Conversion of mutual funds to corresponding ETF question

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Visitor
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Conversion of mutual funds to corresponding ETF question

Post by Visitor » Mon May 10, 2010 4:21 pm

Hi,

Can you take advantage of the discount/premium for ETFs when converting shares of a mutual fund to it's corresponding ETF or is the conversion a complete wash? In other words, do these type of transactions end up being exact dollar-to-dollar purchases?

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Boglenaut
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Post by Boglenaut » Mon May 10, 2010 4:43 pm

See this from the Wiki:

http://www.bogleheads.org/wiki/ETF#How_ ... t_Vanguard

Number of ETF shares = number of mutual fund shares X mutual fund NAV / ETF closing NAV

Notice ETF Market Price is not in the equation.

if you convert on a premium day, you'll get a bump. If you convert on a discount day, you'll get dinged. But either way, it's based on the underlying NAV's, so you'll go back once the premium or discount changes. You are not actually selling and buying, so it shouldn't make a difference.

Vangard was supposed to convert a fund of mine last week on a discount day, but messed up. Instead they'll do it today (a premium day). As they explained, it won't make a difference because the underlying shares I own will be the same. Had it happened last week, the ETF would have been lower initially but gone up to match today's premium.

So, unless you plan to sell right away, it makes no difference. If you plan to sell right away, do it on a premium day (assuming it doesn't change before you can sell). You basically would be acting like the people that arbitrage making the creation units. If you convert then sell on a discount day, that would be the opposite of what they would do.

That's my understanding at least. I'll check the numbers tonight on my conversion and let you know if that's what happened.

I hope the Wiki adds more details on this.

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Post by mikep » Mon May 10, 2010 4:54 pm

Boglenaut wrote: I hope the Wiki adds more details on this.
I added that section to the wiki as my experience converting shares. What else do you feel should be there? I could update, or we could always use more wiki editors :)

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Boglenaut
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Post by Boglenaut » Mon May 10, 2010 4:58 pm

mikep wrote:
Boglenaut wrote: I hope the Wiki adds more details on this.
I added that section to the wiki as my experience converting shares. What else do you feel should be there? I could update, or we could always use more wiki editors :)
If what I wrote below is correct, feel free to use it or modify it:


Notice ETF Market Price is not in the equation.

If you convert on a premium day, you'll get a bump. If you convert on a discount day, you'll get dinged. But either way, it's based on the underlying NAV's, so you'll go back once the premium or discount changes. You are not actually selling and buying, so it shouldn't make a difference in the long run.

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Post by mikep » Mon May 10, 2010 5:02 pm

Boglenaut wrote:
mikep wrote:
Boglenaut wrote: I hope the Wiki adds more details on this.
I added that section to the wiki as my experience converting shares. What else do you feel should be there? I could update, or we could always use more wiki editors :)
If what I wrote below is correct, feel free to use it or modify it:


Notice ETF Market Price is not in the equation.

If you convert on a premium day, you'll get a bump. If you convert on a discount day, you'll get dinged. But either way, it's based on the underlying NAV's, so you'll go back once the premium or discount changes. You are not actually selling and buying, so it shouldn't make a difference in the long run.
Yes its correct. I updated the page.
Thanks,
Mike

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Boglenaut
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Post by Boglenaut » Mon May 10, 2010 5:05 pm

Yes its correct. I updated the page.
Thanks,
Mike
Wow! Something I wrote is in the Wiki! :sharebeer

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Post by mikep » Mon May 10, 2010 5:09 pm

If you want to become an editor, please send a pm to Barry Barnitz. We always need more editors to help cleanup pages as well as add new pages. :)

Mike

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hi

Post by Visitor » Mon May 10, 2010 5:22 pm

Thanks for your help. Yes, please let me know the results of your conversion.

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LadyGeek
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Post by LadyGeek » Mon May 10, 2010 5:35 pm

Boglenaut wrote:Wow! Something I wrote is in the Wiki! :sharebeer
You're fame is ensured! I added a reference link back to this thread (the wiki should always cite references).

Please see Exchange Traded Funds on the Bogleheads Wiki.
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Post by mikep » Mon May 10, 2010 5:46 pm

Thanks LadyGeek, I added another reference to that section (and also moved your reference next to Boglenaut's comment).

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Post by sscritic » Mon May 10, 2010 5:59 pm

The logic is that you are converting shares, not dollars.

Suppose you were able to create shares of the ETF. You would have to give Vanguard a basket of shares equal to a fixed multiple of a particular index. The dollar value of your basket would not matter.

Here is an index:
2 shares of A
3 shares of B
5 shares of C

(The number of shares in the index is proportional to the number of shares outstanding of each company so that this is a cap weighted index.) Note that the prices of the shares don't matter. If the prices go up, the index goes up, but the holdings in the index don't change. (That is the theory behind a cap-weighted index fund; you track the index without any buying and selling.)

Suppose the Index Fund contains shares that each represent .4 shares of A, .6 shares of B and 1.0 share of C and the ETF contains the actual index, 2 shares of A, 3 shares of B, and 5 shares of C. To convert from the Index Fund to the ETF, you turn over 5 shares of the Index Fund to get one share of the ETF. The price of the shares is irrelevant.

For example, if the prices were $4, $2, and $1, the index would be at 8+6+5 = 19. The NAV of a share of the index fund would be 1.6+1.2+1 = 3.8. The NAV of the ETF would be $19, since it holds the exact index. Using the ratio of NAV method mentioned previously, the ratio is 19/3.8 = 5. But of course it has to be 5, since that is the ratio of stocks in the ETF to the stocks in the Index Fund. So it really doesn't have anything to do with the NAV, it has to do with the ratio of the shares in one ETF share to the shares in one Index Fund share. Using NAV is just a way of finding that ratio.

At least that's the way I think about it.

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Post by Boglenaut » Tue May 11, 2010 6:23 pm

OK, I can confirm the price they gave me was $82.01 yesterday (5/10/2010). The market value was $83.66 and the NAV was $82.01 according to the VG webpage.

But that brings up another question.. Why doesn't Yahoo's NAV for Vanguard FTSE All World ex US S (^VSS-IV) match Vaguard's?


Yahoo: Vanguard FTSE All World ex US S (^VSS-IV)

http://finance.yahoo.com/echarts?s=%5EV ... d;compare=

VG (look up price history at bottom):

https://advisors.vanguard.com/VGApp/iip ... 1444801531

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Post by LadyGeek » Wed May 12, 2010 7:06 pm

I'd take a guess that the difference is because FTSE is an international fund. Click on the "See performance data" link at the bottom of the Vanguard page. You'll see these footnotes:
Foreign security values are typically determined using either the latest quoted sales price or the latest closing price calculated according to local market convention. If events occur after the close of the securities markets on which such securities are primarily traded, which materially affect the value of each fund's investments fair value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities.
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