Vanguard ETF vs MF and Vangaurd Patent

[retire to nature]

Hi All,

I have a question about Vanguard fund.

It has been 2month after FIRE, so I have been studying about how I would invest from now on.

My stock is vanguard fund, VTSAX (total index) and VFIAX(S&P index), in both taxable and retirement account.

I have learned about ETF vs Mutual fund. But I am not clear what means about tax advantage of ETF. Honestly, I didn't know ETF until recently. I heard long time ago, Vanguard Index fund is good to invest, so I was just invest monthly automatic investment way. I like that feature mostly, and I heard ETF is a bit pain in ass like day trading, but everywhere it says ETF has a better tax advantage of.

I have cash flow from rental properties, so I don't have or buy any bond etc. But, I know some day when no rentals, I have to allocate to make cash flow. So which strategy should I go.

Somewhere internet S&P 500 ETF is tax deferred(I couldn't confirm in vanguard.com for this info). then not S&P 500 mutual fund is not? then total index is not tax deferred? Is tax deferred good for me?

Also, I run into the statement about Vanguard patent. I don't understand what that means.

Until 2023, Vanguard holds a patent on the ability of its mutual funds to flow capital gains through its ETF shares of the same fund.

Should I do anything for it before or after 2023 then?

My question is if it is better to buy ETF from now on? Does it matter? And I am not sure why ETF expense is cheaper for these funds, so should I bother to convert to ETF(0.01% difference for asset over 1mil)? Just leave it as is, and start to buy ETF instead of MF?

I have researched recent days, but I am not sure from my perspective which would be good for me in tax advantage part. what kind tax advantage?

[disneysteve]

ETF has a lower expense ratio than MF.


In your taxable account especially (also in your retirement account but it's of less significance there), ETF lets you control when to sell shares and harvest gains; the MF does that for you automatically. So the ETF is more tax-efficient.


MF lets you buy fractional shares, so you can invest a set dollar amount; ETF requires you to buy whole shares so if you want to invest $500/month, for example, you may not be able to put in the full $500 each time depending on the share price.

[disneysteve]

I also don't think you can do an automated investment plan into the ETF but you can with the MF.


So there are some pros and cons to each.

[retire to nature]

Quote:

Originally Posted by disneysteve ETF has a lower expense ratio than MF. In your taxable account especially (also in your retirement account but it's of less significance there), ETF lets you control when to sell shares and harvest gains; the MF does that for you automatically. So the ETF is more tax-efficient. MF lets you buy fractional shares, so you can invest a set dollar amount; ETF requires you to buy whole shares so if you want to invest $500/month, for example, you may not be able to put in the full $500 each time depending on the share price.

Thank you for replying. Yes, I understood this part while studying. But it says ETF allow sell and buy in the same day. MF should be a second business day etc. So my question is ETF is not need to pay capital gain tax then?

[retire to nature]

Quote:

Originally Posted by disneysteve I also don't think you can do an automated investment plan into the ETF but you can with the MF. So there are some pros and cons to each.

yes, after I reviewed the pro and cons also, I lean to MF because I just like easy automated investment.

But if it gives a big difference in profit to have ETF, I would seriously consider to convert. So I wanna confirm if I miss anything.

ETFs are more tax efficient than mutual funds: Both ETFs and mutual funds are treated the same by the IRS in that investors pay capital gains taxes and taxes on dividend income. (However, there are generally fewer taxable events in ETFs, which means tax liability will typically be lower. There are fewer taxable events because while mutual funds often must sell securities when shares are redeemed, ETFs are simply traded between investors and no underlying assets must be sold just because shares of the ETF are sold. )

Since I may wanna just allocate one day, that was my biggest question.

[pb4uski]

I think you are probably overthinking it.

The differences are pretty negligible for a buy and hold investor... I personally would go with the ETF versions (I have held both VTSAX and VTIAX in the past).

[RunningBum]

Quote:

Originally Posted by pb4uski I think you are probably overthinking it. The differences are pretty negligible for a buy and hold investor... I personally would go with the ETF versions (I have held both VTSAX and VTIAX in the past).

I agree. Though I personally go with the mutual fund for the ease of buying and selling in dollar amounts.

.01% higher fee is not significant to me. If it is to you, you could buy the mutual fund and then convert to the ETF. I might move mine over now that I think about it. Last I had really looked at this the fees were the same so I saw no reason to.

On the capital gains question, my understanding is that Vanguard holds some patent that allows it to not have to do capital gains distributions in many cases. I haven't seen one in years of holding VTSAX. When the patent expires, my understanding is that other fund companies can use this method. It does not mean that Vanguard must stop using it.

[walkinwood]

Quote:

Originally Posted by disneysteve MF lets you buy fractional shares, so you can invest a set dollar amount; ETF requires you to buy whole shares so if you want to invest $500/month, for example, you may not be able to put in the full $500 each time depending on the share price.

Fidelity allows you to purchase fractional ETF shares - at least in their HSA account. Vanguard also allows fractional shares in their brokerage accounts.



I noticed that there was no option for automatic reinvestment of dividends in the ETF I hold in the Fidelity HSA.

[sengsational]

I'm pretty sure my Fidelity HSA allowed the reinvest dividends option.

[disneysteve]

OP, you are correct that ETFs can be bought and sold throughout the market day, just like stocks. MFs only trade at the end of the day so regardless of when you put in your buy or sell order, the transaction doesn't actually happen until close of business and you get the closing price for the day.


That said, this is not a reason to do one or the other because both ETFs and MFs should be treated as long term investments, not trading instruments.

[retire to nature]

Yeah, I may be overthinking but it is from curiosity not from worrisome. I was simply saving those vanguard funds, and now I would like to learn about more finance issues.

Money was always joyful to me, not stressful issue.

ETFs have an inherent tax efficiency advantage due to their share redemption process (see ETF Taxes). Other things equal, an ETF can be expected to distribute less capital gains than its mutual fund equivalent, often none at all.

I just wanna clarify about the paragraph just in case I buy other ETF in another brand.

I didnt worry about dividends or capital gains etc, but the amount became pretty big and I need to care about tax braket etc.

[retire to nature]

Quote:

Originally Posted by disneysteve MFs only trade at the end of the day so regardless of when you put in your buy or sell order, the transaction doesn't actually happen until close of business and you get the closing price for the day.

I have a question about that. I knew it is one day delayed price in admiral MF. So I thought it is a good chance to buy when I know today's index went down a lot.

So I bought MF on the next day. Is my idea correct?

[Done]

When you place an order for a MF, the transaction happens when the trading day ends (New York time). This is also when the price is determined. You may be able to estimate the price or least the price direction when you place the order based on the related index or a similar ETF.

[SecondCor521]

Quote:

Originally Posted by retire to nature I have a question about that. I knew it is one day delayed price in admiral MF. So I thought it is a good chance to buy when I know today's index went down a lot. So I bought MF on the next day. Is my idea correct?

Depends on what you mean by "my idea".

Essentially, the price for Vanguard mutual funds is set once per day at the end of the trading day. So today - Wednesday April 7th - at 4pm Eastern time when the NYSE closes, VTSAX will set their price for the day.

Vanguard publishes this April 7th price to various places shortly after that - usually by 4:15pm EST.

Vanguard updates their own client accounts after that - usually around 6pm EST.

If you want to buy at the April 7th price, you have to submit your order to Vanguard before the close of trading - so by 3:59pm EST today. If you submit an order to Vanguard at 4:01pm EST today, you will get tomorrow's price (April 8th 4pm EST).

So if your idea is to buy at a price after finding out what it is, no, you can't do that.

If your idea is to "buy the dip", because you think that if VTSAX closes down for the day then it is a slightly better deal, then yes, you can do that. Although note that mutual funds only have one price per day, so the dip might be gone by the time your order executes. As someone pointed out above though, Vanguard mutual funds are not really designed for that kind of trading.

[walkinwood]

Quote:

Originally Posted by sengsational I'm pretty sure my Fidelity HSA allowed the reinvest dividends option.

Thank you!
I went back and found out how to do this. Thanks again.

[retire to nature]

Quote:

Originally Posted by SecondCor521 Depends on what you mean by "my idea". Essentially, the price for Vanguard mutual funds is set once per day at the end of the trading day. So today - Wednesday April 7th - at 4pm Eastern time when the NYSE closes, VTSAX will set their price for the day. Vanguard publishes this April 7th price to various places shortly after that - usually by 4:15pm EST. Vanguard updates their own client accounts after that - usually around 6pm EST. If you want to buy at the April 7th price, you have to submit your order to Vanguard before the close of trading - so by 3:59pm EST today. If you submit an order to Vanguard at 4:01pm EST today, you will get tomorrow's price (April 8th 4pm EST). So if your idea is to buy at a price after finding out what it is, no, you can't do that. If your idea is to "buy the dip", because you think that if VTSAX closes down for the day then it is a slightly better deal, then yes, you can do that. Although note that mutual funds only have one price per day, so the dip might be gone by the time your order executes. As someone pointed out above though, Vanguard mutual funds are not really designed for that kind of trading.

hahaha, I was doing wrong. But at least I put some money and it is growing. I had a big money and keep waiting for falling and lost all the chances. So I know MF is for long run, so it will be alright.

Thank you for the clarification.