WellsTrade can convert Vanguard funds to ETFs for free

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GammaPoint
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WellsTrade can convert Vanguard funds to ETFs for free

Post by GammaPoint »

natureexplorer and I did a little legwork in another thread (http://www.bogleheads.org/forum/viewtop ... 818#730818) and it turns out that WellsTrade (and possibly other brokerages) can convert Vanguard funds to ETFs. In other words, it's not just for those direct at Vanguard. Maybe this isn't new to some of you, but I didn't know it.

I called WellsTrade about this today and they also said it was free. I don't know if they could always do this or if it's something new. The guy I talked to said that they work with Vanguard to make the exchange.

Has anyone actually done this? I didn't do it yet. I've heard others say that they've benefited from the exchange from funds to ETFs and wanted to make sure I understood that. Do you benefit from the exchange if the ETF is selling at a premium, and get hurt from it if it's selling at a discount (to IIV)?
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Post by tfb »

Thank you for taking the time to call WellsTrade and share the info with us. This is very good news.
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Re: WellsTrade can convert Vanguard funds to ETFs for free

Post by dumbmoney »

GammaPoint wrote:Do you benefit from the exchange if the ETF is selling at a premium, and get hurt from it if it's selling at a discount (to IIV)?
The conversion occurs at the NAV of the ETF shares, not the market price. So it only matters, maybe, if you plan to immediately sell.
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Re: WellsTrade can convert Vanguard funds to ETFs for free

Post by GammaPoint »

dumbmoney wrote:
GammaPoint wrote:Do you benefit from the exchange if the ETF is selling at a premium, and get hurt from it if it's selling at a discount (to IIV)?
The conversion occurs at the NAV of the ETF shares, not the market price. So it only matters, maybe, if you plan to immediately sell.
I see, so if it's selling at a premium than you benefit in that your immediate market value is higher.
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Post by mikep »

Any broker can convert to ETF shares, the price for the conversion depends on the broker (which the broker fee is in addition to Vanguard's fee, which was recently reduced to $0 from $50). It's in the mutual fund and ETF prospectus.

https://personal.vanguard.com/us/Litera ... wWcHZgEKYl
REIT ETF prospectus page 18 wrote: Conversion Privilege
Owners of conventional shares issued by the Fund may convert those shares to ETF
Shares of equivalent value. Please note that investors who own conventional shares
through a 401(k) plan or other employer-sponsored retirement or benefit plan may not
convert those shares to ETF Shares. Vanguard imposes a $50 charge on conversion
transactions and reserves the right, in the future, to raise or lower the fee and to limit
or terminate the conversion privilege. Your broker may charge an additional fee to
process a conversion. ETF Shares, whether acquired through a conversion or
purchased on the open market, cannot be converted to conventional shares of the
same fund. Similarly, ETF Shares of one fund cannot be exchanged for ETF Shares of
another fund.
edit: added link to prospectus
Last edited by mikep on Fri May 07, 2010 10:49 pm, edited 1 time in total.
natureexplorer
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Post by natureexplorer »

mikep, thanks for pointing us to the prospectucs. Have you (or anyone else here) done such an ETF conversion at a non-Vanguard brokerage?
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Post by natureexplorer »

https://personal.vanguard.com/us/conten ... sp#link_12
Can I convert conventional Vanguard mutual fund shares to Vanguard ETFs?

Shareholders of Vanguard stock index funds that offer Vanguard ETFs may convert their conventional shares to Vanguard ETFs of the same fund. This conversion is generally tax-free, although some brokerage firms may be unable to convert fractional shares, which could result in a modest taxable gain. (Four of our bond ETFs—Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—do not allow the conversion of bond index fund shares to bond ETF shares of the same fund; the other eight Vanguard bond ETFs allow conversions.)

There is no fee for Vanguard Brokerage clients to convert conventional shares to Vanguard ETFs of the same fund. Other brokerage providers may charge a fee for this service. For more information, contact your brokerage firm, or call 866-499-8473.
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Post by mikep »

natureexplorer wrote:mikep, thanks for pointing us to the prospectucs. Have you (or anyone else here) done such an ETF conversion at a non-Vanguard brokerage?
I haven't.. I just opened a VBS account this week and did the conversion over the phone. Mutual fund shares disappeared from the account yesterday and ETF shares should appear on Monday. Of course, everyone should read the prospectus before investing.
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Re: WellsTrade can convert Vanguard funds to ETFs for free

Post by caklim00 »

GammaPoint wrote:natureexplorer and I did a little legwork in another thread (http://www.bogleheads.org/forum/viewtop ... 818#730818) and it turns out that WellsTrade (and possibly other brokerages) can convert Vanguard funds to ETFs. In other words, it's not just for those direct at Vanguard. Maybe this isn't new to some of you, but I didn't know it.

I called WellsTrade about this today and they also said it was free. I don't know if they could always do this or if it's something new. The guy I talked to said that they work with Vanguard to make the exchange.

Has anyone actually done this? I didn't do it yet. I've heard others say that they've benefited from the exchange from funds to ETFs and wanted to make sure I understood that. Do you benefit from the exchange if the ETF is selling at a premium, and get hurt from it if it's selling at a discount (to IIV)?
I'm assuming you have to do this over the phone correct? Any idea how they handle the cost basis? Does the ETF shares just end up getting the NAV equivalent when the mutual funds were bought?

Also, I wonder how redemption fees are handled? IE. if there is a redemption fee if held under 2 months (is an ETF conversion considered a redemption?)
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Re: WellsTrade can convert Vanguard funds to ETFs for free

Post by GammaPoint »

caklim00 wrote:I'm assuming you have to do this over the phone correct? Any idea how they handle the cost basis? Does the ETF shares just end up getting the NAV equivalent when the mutual funds were bought?

Also, I wonder how redemption fees are handled? IE. if there is a redemption fee if held under 2 months (is an ETF conversion considered a redemption?)
Yes, I think you have to do it over the phone. I'm not sure how they'll handle the cost basis but I imagine that it'll give you the same (cost basis)/(market value) ratio as you had in the fund. I can tell you exactly this week when I do the exchange.

Don't know how the redemption fee is handled though. I can ask when I call if I remember, or maybe someone reading this already knows.
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Post by mikep »

Redemption fees don't get charged when you convert shares to ETF (or Admiral, also). I just converted REIT index (1% fee) and int'l small index (0.75% fee) and neither were charged upon conversion.

The conversion rate is determined by the closing NAV of the ETF (not market price) and the closing NAV of the mutual fund using the below formula. If the formula doesn't produce a whole number you get fractional ETF shares for the remainder.

# ETF shares = mutual fund shares X mutual fund NAV / ETF closing NAV

Here's the timeline from my experience of converting Vanguard funds held in a Vanguard IRA mutual fund account.

Tuesday afternoon I applied for VG brokerage acct's online for my and my wife's IRA upon learning of VG's lower fees
Wednesday afternoon/evening I had to sign some exchange agreements online to open the brokerage account.
Thursday AM I called Vanguard at 866-499-8473 to do the conversion of REIT and FTSE ex-US small index funds. With Vanguard this has to be done over the phone.
Friday AM the mutual fund shares disappeared (be prepared as you see a huge drop in your account balance :))
Saturday AM the ETF shares appeared and I ran calculation above and numbers were correct using Thursday's closing NAV's.

I didn't care about cost basis since this was in an IRA, but I see where you can add this online after the conversion.
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Post by GammaPoint »

Thanks for sharing your experience in the conversion mikep!
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Post by natureexplorer »

Gamma, please keep us posted on your progress with the conversion at WellsTrade. I guess nobody here has ever done such an ETF conversion at a third party brokerage.
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Post by GammaPoint »

natureexplorer wrote:Gamma, please keep us posted on your progress with the conversion at WellsTrade. I guess nobody here has ever done such an ETF conversion at a third party brokerage.
Will do.
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Post by mikep »

One other thing, with Vanguard it is helpful if your spouse is not into finances to have an Agent Authroization form on file. They will only talk to the account owner over the phone otherwise, and my wife is not into it at all and gave me agent authority with this form. Go to VG and search for "agent authorization" (it doesn't give me a direct link)
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Post by GammaPoint »

I just called WellsTrade and told them to convert to the ETFs. The first guy I talked to said he thought it wasn't possible, and furthermore, even if it were it would be a taxable event. I told him that it wasn't a taxable event because it's a different share class of the same fund. So he put me on hold and talked to the mutual fund guy and came back saying that it was indeed possible and he would do it right away. He also confirmed that it's free.

He said that I might expect to have the ETF in my account tomorrow, so I'll report on the timing of that.

So I guess the points to take away from this are:
1). The brokerage reps don't necessarily know the tax consequences of the exchange, which is understandable as Vanguard's ETF structure is unique.
2). It's a new enough or uncommon enough thing that you probably won't get someone who knows they can do it. But in any case, the mutual fund guys take care of it and know about it.
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Post by mikep »

Also the Vanguard brokerage reps may also not be as knowledgeable. He first told me no such ETF equivalent was available for FTSE ex-US small VFSVX. I told him it was VSS, which he said was a different fund and it wasn't possible. I asked him kindly to check again, which he placed me on hold, and confirmed I was correct.
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Post by GammaPoint »

mikep wrote:Also the Vanguard brokerage reps may also not be as knowledgeable. He first told me no such ETF equivalent was available for FTSE ex-US small VFSVX. I told him it was VSS, which he said was a different fund and it wasn't possible. I asked him kindly to check again, which he placed me on hold, and confirmed I was correct.
Wow, more proof that DIY investing is the way to go. No one cares more or knows more about your investments than you do.
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Post by mikep »

GammaPoint wrote:
mikep wrote:Also the Vanguard brokerage reps may also not be as knowledgeable. He first told me no such ETF equivalent was available for FTSE ex-US small VFSVX. I told him it was VSS, which he said was a different fund and it wasn't possible. I asked him kindly to check again, which he placed me on hold, and confirmed I was correct.
Wow, more proof that DIY investing is the way to go. No one cares more or knows more about your investments than you do.
Agreed. Don't think I'll be shelling out $1000 or even $250 for that Vanguard financial plan anytime soon.
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Post by natureexplorer »

Gamma, thanks for the great update!

Are you converting just one mutual fund position to ETF shares to make sure it works or are you doing several?

As this seems to require some manual handling, I will be sure to convert my equity mutual funds to ETFs this week. Not that they start charging a fee for it.
Last edited by natureexplorer on Mon May 10, 2010 1:24 pm, edited 1 time in total.
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Post by GammaPoint »

natureexplorer wrote: Are you converting just one mutual fund position to ETF shares to make sure it works or are you doing several?
I'm converting VTSMX->VTI and VFWIX->VEU, so I'm converting all of the mutual funds I own in taxable there to ETFs.

And yeah, I guess it's possible that they might start charging a fee for it. Right now it's maybe rare enough that they haven't thought of charging a fee yet :)
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Post by GammaPoint »

Okay update. VTI and VEU now show up in my account with 'Pend' status. VTSMX and VFWIX are actually still in my account, but I imagine they'll take those away from me :)

I calculated the number of shares that I should have received based on the NAV yesterday and they gave me the correct number of shares EXCEPT it doesn't look like they gave me fractional shares. They owe me about 0.3447 share of VTI and 0.524 share of VEU. I wonder if I'll get that in cash, if they'll keep that much of the mutual fund in my account, or if I'll eventually get a fractional share.

I'll keep you updated. But this is being processed very quickly.

Edit: Decided to call in and see what was going to happen with the fractional shares. The rep talked to the mutual fund guy who was working on my account and he said that the fractional share will remain as a fractional share of the fund (VTSMX/VFWIX) rather than get converted or put in cash. This is what I would have wanted to I'm happy with that. They said that my account should look normal by Thursday.
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Post by mikep »

Vanguard gave me fractional ETF shares. I wonder how I'll eventually sell them though, since I can put in only whole numbers for ETF transactions.

Has anyone sold fractional ETF shares through VBS from a conversion?
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Post by indexfundfan »

mikep wrote:Vanguard gave me fractional ETF shares. I wonder how I'll eventually sell them though, since I can put in only whole numbers for ETF transactions.

Has anyone sold fractional ETF shares through VBS from a conversion?
My experience with VBS was that you can only sell whole shares. But when you liquidate the entire position (less the fractional shares), the remaining fractional shares will automatically get liquidated.
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Post by DSInvestor »

Here's a blurb from VBS but I think it applies to all brokerage firms.
Why can't I enter fractional shares?


Only whole shares can be traded on exchanges. You may own fractional shares of a stock, often because of a dividend reinvestment plan or stock splits. If you are selling your entire position of a stock, any fractional shares liquidate automatically on the settlement date, at no additional cost to you. The cash from liquidating fractional shares sweeps into your money market settlement account one business day after the settlement date and appears in your Transaction History. Your fractional shares are sold at the same price as your whole shares.
I have seen this behavior at VBS and Fidelity. You may see the same at WF.
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Post by natureexplorer »

Gamma, thanks for the update! What is the ratio of ETF shares you are getting per mutual fund share for those two funds (VTSMX and VFWIX)?

If one converts to ETFs at Vanguard, are what would be fractional ETF shares liquidated as well?
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Post by mall0c »

Now if they could only convert investor shares to admiral...
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Post by natureexplorer »

mike_slc wrote:Now if they could only convert investor shares to admiral...
Who said they don't?
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Post by GammaPoint »

natureexplorer wrote:Gamma, thanks for the update! What is the ratio of ETF shares you are getting per mutual fund share for those two funds (VTSMX and VFWIX)?
This is specific to yesterday of course, but since the mutual fund value for VTSMX was 28.85 and the NAV for VTI was 59.27 (59.27/28.85~2.05), then 2.05 shares of VTSMX converted to one share of VTI.

For VFWIX the closing price as 16.44 and for VEU it was 41.82 so (41.82/16.44~2.54) then about 2.54 shares of VFWIX convert to one share of VEU.
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Post by caklim00 »

GammaPoint wrote:
natureexplorer wrote:Gamma, thanks for the update! What is the ratio of ETF shares you are getting per mutual fund share for those two funds (VTSMX and VFWIX)?
This is specific to yesterday of course, but since the mutual fund value for VTSMX was 28.85 and the NAV for VTI was 59.27 (59.27/28.85~2.05), then 2.05 shares of VTSMX converted to one share of VTI.

For VFWIX the closing price as 16.44 and for VEU it was 41.82 so (41.82/16.44~2.54) then about 2.54 shares of VFWIX convert to one share of VEU.
How did they handle your cost basis? Was it done correctly?
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Post by GammaPoint »

caklim00 wrote:How did they handle your cost basis? Was it done correctly?
It looks so far like they didn't handle it. Looks like I need to enter it myself.
Also, those fractional shares that they said would remain in my account got automatically sold off and put in cash. Not a big deal, and keeping them probably wasn't worth the clutter anyway.
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Post by caklim00 »

GammaPoint wrote:
caklim00 wrote:How did they handle your cost basis? Was it done correctly?
It looks so far like they didn't handle it. Looks like I need to enter it myself.
Also, those fractional shares that they said would remain in my account got automatically sold off and put in cash. Not a big deal, and keeping them probably wasn't worth the clutter anyway.
Interesting, and not surprising. The mutual fund to ETF conversion is a rather unique event. I'll probably stick with just buying ETFs to avoid the hassle, especially since the bid/ask on all of the Vanguard ETFs I buy is negligible (typically .01 - .02).
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Post by GammaPoint »

caklim00 wrote:]Interesting, and not surprising. The mutual fund to ETF conversion is a rather unique event. I'll probably stick with just buying ETFs to avoid the hassle, especially since the bid/ask on all of the Vanguard ETFs I buy is negligible (typically .01 - .02).
Sure. I just had some mutual funds from before I had a brokerage account that I figured I would convert. I wasn't reinvesting dividends anyway so it was just sitting there costing me more ER than it needed to.
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Post by wintermute »

Speaking of fractional shares, I was able to buy a fractional share of vmmxx (vanguard money market mutual fund) thru wellstrade.
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