2018 2:13 am
‘Best practices’ for ETF trading: Seven rules of the road

"...avoid trading at either the market open or close;"
I think it is pretty clear that if trading at the market open or close rips one party off, then the other party makes out like a bandit. You want to be the bandit, so you should figure out how to trade at the market open/close and take advantage of others.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
triceratop
Moderator
Posts: 5756
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by triceratop » Wed Oct 31, 2018 9:57 am

Or one could have a preference against high-variance outcomes and choose markets where the spread is tighter, so one ensures that one is not the one who is ripped off.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

User avatar
jhfenton
Posts: 3532
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by jhfenton » Wed Oct 31, 2018 10:27 am

ivk5 wrote:
Wed Oct 31, 2018 2:46 am
You also have a settlement timing issue to consider, since the ETF sale settles T+2 and the MF purchase may settle T+1 (depending on fund and brokerage platform). Options are to use other cash (eg Emergency Fund) to float yourself a 1-day bridge loan, buy a fund that also settles T+2, be out of the market for a day, or incur a margin interest charge if you’re in a margin account I suppose.
If you are at Vanguard, Vanguard will float the settlement difference in a non-margin account on the purchase of mutual funds. If you sell an ETF (or stock), the proceeds are immediately available to trade, including buying mutual funds.

Selling large, liquid ETFs just before the close is completely fine. Spreads and premiums/discounts do not noticeably widen.

(The closing cross/auction is actually a reasonable time to sell, with tons of volume, but there is no way to issue a "Market on Close" or "Limit on Close" order at Vanguard.)

scrp21
Posts: 17
Joined: Thu Oct 04, 2018 4:36 pm

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by scrp21 » Wed Oct 31, 2018 11:06 am

jhfenton wrote:
Wed Oct 31, 2018 10:27 am
ivk5 wrote:
Wed Oct 31, 2018 2:46 am
You also have a settlement timing issue to consider, since the ETF sale settles T+2 and the MF purchase may settle T+1 (depending on fund and brokerage platform). Options are to use other cash (eg Emergency Fund) to float yourself a 1-day bridge loan, buy a fund that also settles T+2, be out of the market for a day, or incur a margin interest charge if you’re in a margin account I suppose.
If you are at Vanguard, Vanguard will float the settlement difference in a non-margin account on the purchase of mutual funds. If you sell an ETF (or stock), the proceeds are immediately available to trade, including buying mutual funds.

Selling large, liquid ETFs just before the close is completely fine. Spreads and premiums/discounts do not noticeably widen.


(The closing cross/auction is actually a reasonable time to sell, with tons of volume, but there is no way to issue a "Market on Close" or "Limit on Close" order at Vanguard.)
I’m at Fidelity so I’m not sure if the same rules apply—I will ask them.

scrp21
Posts: 17
Joined: Thu Oct 04, 2018 4:36 pm

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by scrp21 » Wed Oct 31, 2018 11:40 am

oldzey wrote:
Wed Oct 31, 2018 2:13 am
‘Best practices’ for ETF trading: Seven rules of the road

"...avoid trading at either the market open or close;"

Note that Vanguard is not the only entity giving this recommendation:

https://etfdb.com/etf-education/6-best- ... tf-orders/

https://www.investopedia.com/university ... g-etfs.asp

https://www.schwabfunds.com/public/file/P-11110824
I’ve seen this advice, which is one reason I was interested in the question of optimal timing the sale of the ETF. The problem I see is that missing out on mutual fund gains could reduce the benefit from tax loss harvesting. You could still claim the tax deduction for losses but would be realizing fewer eventual gains.

User avatar
Earl Lemongrab
Posts: 5837
Joined: Tue Jun 10, 2014 1:14 am

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by Earl Lemongrab » Wed Oct 31, 2018 11:47 am

This is an interesting question. In a cash account, for anything you buy you need to have the money available at the end of the settlement period for the purchase.

Normally, if you're selling ETFs and buying a new one, there's no problem because the settlement periods match. I think this could be a problem because the mutual fund purchase will settle before the ETF sale. You would probably have some sort of violation. I'd check with the brokerage before trying that.

Of course, you could temporarily transfer in some cash from your emergency fund to provide your own margin.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

User avatar
aj76er
Posts: 603
Joined: Tue Dec 01, 2015 11:34 pm
Location: Portland, OR

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by aj76er » Wed Oct 31, 2018 12:21 pm

scrp21 wrote:
Wed Oct 31, 2018 11:06 am
jhfenton wrote:
Wed Oct 31, 2018 10:27 am
ivk5 wrote:
Wed Oct 31, 2018 2:46 am
You also have a settlement timing issue to consider, since the ETF sale settles T+2 and the MF purchase may settle T+1 (depending on fund and brokerage platform). Options are to use other cash (eg Emergency Fund) to float yourself a 1-day bridge loan, buy a fund that also settles T+2, be out of the market for a day, or incur a margin interest charge if you’re in a margin account I suppose.
If you are at Vanguard, Vanguard will float the settlement difference in a non-margin account on the purchase of mutual funds. If you sell an ETF (or stock), the proceeds are immediately available to trade, including buying mutual funds.

Selling large, liquid ETFs just before the close is completely fine. Spreads and premiums/discounts do not noticeably widen.


(The closing cross/auction is actually a reasonable time to sell, with tons of volume, but there is no way to issue a "Market on Close" or "Limit on Close" order at Vanguard.)
I’m at Fidelity so I’m not sure if the same rules apply—I will ask them.
I believe Fidelity does this as well. But definitely do your due diligence and ask them. Also please post back in this thread with the definitive answer :)
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

User avatar
jhfenton
Posts: 3532
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by jhfenton » Wed Oct 31, 2018 12:23 pm

Earl Lemongrab wrote:
Wed Oct 31, 2018 11:47 am
This is an interesting question. In a cash account, for anything you buy you need to have the money available at the end of the settlement period for the purchase.

Normally, if you're selling ETFs and buying a new one, there's no problem because the settlement periods match. I think this could be a problem because the mutual fund purchase will settle before the ETF sale. You would probably have some sort of violation. I'd check with the brokerage before trying that.

Of course, you could temporarily transfer in some cash from your emergency fund to provide your own margin.
Mutual funds are not exchange-traded, so the settlement rules don't entirely apply on purchases. Vanguard is free to--and does--allow mutual fund purchases today based on sales of ETFs or stocks today even though there is a one-day difference in settlement. I've done it regularly for 3 years. (If you do it in a margin account, you will get dinged for one day of interest. In a non-margin account, including retirement accounts, they just float the difference.) There is no violation, and I never have cash in my accounts. (I currently have $0.01 combined in the settlement funds of 5 Vanguard accounts.)

You should clearly ask and check at other brokerages. Not all are as flexible.

User avatar
celia
Posts: 8602
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by celia » Wed Oct 31, 2018 12:35 pm

scrp21 wrote:
Wed Oct 31, 2018 12:54 am
Since ETFs trade intraday and mutual funds trade at the end of the day, would selling and buying just before the close of the market get the best match between the price of the ETF and mutual fund?
You are going to get the same price on the purchase whether you put in the order right after you sell the ETF or right before the markets close. To get the closest "match" in price, you could do this on a "low volatility" day.

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by megabad » Wed Oct 31, 2018 4:10 pm

triceratop wrote:
Wed Oct 31, 2018 9:57 am
Or one could have a preference against high-variance outcomes and choose markets where the spread is tighter, so one ensures that one is not the one who is ripped off.
This. The bid ask spread on everything I own is pretty small. If a tiny one day variance on a small portion of my portfolio mattered to me, I would not TLH. In the grand scheme of things a one or two time cost of 0.05% is pretty insignificant to me. If this order of magnitude in costs matters, than everyone should leave Vanguard immediately and move to Fidelity since the expense ratio savings would likely dwarf my bid ask spread losses over time (assuming you are not a day trader). I doubt investors are leaving Vanguard in droves.

scrp21
Posts: 17
Joined: Thu Oct 04, 2018 4:36 pm

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by scrp21 » Wed Oct 31, 2018 6:58 pm

megabad wrote:
Wed Oct 31, 2018 4:10 pm
triceratop wrote:
Wed Oct 31, 2018 9:57 am
Or one could have a preference against high-variance outcomes and choose markets where the spread is tighter, so one ensures that one is not the one who is ripped off.
This. The bid ask spread on everything I own is pretty small. If a tiny one day variance on a small portion of my portfolio mattered to me, I would not TLH. In the grand scheme of things a one or two time cost of 0.05% is pretty insignificant to me. If this order of magnitude in costs matters, than everyone should leave Vanguard immediately and move to Fidelity since the expense ratio savings would likely dwarf my bid ask spread losses over time (assuming you are not a day trader). I doubt investors are leaving Vanguard in droves.
But the issue is more than the bid ask spread. The market could easily change 2-3% in a day, and if attempting to TLH with a large investment the time between selling an ETF and buying a mutual fund could result in a decent sized loss.

For what it’s worth, Fidelity told me that funds from selling an ETF are immediately available to buy a mutual fund

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by megabad » Thu Nov 01, 2018 8:57 am

scrp21 wrote:
Wed Oct 31, 2018 6:58 pm
But the issue is more than the bid ask spread. The market could easily change 2-3% in a day, and if attempting to TLH with a large investment the time between selling an ETF and buying a mutual fund could result in a decent sized loss.

For what it’s worth, Fidelity told me that funds from selling an ETF are immediately available to buy a mutual fund
As I stated above "If a tiny one day variance on a small portion of my portfolio mattered to me, I would not TLH". The SEC required settlement date rules are not an "issue", but rather a legal requirement (that I am sure Fidelity follows). Market volatility is neither controllable nor predictable and could tip in your favor or against you. Nothing can be done about this outside of using Mutual funds to reduce the settlement time to one day. To me, this is akin to saying, "I wish I had invested today instead of yesterday because the market is lower today. Yes, of course, I too wish that I could predict the future. You must ask yourself, is the risk of time outside of the market worth the tax benefit of TLH?

I encourage you to run the numbers. In my case, deducting losses from income has netted me about 20% more over the long term to this day (on that amount). I don't believe I have yet seen a one day 20% market drop in my lifetime (but it could happen).

b0B
Posts: 360
Joined: Fri Oct 19, 2018 11:39 am

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by b0B » Thu Nov 01, 2018 7:53 pm

I had a related thread, my first thread here.
viewtopic.php?f=10&t=261818

There were some good answers (use "Market on Close" if possible), but there were several participants in the thread for whom the question was incomprehensible, as was the fact that I was asking it. I was surprised at the widespread viewpoint that the risk of jumping in and out of the market as prices fluctuate, was either not a problem, or unavoidable, or both. :oops:

SlowMovingInvestor
Posts: 916
Joined: Sun Sep 11, 2016 11:27 am

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by SlowMovingInvestor » Thu Nov 01, 2018 8:05 pm

livesoft wrote:
Wed Oct 31, 2018 6:52 am
oldzey wrote:
Wed Oct 31, 2018 2:13 am
‘Best practices’ for ETF trading: Seven rules of the road

"...avoid trading at either the market open or close;"
I think it is pretty clear that if trading at the market open or close rips one party off, then the other party makes out like a bandit. You want to be the bandit, so you should figure out how to trade at the market open/close and take advantage of others.
Is that really possible (being a bandit) possible if you're not a professional trader, maybe with automated trading systems running in colocated servers ?

I am still unsure whether there's any real harm from trading a widely traded ETF (even an international ETF) at close. After all, the variance could be in either direction (for or against you), and hopefully the variance will be low in a liquid ETF.

User avatar
grabiner
Advisory Board
Posts: 23110
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Tax Loss Harvesting from ETF to Mutual Fund

Post by grabiner » Fri Nov 02, 2018 9:27 pm

livesoft wrote:
Wed Oct 31, 2018 6:52 am
oldzey wrote:
Wed Oct 31, 2018 2:13 am
‘Best practices’ for ETF trading: Seven rules of the road

"...avoid trading at either the market open or close;"
I think it is pretty clear that if trading at the market open or close rips one party off, then the other party makes out like a bandit. You want to be the bandit, so you should figure out how to trade at the market open/close and take advantage of others.
To gain from a bad trade, you have to place a limit order to buy below the fair value, or to sell above it, and have the order accepted. If an ETF opens at a spread of $49.50-$50.50, and you have the $49.50 order, you might gain if someone places a market order to sell. This is a low-probability event, as most traders know not to place market orders into a large spread. (At the open, there may be market orders both to buy and sell, but whichever side has more is likely to move the mar

To lose from a bad trade, you have to place a market order, or a limit order to buy above the fair value or to sell below it, and have the order accepted. If you place such an order, it will be accepted and you will take the loss.

So it is true that you can gain or lose from a bad trade if your order is accepted. But if you place an order, it is much more likely to be accepted if you lose on the deal. If you place an order which could gain and it isn't accepted, that is a neutral move; eventually, the spread will narrow and you can place an order which is close to the faie value.

And your disadvantage as an individual investor is that you aren't making a market; you want to buy a particular ETF, and not sit there for an hour hoping to capture the spread on one of 100 different ETFs. An institutional trader can make a market for what it expects to be a small profit, letting a computer manage the trades.
Wiki David Grabiner

Post Reply