Convert VTSAX to VTI because of VTI's lower expense ratio?

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A Boglehead
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Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by A Boglehead » Mon May 06, 2019 2:24 pm

Dear everyone,

Vanguard lowered the expense ratio on Vanguard Total Stock Market ETF (VTI) to 0.03%. I have Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) in retirement and taxable accounts. I'm thinking of converting VTSAX to VTI because VTSAX has an expense ratio of 0.04%. Can you think of any downsides to converting?

Vanguard said I won't have to pay tax because they’re in the same fund family. Vanguard doesn't charge commissions on Vanguard ETFs.

Thank you!

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Thesaints » Mon May 06, 2019 2:35 pm

Difference in expense ratio is minuscule. When you'll sell your VTI shares you may have to pay a broker's commission and will be subject to the bid/ask spread and its volatility. Redeeming VTSAX shares is done at the mid of the bid/ask point as settled by the end of day auction. Chances are you'll get a better price and there is no possibility of making a big mistake.
Same goes in case you want to add to your VTSAX/VTI holding in the future.

On the positive side, VTI will never distribute capital gains, but search for "Vanguard" and "heartbeat"; VTSAX may also never distribute.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by KyleAAA » Mon May 06, 2019 2:37 pm

If you prefer owning mutual funds I don't see why you would convert for that amount. If you really cared that much about an extra 0.01% you would have already owned ITOT instead of VTSAX.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by TigerNest » Mon May 06, 2019 2:40 pm

To put it into context, this is $100 per year per $1,000,000 invested.

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A Boglehead
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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by A Boglehead » Mon May 06, 2019 2:52 pm

Thanks!

It sounds like the consensus is to leave it as VTSAX, because of bid-ask spreads. Re: "broker's commission", Vanguard said they don't charge commissions on their ETFs. Is there another broker's commission to consider?

I'm thinking of investing more money in my taxable account. Do you prefer the mutual fund or ETF, and why? Thanks!

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by gjlynch17 » Mon May 06, 2019 3:14 pm

A Boglehead wrote:
Mon May 06, 2019 2:52 pm
Thanks!

It sounds like the consensus is to leave it as VTSAX, because of bid-ask spreads. Re: "broker's commission", Vanguard said they don't charge commissions on their ETFs. Is there another broker's commission to consider?

I'm thinking of investing more money in my taxable account. Do you prefer the mutual fund or ETF, and why? Thanks!
Good question and there is no inherently right or wrong answer. I am in a similar situation to you with VTSAX/VTI and VTMGX/VEA. I prefer a mutual fund structure to ETF but ended up converting to ETFs because I do not plan on withdrawing from these funds/ETFs for a decade or more and the difference in ER, while not material, does add up over time. I am also making new investments in these funds but I will invest in the mutual fund structure due to the ability to make automatic investments in mutual funds and convert to ETFs every year or two.

It is also reasonable to stay with the mutual fund structure and not convert to ETFs.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Thesaints » Mon May 06, 2019 3:19 pm

I wasn't sure you would be trading from a Vanguard account. In that case, yes, brokerage fees on VTI would be zero.

As new purchases are concerned the same concepts apply: trading an ETF is more complicated and generally less efficient than purchasing/redeeming fund shares.
I'd say the only reason for a retail investor to prefer VTI over VTSAX would be the ability to do that in conjunction with options trading.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Dale_G » Mon May 06, 2019 5:13 pm

If you are not reinvesting dividends, a slight disadvantage of the ETFs is that it takes several days after the dividend distribution date for the dividends to show up in the settlement fund. It's not a problem if you are going to invest the proceed in an ETF, but it delays being able to invest in an old fashioned mutual fund.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by CoastalWinds » Mon May 06, 2019 6:34 pm

Why doesn’t VG lower the ER on its Admiral share mutual funds, i.e., why not make VTSAX 0.03% too? Are they trying to steer people into the ETFs, and if so, why??

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by TropikThunder » Mon May 06, 2019 6:54 pm

CoastalWinds wrote:
Mon May 06, 2019 6:34 pm
Why doesn’t VG lower the ER on its Admiral share mutual funds, i.e., why not make VTSAX 0.03% too? Are they trying to steer people into the ETFs, and if so, why??
It’s been well commented on other threads, but Vanguard runs their funds at cost. The published ER is a forward looking estimate but the true cost is calculated after the fact once Vanguard determines what it actually cost to run the fund. ETF’s are inherently less expensive to run (less bookkeeping and less trading by Vanguard since you’re buying and selling to and from other people, not to and from Vanguard). Their business model does not allow them to just “decide” to lower a fund’s ER.

It almost became a conspiracy theory on some prior threads when they lowered the ER’s on a bunch of ETF’s and people were speculating that Vanguard wanted everyone to switch but I just don’t think they operate that way.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by livesoft » Mon May 06, 2019 7:12 pm

As noted, the difference in the dividend schedule could be con. Also the settlement time for ETFs sales (2 days) and mutual fund sales (1 day) could be important for investors who want to sell and withdraw the money to spend for things like tax payments, credit card bills, emergencies, cars, etc. You will get your money a day or sooner faster with the mutual fund shares. Or it will take a day or two longer if you use ETF shares.
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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by F150HD » Mon May 06, 2019 7:39 pm

personally find the funds far easier to use for set it and forget it (tax deferred). Buying ETFs always feels like trading stock to me- which brings in market/limit etc. Can be a headache. YMMV
Also can only purchase whole shares of ETFs....and it can leave a little $$ uninvested as its not enough to buy another share (not talking dividend reinvestment).
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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Silence Dogood » Tue May 07, 2019 11:23 am

I don't think expense ratio matters all that much once you get to 10 basis points or lower (honestly I don't think it even matters much at 15 basis points or lower) - especially when you take into consideration tracking error and security lending.

I think 10 years ago people would have been thrilled to own the entire U.S. stock market for just 4 basis points (with just a $3K minimum investment).

I wonder if in 10 years from now people will be asking whether they should switch from a fund with a 0.007% expense ratio to one with a 0.006% expense ratio.

At least we're headed in the right direction!

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Double Dog » Wed Feb 12, 2020 12:24 pm

Reviving an older thread. I'm also considering converting VTSAX (Vanguard Total Market Index) to VTI (its ETF-equivalent). These are shares I plan to let sit for a long time, and likely won't be buying or selling any more for a while. I agree the difference in expense ratio is small, but it's still something. The bigger factor for me is that converting to VTI may make it easier to later transfer those shares to a different broker, or donate them to a DAF. From what I understand, it can be difficult or impossible to hold or donate Vanguard mutual funds at another broker. Combined with the small reduction in expense ratio, does that seem like enough reason to convert?

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by friar1610 » Wed Feb 12, 2020 3:01 pm

All of our domestic equities are in VTSAX. I've considered converting to VTI but have cone up with no compelling reason to do so. I will agree, however, that what you mention about donating shares is easier with VTI.

I used to send my annual donation to my alma mater that way. With VTSAX I had to fill out a Vanguard form with all the relevant info and then send it to rhe college (which has a VG MF account) and they woul have to indicate that they were willing to accept the MF shares. (As if any charity would decline them! :oops: ) The college then had to send the form on to VG which would eventually transfer the shares. Total start-to-finish was 2-3 weeks. I then discovered I could convert the appropriate number of VTSAX shares to VTI over the Internet. Then I could tell VG to transfer those shares from my account to the college's non-VG brokerage account. This was a much simpler and quicker process. But you can simply convert the dollar amount of VTSAX to VTI at the time you are going to donate - no need to convert all your VTSAX shares just to be able to donate a smaller amount.

All of this has become moot in our case as we now use the QCD process for charitable donations since we use the standard deduction and can no longer deduct charitable donations as nob-itemizes. This has essentially the same result as the deduction formerly did while still taking advantage of the now-more generous standard deduction.
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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Double Dog » Wed Feb 12, 2020 4:03 pm

I currently have accounts both at Vanguard and TD Ameritrade. I'm thinking about converting a portion of my VTSAX to VTI and transferring it to TD Ameritrade to take advantage of their transfer bonuses. The only things really stopping me are fear that the tax lots and cost basis info will get screwed up, and the general hassle involved.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by 1789 » Wed Feb 12, 2020 4:18 pm

That cant be a reason to convert, imo.
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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Wed Feb 12, 2020 6:57 pm

A Boglehead wrote:
Mon May 06, 2019 2:24 pm
Dear everyone,

Vanguard lowered the expense ratio on Vanguard Total Stock Market ETF (VTI) to 0.03%. I have Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) in retirement and taxable accounts. I'm thinking of converting VTSAX to VTI because VTSAX has an expense ratio of 0.04%. Can you think of any downsides to converting?

Vanguard said I won't have to pay tax because they’re in the same fund family. Vanguard doesn't charge commissions on Vanguard ETFs.

Thank you!
We shouldn't discount OP's question without doing any math. Here is what I'm aware of:

Advantages
  • If you have 1 million dollars in VTSAX then it will cost you about 21k more in fees over 30 years (assuming 7% returns). It could be worth switching as 21k is significant to someone with 1 million in retirement savings (don't forget to count time while retired). https://www.begintoinvest.com/expense-ratio-calculator/
Disadvantages
  • You have to pay a 1 time SEC fees on sale that amounts to paying about 0.002% expense ratio for a single year. These will be much smaller than the other fees so should probably be ignored.
  • There is also the bid-ask spread, but my understanding is that with a mainstream fund like VTI this would be negligible (would be interested in others knowledge here)
Overall seems like a good choice to me.

Also if it's VXUS vs VTIAX then the difference in fees doubles. That said..can anyone weigh in on why Vanguard is lowering only their ETF fees?
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by boater07 » Wed Feb 12, 2020 7:12 pm

This is probably a naive question but I don't understand the respective expense factors.
If the ETF invests in the same fund, wouldn't it also incur the actual fund expenses?
It seems the ETF expenses are in addition. Make any sense?

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Wed Feb 12, 2020 7:19 pm

boater07 wrote:
Wed Feb 12, 2020 7:12 pm
This is probably a naive question but I don't understand the respective expense factors.
If the ETF invests in the same fund, wouldn't it also incur the actual fund expenses?
It seems the ETF expenses are in addition. Make any sense?
Vanguard set it's mutual fund expense ratios higher than its ETF expense ratios. This was likely a business decision by Vanguard and not a reflection of underlying costs.

Perhaps it's because they can't afford to lower the mutual fund costs but want to compete with Blackrock and StateStreet for ETF prices...at least that'd be my current guess.

Also, to clarify - the mutual fund is actually investing in underlying shares of ETF - not the other way around. But they are different share classes so expense ratios can be different based on the brokers preference.
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by FIREchief » Wed Feb 12, 2020 8:31 pm

TigerNest wrote:
Mon May 06, 2019 2:40 pm
To put it into context, this is $100 per year per $1,000,000 invested.
Wait a tick.... So if I have $1M in VTSAX then $100 each and every year isn't worth anything to me?? :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Wed Feb 12, 2020 8:38 pm

TigerNest wrote:
Mon May 06, 2019 2:40 pm
To put it into context, this is $100 per year per $1,000,000 invested.
This isn't an accurate way to look at costs. Costs compound just like returns. My response above contains a compounded costs calculation: viewtopic.php?f=1&t=280510&p=5018063#p5017889
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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Northern Flicker » Wed Feb 12, 2020 8:48 pm

Before converting it would be a good idea to speak with Vanguard about how the conversion constrains future cost basis declarations. My (possibly incorrect) understanding is that once you convert, you cannot subsequently change the cost basis method for partial liquidations.
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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by retired@50 » Wed Feb 12, 2020 9:25 pm

lexor wrote:
Wed Feb 12, 2020 7:19 pm
boater07 wrote:
Wed Feb 12, 2020 7:12 pm
This is probably a naive question but I don't understand the respective expense factors.
If the ETF invests in the same fund, wouldn't it also incur the actual fund expenses?
It seems the ETF expenses are in addition. Make any sense?
Vanguard set it's mutual fund expense ratios higher than its ETF expense ratios. This was likely a business decision by Vanguard and not a reflection of underlying costs.

Perhaps it's because they can't afford to lower the mutual fund costs but want to compete with Blackrock and StateStreet for ETF prices...at least that'd be my current guess.

Also, to clarify - the mutual fund is actually investing in underlying shares of ETF - not the other way around. But they are different share classes so expense ratios can be different based on the brokers preference.
The Vanguard Admiral share class of mutual fund used to have the same expense ratio as the ETFs when the ETFs were initially introduced. The ETF share class only recently started moving lower than the Admiral share class. I suspect this is more likely a result of the fact that many ETF shareholders are holding the ETF at other custodians, so the share class expense isn't borne by Vanguard. This is likely far less common with mutual fund shares being held at other custodians.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Wed Feb 12, 2020 9:31 pm

Northern Flicker wrote:
Wed Feb 12, 2020 8:48 pm
Before converting it would be a good idea to speak with Vanguard about how the conversion constrains future cost basis declarations. My (possibly incorrect) understanding is that once you convert, you cannot subsequently change the cost basis method for partial liquidations.
Well that would matter quite a bit if true...
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by TropikThunder » Wed Feb 12, 2020 9:50 pm

lexor wrote:
Wed Feb 12, 2020 7:19 pm
Vanguard set it's mutual fund expense ratios higher than its ETF expense ratios. This was likely a business decision by Vanguard and not a reflection of underlying costs.
From the latest semiannual report (30 Jun 2019):

Code: Select all

Total Stock Market
Based on Actual Fund Return
			Beginning 	Ending		Expenses 	Annualized ER
			Account Value	Account Value	Paid During
			12-31-2018	06-30-2019	Period
Investor Shares 	$1,000.00	$1,186.21 	$0.76		0.128%
ETF Shares 		$1,000.00	$1,186.99 	$0.16		0.027%
Admiral™ Shares 	$1,000.00	$1,187.05 	$0.22		0.037
https://personal.vanguard.com/funds/rep ... 2210156223
VTSAX 0.04%
VTI 0.03%
Seems like those are actual costs to me. I don't understand all the Vanguard ETF Conspiracy Theory stuff that's on here a lot. Fact of the matter is ETF's are cheaper to run then Mutual Funds.
Last edited by TropikThunder on Wed Feb 12, 2020 9:54 pm, edited 1 time in total.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by TropikThunder » Wed Feb 12, 2020 9:52 pm

lexor wrote:
Wed Feb 12, 2020 7:19 pm
Also, to clarify - the mutual fund is actually investing in underlying shares of ETF - not the other way around. But they are different share classes so expense ratios can be different based on the brokers preference.
Wait, are you saying VTSAX owns shares of VTI? I've never seen that mentioned before.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Wed Feb 12, 2020 10:36 pm

TropikThunder wrote:
Wed Feb 12, 2020 9:52 pm
lexor wrote:
Wed Feb 12, 2020 7:19 pm
Also, to clarify - the mutual fund is actually investing in underlying shares of ETF - not the other way around. But they are different share classes so expense ratios can be different based on the brokers preference.
Wait, are you saying VTSAX owns shares of VTI? I've never seen that mentioned before.
I shouldn't have said the mutual fund is investing in the ETF. The ETF was launched as a share class of the existing mutual fund and via some obscure tax laws they can make the mutual fund more tax efficient just like the ETF...
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Wed Feb 12, 2020 10:43 pm

TropikThunder wrote:
Wed Feb 12, 2020 9:50 pm
lexor wrote:
Wed Feb 12, 2020 7:19 pm
Vanguard set it's mutual fund expense ratios higher than its ETF expense ratios. This was likely a business decision by Vanguard and not a reflection of underlying costs.
From the latest semiannual report (30 Jun 2019):

Code: Select all

Total Stock Market
Based on Actual Fund Return
			Beginning 	Ending		Expenses 	Annualized ER
			Account Value	Account Value	Paid During
			12-31-2018	06-30-2019	Period
Investor Shares 	$1,000.00	$1,186.21 	$0.76		0.128%
ETF Shares 		$1,000.00	$1,186.99 	$0.16		0.027%
Admiral™ Shares 	$1,000.00	$1,187.05 	$0.22		0.037
https://personal.vanguard.com/funds/rep ... 2210156223
VTSAX 0.04%
VTI 0.03%
Seems like those are actual costs to me. I don't understand all the Vanguard ETF Conspiracy Theory stuff that's on here a lot. Fact of the matter is ETF's are cheaper to run then Mutual Funds.
That chart is designed to help you understand the costs as a shareholder, not the operating costs of the fund. By calculating the effective ER you're checking Vanguard's work essentially. But you're likely miscalculating since you didn't get the actual ER.

In the paragraph above it says to read the prospectus to better understand the operating costs. I did that the difference between ETF and Admiral costs falls into "Other Expenses" which isn't clearly defined.
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Geologist » Wed Feb 12, 2020 11:03 pm

lexor wrote:
Wed Feb 12, 2020 10:43 pm
TropikThunder wrote:
Wed Feb 12, 2020 9:50 pm
lexor wrote:
Wed Feb 12, 2020 7:19 pm
Vanguard set it's mutual fund expense ratios higher than its ETF expense ratios. This was likely a business decision by Vanguard and not a reflection of underlying costs.
From the latest semiannual report (30 Jun 2019):

Code: Select all

Total Stock Market
Based on Actual Fund Return
			Beginning 	Ending		Expenses 	Annualized ER
			Account Value	Account Value	Paid During
			12-31-2018	06-30-2019	Period
Investor Shares 	$1,000.00	$1,186.21 	$0.76		0.128%
ETF Shares 		$1,000.00	$1,186.99 	$0.16		0.027%
Admiral™ Shares 	$1,000.00	$1,187.05 	$0.22		0.037
https://personal.vanguard.com/funds/rep ... 2210156223
VTSAX 0.04%
VTI 0.03%
Seems like those are actual costs to me. I don't understand all the Vanguard ETF Conspiracy Theory stuff that's on here a lot. Fact of the matter is ETF's are cheaper to run then Mutual Funds.
That chart is designed to help you understand the costs as a shareholder, not the operating costs of the fund. By calculating the effective ER you're checking Vanguard's work essentially. But you're likely miscalculating since you didn't get the actual ER.

In the paragraph above it says to read the prospectus to better understand the operating costs. I did that the difference between ETF and Admiral costs falls into "Other Expenses" which isn't clearly defined.
Perhaps you should read annual or semi-annual reports. You aren’t coming across with a very sophisticated understanding by just looking at expense ratio percentages rounded to the nearest hundredth of a percent. They also include a Statement of Operations that breaks out costs by share class for many but not all categories. This gives more detail. Costs that aren’t assignable to specific share classes total only about $9.8 million out of $186 million in total expenses in the first six months (these are divvied up in some way among all classes). You really no evidence of a business decision to make Admiral shares higher until you demonstrate understanding of the Statement of Operations where costs are really explained.

I haven’t looked at this carefully* but suppose that ETF shares are really 0.034% (rounded to 0.03%) and Admiral shares are really 0.037% (rounded to 0.04%). Then your extrapolations on the “tyranny of compounding” costs are inflated because the cost difference is not 0.01% but 0.003%.


*because it isn’t important (the costs aren't fixed in time so an extrapolation over 30 years isn't justified).

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by wooster » Wed Feb 12, 2020 11:11 pm

Vanguard set it's mutual fund expense ratios higher than its ETF expense ratios. This was likely a business decision by Vanguard and not a reflection of underlying costs.
There's a substantial difference between the costs incurred by the fund when an investor redeems Admiral shares vs ETF shares.

In the former case, Vanguard will actually sell underlying assets; those assets have a cost basis, and it's conceivable that Vanguard could be forced to sell them at a gain to satisfy the redemption request, and therefore incur capital gains it must distribute to other shareholders. Thus we can assume that Vanguard sells highest-basis stocks first.

In the latter case, when the investor (through an Authorized Participant) redeems ETF shares, Vanguard will meet the redemption in-kind, by handing out a basket of the underlying stocks, whose basis does not matter for purposes of taxation. Thus we can assume that Vanguard hands out the lowest-basis stocks first, in order to effectively raise its built-in basis (lower its built-in gains).

Viewed that way, it's quite clear that a substantial advantage of Admiral->ETF conversions, for Vanguard (and its funds' shareholders!), is that future redemptions of those ETFs will tend to improve the fund's built-in cost basis, as opposed to future redemptions of mutual fund shares, which will worsen it.

This process is described at length in the following Penn Law Review article: https://papers.ssrn.com/sol3/papers.cfm ... id=3070717.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Wed Feb 12, 2020 11:31 pm

Geologist wrote:
Wed Feb 12, 2020 11:03 pm
lexor wrote:
Wed Feb 12, 2020 10:43 pm
TropikThunder wrote:
Wed Feb 12, 2020 9:50 pm
lexor wrote:
Wed Feb 12, 2020 7:19 pm
Vanguard set it's mutual fund expense ratios higher than its ETF expense ratios. This was likely a business decision by Vanguard and not a reflection of underlying costs.
From the latest semiannual report (30 Jun 2019):

Code: Select all

Total Stock Market
Based on Actual Fund Return
			Beginning 	Ending		Expenses 	Annualized ER
			Account Value	Account Value	Paid During
			12-31-2018	06-30-2019	Period
Investor Shares 	$1,000.00	$1,186.21 	$0.76		0.128%
ETF Shares 		$1,000.00	$1,186.99 	$0.16		0.027%
Admiral™ Shares 	$1,000.00	$1,187.05 	$0.22		0.037
https://personal.vanguard.com/funds/rep ... 2210156223
VTSAX 0.04%
VTI 0.03%
Seems like those are actual costs to me. I don't understand all the Vanguard ETF Conspiracy Theory stuff that's on here a lot. Fact of the matter is ETF's are cheaper to run then Mutual Funds.
That chart is designed to help you understand the costs as a shareholder, not the operating costs of the fund. By calculating the effective ER you're checking Vanguard's work essentially. But you're likely miscalculating since you didn't get the actual ER.

In the paragraph above it says to read the prospectus to better understand the operating costs. I did that the difference between ETF and Admiral costs falls into "Other Expenses" which isn't clearly defined.
Perhaps you should read annual or semi-annual reports. You aren’t coming across with a very sophisticated understanding by just looking at expense ratio percentages rounded to the nearest hundredth of a percent. They also include a Statement of Operations that breaks out costs by share class for many but not all categories. This gives more detail. Costs that aren’t assignable to specific share classes total only about $9.8 million out of $186 million in total expenses in the first six months (these are divvied up in some way among all classes). You really no evidence of a business decision to make Admiral shares higher until you demonstrate understanding of the Statement of Operations where costs are really explained.
I read the quoted section of the semiannual report. The Statement of Operations looks to include what we'd need.
Geologist wrote:
Wed Feb 12, 2020 11:03 pm
I haven’t looked at this carefully* but suppose that ETF shares are really 0.034% (rounded to 0.03%) and Admiral shares are really 0.037% (rounded to 0.04%). Then your extrapolations on the “tyranny of compounding” costs are inflated because the cost difference is not 0.01% but 0.003%.
And by the same logic I could have underestimated the difference in costs.
Geologist wrote:
Wed Feb 12, 2020 11:03 pm
*because it isn’t important (the costs aren't fixed in time so an extrapolation over 30 years isn't justified).
Costs may change over time which is why I was digging into why Vanguard was lowering only the ETF prices. If wooster's answer is assumed to be correct, it's likely the ETF would always maintain lesser or equal expense ratios.
Last edited by lexor on Thu Feb 13, 2020 12:08 am, edited 5 times in total.
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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Wed Feb 12, 2020 11:43 pm

wooster wrote:
Wed Feb 12, 2020 11:11 pm
Vanguard set it's mutual fund expense ratios higher than its ETF expense ratios. This was likely a business decision by Vanguard and not a reflection of underlying costs.
There's a substantial difference between the costs incurred by the fund when an investor redeems Admiral shares vs ETF shares.

In the former case, Vanguard will actually sell underlying assets; those assets have a cost basis, and it's conceivable that Vanguard could be forced to sell them at a gain to satisfy the redemption request, and therefore incur capital gains it must distribute to other shareholders. Thus we can assume that Vanguard sells highest-basis stocks first.

In the latter case, when the investor (through an Authorized Participant) redeems ETF shares, Vanguard will meet the redemption in-kind, by handing out a basket of the underlying stocks, whose basis does not matter for purposes of taxation. Thus we can assume that Vanguard hands out the lowest-basis stocks first, in order to effectively raise its built-in basis (lower its built-in gains).

Viewed that way, it's quite clear that a substantial advantage of Admiral->ETF conversions, for Vanguard (and its funds' shareholders!), is that future redemptions of those ETFs will tend to improve the fund's built-in cost basis, as opposed to future redemptions of mutual fund shares, which will worsen it.

This process is described at length in the following Penn Law Review article: https://papers.ssrn.com/sol3/papers.cfm ... id=3070717.
That's interesting. Thanks for sharing.
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Northern Flicker » Wed Feb 12, 2020 11:44 pm

wooster wrote: In the latter case, when the investor (through an Authorized Participant) redeems ETF shares, Vanguard will meet the redemption in-kind,
Regular investors cannot redeem ETF shares. They must sell them to another investor. Market makers (designated as Authorized Participant in the above terminology) for the ETF may redeem shares as part of arbitrage activity.
Index fund investor since 1987.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by jco » Thu Feb 13, 2020 9:33 am

TropikThunder wrote:
Wed Feb 12, 2020 9:50 pm
From the latest semiannual report (30 Jun 2019):

Code: Select all

Total Stock Market
Based on Actual Fund Return
			Beginning 	Ending		Expenses 	Annualized ER
			Account Value	Account Value	Paid During
			12-31-2018	06-30-2019	Period
Investor Shares 	$1,000.00	$1,186.21 	$0.76		0.128%
ETF Shares 		$1,000.00	$1,186.99 	$0.16		0.027%
Admiral™ Shares 	$1,000.00	$1,187.05 	$0.22		0.037
This table confuses me. Doesn't this imply that the actual expenses for ETF shares are very slightly more than the actual expenses for the Admiral shares since the ending account value is slightly less for the ETF shares compared to the Admiral shares? What am I missing?

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Wiggums » Thu Feb 13, 2020 9:41 am

A Boglehead wrote:
Mon May 06, 2019 2:52 pm
Thanks!

It sounds like the consensus is to leave it as VTSAX, because of bid-ask spreads. Re: "broker's commission", Vanguard said they don't charge commissions on their ETFs. Is there another broker's commission to consider?

I'm thinking of investing more money in my taxable account. Do you prefer the mutual fund or ETF, and why? Thanks!
Until you have fraction shares, I can automate my mutual fund purchases. The difference is quite small and Vanguard equivalent is quite efficient. I, personally, like mutual funds because I’m less likely to tinker.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by retired@50 » Thu Feb 13, 2020 10:59 am

A Boglehead wrote:
Mon May 06, 2019 2:24 pm
Can you think of any downsides to converting?
Yes.
If you convert from the mutual fund to the ETF you will be dealing with something called the bid/ask spread. This wiki page (link below) discusses an example of how it works. Depending on how many times you buy or sell, this could be considered a disadvantage. Many folks who regularly contribute to their accounts prefer mutual funds for this reason.

https://www.bogleheads.org/wiki/Bid/ask_spread

In addition to the bid/ask spread, ETFs are typically purchased by a particular number of shares, not a particular number of dollars. So if a share is $125, then you need to commit $125 to buy. If you tend to invest in $100 increments, then you'd have to wait until you had $200 to buy, then you'd have $75 left over waiting around till the next time you could afford to buy. With mutual funds, you buy in a particular number of dollars, so if you want to commit $38 to the account, you can, and all $38 are invested right away. This may cease to be an issue in the future as some investment firms are now offering partial or fractional ETF share purchases. If all investment firms and the associated ETFs begin to adopt the fractional share purchase model like mutual funds already do, then they will be equivalent on this issue. The bid/ask spread won't go away though.

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Thu Feb 13, 2020 11:29 am

retired@50 wrote:
Thu Feb 13, 2020 10:59 am
Yes.
If you convert from the mutual fund to the ETF you will be dealing with something called the bid/ask spread. This wiki page (link below) discusses an example of how it works. Depending on how many times you buy or sell, this could be considered a disadvantage. Many folks who regularly contribute to their accounts prefer mutual funds for this reason.

https://www.bogleheads.org/wiki/Bid/ask_spread
1. Isn't bid ask spread something that tends to even out over time? As in "you win some you lose some". Assuming you are dollar cost averaging and pulling the money out over time during retirement.
2. Isn't spread also so small that it's negligible for such a mainstream ETF for a buy and hold investor? (Per morningstar it's 171.30 / 171.31 / 0.01%)
3. Could bid ask spread basically be ignored if you use a Market At Close order which executes at the midpoint of the closing price?

Sorry for all the questions, but I'm also interested in OP's question.
retired@50 wrote:
Thu Feb 13, 2020 10:59 am
In addition to the bid/ask spread, ETFs are typically purchased by a particular number of shares, not a particular number of dollars. So if a share is $125, then you need to commit $125 to buy. If you tend to invest in $100 increments, then you'd have to wait until you had $200 to buy, then you'd have $75 left over waiting around till the next time you could afford to buy. With mutual funds, you buy in a particular number of dollars, so if you want to commit $38 to the account, you can, and all $38 are invested right away. This may cease to be an issue in the future as some investment firms are now offering partial or fractional ETF share purchases. If all investment firms and the associated ETFs begin to adopt the fractional share purchase model like mutual funds already do, then they will be equivalent on this issue. The bid/ask spread won't go away though.

Regards,
2/3 of the most often recommended brokers here (Fidelity and Schwab) offer fractional ETF purchases of Vanguard ETFs (and others). I'd think Vanguard will eventually.
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by TropikThunder » Thu Feb 13, 2020 12:39 pm

jco wrote:
Thu Feb 13, 2020 9:33 am
TropikThunder wrote:
Wed Feb 12, 2020 9:50 pm
From the latest semiannual report (30 Jun 2019):

Code: Select all

Total Stock Market
Based on Actual Fund Return
			Beginning 	Ending		Expenses 	Annualized ER
			Account Value	Account Value	Paid During
			12-31-2018	06-30-2019	Period
Investor Shares 	$1,000.00	$1,186.21 	$0.76		0.128%
ETF Shares 		$1,000.00	$1,186.99 	$0.16		0.027%
Admiral™ Shares 	$1,000.00	$1,187.05 	$0.22		0.037
This table confuses me. Doesn't this imply that the actual expenses for ETF shares are very slightly more than the actual expenses for the Admiral shares since the ending account value is slightly less for the ETF shares compared to the Admiral shares? What am I missing?
First problem is that I misread the Annual Report, and these aren’t actual post facto costs but rather what the reported cost would be to a hypothetical investor. But in any case the Annualized ER column is simply the expense x2 divided by the final value and I don’t know why the ETF final value is lower than the Admiral share final value.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by Geologist » Thu Feb 13, 2020 7:13 pm

lexor wrote:
Wed Feb 12, 2020 11:31 pm

Geologist wrote:
Wed Feb 12, 2020 11:03 pm
*because it isn’t important (the costs aren't fixed in time so an extrapolation over 30 years isn't justified).
Costs may change over time which is why I was digging into why Vanguard was lowering only the ETF prices. If wooster's answer is assumed to be correct, it's likely the ETF would always maintain lesser or equal expense ratios.
But it's incorrect to say that Vanguard is only lowering ETF prices. From the semi-annual report, the Admiral shares expense ratio was 0.05% in 2015 and was 0.04% in mid-2019. Therefore, Vanguard is NOT just lowering the cost of the ETF share class. You keep saying Vanguard is only lowering ETF costs and you are wrong.

I’m not arguing that the ETF class expense ratio isn’t lower or that it isn’t likely to remain lower. However, I’m with the people who argue the difference isn’t meaningful. You have calculated a long-term cost difference with great precision that doesn’t warrant great precision. In my field, a prominent geologist has written a whole book entitled “Useless Arithmetic” which deals entirely with precision in mathematical models unwarranted by the situation.

Finally, you argue that a 0.04% vs. 0.03% difference with a $1 million portfolio over 30 years at 7% yields a $21k difference and argue that is significant for the $1 million portfolio. However, $1 million compounded at 7% over 30 years is not $1 million at the end but $7.6 million (round numbers). Even leaving aside whether $21k is significant to someone with $7.6 million, the market fluctuates with considerable frequency at 1% on a daily basis. This would change the portfolio value by $76k in market fluctuation swamping your cost difference.

Edit: Depending on your point of view the ending value could be $7.1 million but my conclusion is unaltered.

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Thu Feb 13, 2020 9:53 pm

Geologist wrote:
Thu Feb 13, 2020 7:13 pm
lexor wrote:
Wed Feb 12, 2020 11:31 pm

Geologist wrote:
Wed Feb 12, 2020 11:03 pm
*because it isn’t important (the costs aren't fixed in time so an extrapolation over 30 years isn't justified).
Costs may change over time which is why I was digging into why Vanguard was lowering only the ETF prices. If wooster's answer is assumed to be correct, it's likely the ETF would always maintain lesser or equal expense ratios.
But it's incorrect to say that Vanguard is only lowering ETF prices. From the semi-annual report, the Admiral shares expense ratio was 0.05% in 2015 and was 0.04% in mid-2019. Therefore, Vanguard is NOT just lowering the cost of the ETF share class. You keep saying Vanguard is only lowering ETF costs and you are wrong.
I didn't realize the Admiral shares were so recently were .05%. This doesn't really change the point though.
Geologist wrote:
Thu Feb 13, 2020 7:13 pm
I’m not arguing that the ETF class expense ratio isn’t lower or that it isn’t likely to remain lower. However, I’m with the people who argue the difference isn’t meaningful. You have calculated a long-term cost difference with great precision that doesn’t warrant great precision. In my field, a prominent geologist has written a whole book entitled “Useless Arithmetic” which deals entirely with precision in mathematical models unwarranted by the situation.
I think I made a reasonable assumption of .01% difference. Worst case should be break even for the ETF if wooster is correct, which isn't bad!
Geologist wrote:
Thu Feb 13, 2020 7:13 pm
Finally, you argue that a 0.04% vs. 0.03% difference with a $1 million portfolio over 30 years at 7% yields a $21k difference and argue that is significant for the $1 million portfolio. However, $1 million compounded at 7% over 30 years is not $1 million at the end but $7.6 million (round numbers). Even leaving aside whether $21k is significant to someone with $7.6 million, the market fluctuates with considerable frequency at 1% on a daily basis. This would change the portfolio value by $76k in market fluctuation swamping your cost difference.

Edit: Depending on your point of view the ending value could be $7.1 million but my conclusion is unaltered.
I would take 21k if I had 7 million but people can decide for themselves (Isn't there a cognitive bias where people don't care as much about price differences for large numbers? I actually thought I linked it in another post). The 21k could obviously be higher or lower based on a variety of factors but the point is we are talking thousands over the long run depending on the situation.

We can't control market fluctuations so there is no point discussing them in this context.

For my situation, I have a large balance in taxable mutual funds - some of which has a .02% ER difference currently because it's international - so I'm still interested in reasons NOT to use the ETF.
Last edited by lexor on Thu Feb 13, 2020 10:43 pm, edited 1 time in total.
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A Boglehead
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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by A Boglehead » Thu Feb 13, 2020 10:06 pm

I buy the mutual fund in order to be able to use up all the cash I want to invest, then convert it to the ETF after it settles. Is there still a bid-ask spread if I'm converting from the mutual fund to the ETF? I thought they were difference share classes of the same fund.

Thanks!

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by lexor » Thu Feb 13, 2020 10:21 pm

A Boglehead wrote:
Thu Feb 13, 2020 10:06 pm
I buy the mutual fund in order to be able to use up all the cash I want to invest, then convert it to the ETF after it settles. Is there still a bid-ask spread if I'm converting from the mutual fund to the ETF? I thought they were difference share classes of the same fund.

Thanks!
According to this you won't have bid ask spread https://www.etf.com/sections/index-inve ... funds-etfs
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle

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Re: Convert VTSAX to VTI because of VTI's lower expense ratio?

Post by 02nz » Thu Feb 13, 2020 10:31 pm

Thesaints wrote:
Mon May 06, 2019 2:35 pm
Redeeming VTSAX shares is done at the mid of the bid/ask point as settled by the end of day auction.
Realize this is an older post but just noting for the record that this is not how mutual funds work. A mutual fund's price is based on the net asset value (NAV) at closing, which is generally quite close to the equivalent ETF's closing prices, but the two can diverge, and nothing says that the NAV of VTSAX at close must be equal to the midpoint of the bid/ask spread of VTI, or even be within that spread. ETFs can trade at a discount to, or premium over, the net asset value.

And "end of day auction" is misleading - it's not like stocks are only sold at the end of the day. Sure, at 3:55 pm you have a pretty good sense of where a stock/ETF will close, but it got there through nearly an entire day's worth of trading.

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