Vanguard ETF/fund ratios

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Vanguard began offering exchange traded funds in 2001. Vanguard ETFs are structured as separate share classes of mutual fund portfolios. Thus each of these portfolios will have an ETF/fund ratio.

Asset growth
Since inception, Vanguard has experienced steady growth of ETF assets. The firm is now the second largest U.S. ETF provider (behind Blackrock/iShares and in front of State Street Global Advisors). The following table shows Vanguard ETF asset levels over the 2008 to 2014 period.

Dual fund structure
The dual structure of Vanguard ETFs provides the investment manager with multiple techniques for handling tax-management issues and helps reduce fund transaction costs. According to Vanguard:

Shareholder transactions (purchases and redemptions) in mutual fund shares impose transaction costs on fund shareholders as the fund manager buys or sells securities with these fund flows. In the case of selling, the fund realizes a taxable gain or loss depending on the cost basis of the shares sold.

Individual shareholder transactions (purchases and sales) in ETF shares are made on brokerages; no transaction costs are incurred by the fund portfolio. Direct purchases and redemptions in the fund portfolio are made by institutional investors during the creation/redemption process. These are in-kind security transfers. Once again, the fund pays little or no transaction costs for in-kind exchanges (the transaction costs are borne by the institutional investor). In-kind redemption gains are not taxable. By selecting the lowest basis shares for such transfers, the fund manager can transfer the embedded capital appreciation tax liability from the portfolio.



Fund to ETF ratio
The following table records the percentage of ETF shares to the total shares of Vanguard equity index funds offering ETF shares. For long term data on Vanguard fund tax efficiency and shareholder turnover, please refer to the pages included in the Vanguard fund distributions navigational box included below.