Why ETFs?

[bingybear]

Yeah, I think you've got it.

My point is that with MF's I get get taxable CG distributions every year I have to pay taxes on. With ETF's the CG's accumulate and will be adjusted to zero at my death.

During really odd years (2007 was one) I had some MF distributed 20 -25% as the market slowed down. No this was not an index fund, but this is a reaction after some number of good years and people start pulling out their funds. But I did not pull mine out at that time.

As more indexers retire and take more $ for retirement, we may see higher taxable distributions due to retirees taking larger RMDs. I would think the index funds internally have investments with high gains.

 

[mpeirce]

That's the first compelling (to me) reason I've seen to have an ETF instead of the mutual find. About a third of my assets are in vtsax. I see you can convert those to VTI (but not back). hmmm

This would also remove the uncertainty of the end of year CG distribution.

I spend that, but it's hard to know how much it'll be at the end of the year for tax planning.

With the ETF I can still cash in some shares when needed, but I would know exactly what the tax impact will be. hmmmm

 

[foxfirev5]

FWIW. Buy Vanguard ETFs at Fidelity. Best of both worlds. Actually I'm finding the iShares with no transaction costs at Fido also cover the bases.

 

[meierlde]

Don't forget the difference on settlement. ETFs are T+3, funds are T.

Note after next Tuesday its T+2 for all stocks and ETFs. Vanguard made a big point about it when you logged in for a while.

 

[LOL!]

Question, if one converts Vanguard funds to the equivalent Vanguard ETF, can you still sell by Spec ID from when the mutual funds were purchased? For example, say 10 years ago I bought a fund and it has doubled in price, and a year ago I bought a bunch of new shares and it's been flat in the last year. If I convert to an ETF, and then want to sell some shares, can I still pick out those shares with no gain?

First, ETFs and stocks cannot use Average Cost Basis. That's for mutual funds only.

Second, if you don't use Spec ID and sell then the first shares purchased are sold, that is FIFO is used. One can also think of FIFO as Spec ID with you identifying the first shares sold.

Third, Vanguard didn't keep track of any purchase dates before 2012, so you are on your own. One can certainly use Spec ID for converted ETF shares if you follow the IRS rules. If your pre-conversion cost basis method for the mutual fund shares was Spec ID then Vanguard may even keep that intact on conversion. But anecdotes on bogleheads suggest Vanguard screws it up sometimes. Vanguard won't know about nor be helpful about pre-2012 shares.

 

[MRG]

Note after next Tuesday its T+2 for all stocks and ETFs. Vanguard made a big point about it when you logged in for a while.

Thanks. I didn't know the effective date of that change.

 

[LOL!]

That's the first compelling (to me) reason I've seen to have an ETF instead of the mutual find. About a third of my assets are in vtsax. I see you can convert those to VTI (but not back). hmmm

If VTSAX has a capital gain distribution, then VTI will as well. This is because of the way Vanguard share classes work. You can see this for VSCSX/VCSH.

This not the same for something like FUSVX and IVV which have different sponsors.

 

[Totoro]

Why ETFs for me:

• I simply cannot buy several of mentioned mfs. I'm in Europe.
• Tax structure: some ETFs are optimized for a country's tax structure. E.g. in Belgium (DM residence) one pays tax on paid out dividends, but not on capital gains. So if there is automatic reinvestment we have a tax benefit. Likewise with where the ETF is located (leakage / witholding taxes).

 

[Scuba]

Most of our assets are in a taxable portfolio. I switched to ETF's because of taxes. I also help my MIL with her portfolio. Had her in Vanguard MF's and she wasn't happy with the tax consequences. Switched her over to ETF's a few years ago and she's been quite happy since.

I don't know why anyone who pays taxes would choose a MF over a similar ETF.

 

[LOL!]

Most of our assets are in a taxable portfolio. I switched to ETF's because of taxes. I also help my MIL with her portfolio. Had her in Vanguard MF's and she wasn't happy with the tax consequences. Switched her over to ETF's a few years ago and she's been quite happy since.

I don't know why anyone who pays taxes would choose a MF over a similar ETF.

Once again the taxable distributions from a Vanguard mutual fund that has an ETF share class are identical to the taxable distributions of the ETF. There are no tax savings in such a situation.

So your MIL must've been in some tax-inefficient Vanguard mutual funds like Wellesley or Wellington. Or simply that when she switched the ETF share class was introduced and if she had stayed she would have had a similar outcome.

BUT! A Vanguard index mutual fund that has an ETF share class is generally more tax-efficient (not always!) than an index fund that does not have an ETF share class. Thus a Fidelity index fund may not be as tax-efficient as an ETF for the same asset class. And Schwab index mutual funds are not connected to Schwab ETFs in the same way that Vanguard mutual funds and ETFs are connected.

So someone who pays taxes should have no qualms about owning the Vanguard mutual fund instead of the corresponding Vanguard ETF if they are only considering taxes.

We have about 80% of our investable assets in ETFs.

 

[pb4uski]

Since I asked "can you still sell by Spec ID" it's pretty clear I have elected spec ID. And I'd like to hear a more definitive answer than "I would think" but I guess I have to call VG anyway to do the transfer so I can ask them and hope I get someone who really knows.

I can't find any definitive answer, but since the tax basis is unchanged by conversion I would take the position that the new basis of each tax lot (or share within each tax lot) is the product of the basis prior to conversion and the conversion ratio. Hopefully, Vanguard can confirm.

 

[RunningBum]

I can't find any definitive answer, but since the tax basis is unchanged by conversion I would take the position that the nes basis of each tax lot (or share within each tax lot) is the product of the basis prior to conversion and the conversion ratio. Hopefully, Vanguard can confirm.

Thanks. I went searching on the Bogleheads board, and as someone else here noted, results are mixed. One person had their covered purchases preserved perfectly. Another had all their non covered shares averaged together and all their covered shares averaged together. I wonder if it became an issue of doing fractional shares for people with many different purchases.

I don't really have any extremes like the example I gave so it probably wouldn't hurt much to let them be averaged, but given that there's no tax advantage at Vanguard, I don't see a reason to convert unless I want to move the shares elsewhere. There are small differences but probably not worth my time.

 

[OldShooter]

I can't find any definitive answer ...

Why obsess over this? Just make the most favorable assumption, file your taxes and wait. In the extremely unlikely event that you get audited you'll get your question answered. And since you filed in good faith, it seems like penalties would be unlikely.

My CPA once told me: "If you don't get audited once in a while, you're not trying hard enough." I never have been audited, so I don't know what that says about me.

 

[pb4uski]

Not obsessing at all... just stating what I found in a 3 minute search. I also agreed with what you said when I said "I would take the position"... that is the same as your "make the most favorable assumption".

You seem to be obsessing over a reasonable response to Runningbum's post that he seemed to appreciate. So why are you obsessing over this?

 

[OldShooter]

Not obsessing at all... just stating what I found in a 3 minute search. I also agreed with what you said when I said "I would take the position"... that is the same as your "make the most favorable assumption".

You seem to be obsessing over a reasonable response to Runningbum's post that he seemed to appreciate. So why are you obsessing over this?

Oh, not picking on you at all. I was thinking about the time overall that the thread is spending on this IMO small issue. Sorry if it sounded personal. You were just the last guy to post, so I hit the "quote" button.

 

[BeachOrCity]

If you do go etf route be sure to only buy larger funds. Thinky traded or smaller funds have too many potential issues with nav, especially in crisis

For vanguard admiral and etf are the same when buying from vanguard. Outside of vanguard i would lean etf because of the capital gains tax issues.

 

[mathjak107]

etf's generally have their own sets of issues as compared to open ended funds .

they can be more volatile because they can be sold short .

they can sell at premiums or discounts to nav as well as spreads

bond funds generally have bigger spreads than stock funds .

etf's can have issues in fast plunging markets .

quite a few popular ones like DVY had terrible imbalances in the flash crash after brexit . DVY and a few others were down 35% while the underlying shares were down just 5% and orders were sold out at those levels .

it took a couple of minutes for things to balance out and recover

 

[NW-Bound]

Between an MF and an ETF of the same composition, I prefer the ETF for all reasons previous posters mentioned.

I get free trades at my broker for ETF but not some MF. I also like to know exactly at what price the transaction takes place, compared to the closing price which I do not know when placing the order. In the long run it all averages out, but knowing the exact real-time price is a freebie so why not?

Finally, I can sell options on my ETF shares to get a bit more return, or to force myself to divest of some to reduce overweight of some sectors.

PS. Weird things during flash crashes do not bother me because I use only mental stops.

 

[RunningBum]

Why obsess over this? Just make the most favorable assumption, file your taxes and wait. In the extremely unlikely event that you get audited you'll get your question answered. And since you filed in good faith, it seems like penalties would be unlikely.

My CPA once told me: "If you don't get audited once in a while, you're not trying hard enough." I never have been audited, so I don't know what that says about me.

You're missing the point. I don't want to keep track of this myself; I want Vanguard to do it. I want to know how they handle basis on ETF conversion, because if they don't do it how I want, I can't convert back, so I'm stuck with either accepting less favorable terms, or doing it myself.

If I do it myself and file a fund sale with a different basis than what Vanguard reports for covered shares, I'm just asking for an audit or a letter. This is a very easy thing for them to automate without doing an audit. It's not like uncovered shares where the basis isn't reported. Maybe you think it would be a fun exercise. I've been through it (getting letters for things like my schedule D not matching 1099 sales), and it's not always simple and easy to correct. Why would I want to deal with that?

So you say Just try it? That's the worst answer I've had on my question.

I'm not obsessing. I've decided, I'm not going to convert.

 

[Cobra9777]

We only own ETFs, mainly to avoid year-end CG distributions and because ERs are generally lower compared to an equivalent mutual fund. Bid/ask spreads are not much of an issue for us because we only own very large, highly liquid ETFs and don't trade except occasional rebalancing. Also, we like Vanguard ETFs but prefer housing all our accounts at Fidelity for the excellent service, tools, and website. We own a mix of Vanguard and iShares ETFs. iShares ETFs trade free at Fidelity while Vanguard ETFs incur a $4.95 trading commission. Vanguard mutual funds would be quite costly to trade.

 

[mathjak107]

You're missing the point. I don't want to keep track of this myself; I want Vanguard to do it. I want to know how they handle basis on ETF conversion, because if they don't do it how I want, I can't convert back, so I'm stuck with either accepting less favorable terms, or doing it myself.

If I do it myself and file a fund sale with a different basis than what Vanguard reports for covered shares, I'm just asking for an audit or a letter. This is a very easy thing for them to automate without doing an audit. It's not like uncovered shares where the basis isn't reported. Maybe you think it would be a fun exercise. I've been through it (getting letters for things like my schedule D not matching 1099 sales), and it's not always simple and easy to correct. Why would I want to deal with that?

So you say Just try it? That's the worst answer I've had on my question.

I'm not obsessing. I've decided, I'm not going to convert.

AND THE ANSWER IS !

i just did a vanguard fund to etf conversion last week . i just looked and clicked on cost basis on the new etf.

a box comes up with drop down choices in basis and says :
------------------------------------------------------------------------------------
You haven't established a cost basis method for 1 holding
Unless you specify a cost basis method for a holding, the basis of that holding will be determined under Vanguard's default method. Our default for mutual fund shares is average cost; for all other securities, the default is first in, first out (FIFO). You can change your methods at any time. Selecting your cost basis method now can speed up future transactions because we'll already know the method you'd like to use for those transactions

 

[RunningBum]

AND THE ANSWER IS !

i just did a vanguard fund to etf conversion last week . i just looked and clicked on cost basis on the new etf.

a box comes up with drop down choices in basis and says :
------------------------------------------------------------------------------------
You haven't established a cost basis method for 1 holding
Unless you specify a cost basis method for a holding, the basis of that holding will be determined under Vanguard's default method. Our default for mutual fund shares is average cost; for all other securities, the default is first in, first out (FIFO). You can change your methods at any time. Selecting your cost basis method now can speed up future transactions because we'll already know the method you'd like to use for those transactions

That doesn't answer the question I had at all, but I don't care anymore. If someone else cares they can follow up.

 

[mathjak107]

isn't your question about setting the carried over cost basis ? the funds cost is carried over .