WHY convert Admiral Funds to ETFs ??

[rkser]

I am a long term all Vanguard 5 Admiral Fund investor, I am superficially familiar but need an in depth understanding about ETFs,

What I know about ETFs vs Mutual Funds -

1) Admiral Fund expense ratios have the same expense ratios of ETFs.

2) An ETF can be traded at the middle of the day price (Like a individual Stock) where as a Mutual Fund is priced at the end of the trading day, hence ETFs are generally better suited for active traders.

3)ETFs are relatively newer investment vehicles although introduced years back, when compared to Mutual Funds. I am from pre ETF era


The main reason I am looking into ETFs at this time is -

1) I suspect the ETFs MAY have a lower expense ratio than my Vanguard admiral funds & I do not want to leave anything on the table due to my ignorance.
I believe the admiral funds could be converted to ETFs without any tax repercussions (But not the other way around)

2) I am researching the Schwab Intelligent Income for a portion of my savings for monthly withdrawals starting next year where they use Robo Advisor management with ETFs & give access to a CFP for a relatively small cost.

3) I realize other investment companies in many ways have more than reduced the gap with Vanguard, although I realize the ease & simplicity of having all savings at one place with me not getting any younger .

4) If I do make a change I want to go in knowing all the in & outs about ETFs. It is an important decision for me to change as I usually can manage my good old Vanguard account half asleep.

 

[VanWinkle]

I am a long term all Vanguard 5 Admiral Fund investor, I am superficially familiar but need an in depth understanding about ETFs,

What I know about ETFs vs Mutual Funds -

1) Admiral Fund expense ratios have the same expense ratios of ETFs.

2) An ETF can be traded at the middle of the day price (Like a individual Stock) where as a Mutual Fund is priced at the end of the trading day, hence ETFs are generally better suited for active traders.

3)ETFs are relatively newer investment vehicles although introduced years back, when compared to Mutual Funds. I am from pre ETF era


The main reason I am looking into ETFs at this time is -

1) I suspect the ETFs MAY have a lower expense ratio than my Vanguard admiral funds & I do not want to leave anything on the table due to my ignorance.
I believe the admiral funds could be converted to ETFs without any tax repercussions (But not the other way around)

2) I am researching the Schwab Intelligent Income for a portion of my savings for monthly withdrawals starting next year where they use Robo Advisor management with ETFs & give access to a CFP for a relatively small cost.

3) I realize other investment companies in many ways have more than reduced the gap with Vanguard, although I realize the ease & simplicity of having all savings at one place with me not getting any younger .

4) If I do make a change I want to go in knowing all the in & outs about ETFs. It is an important decision for me to change as I usually can manage my good old Vanguard account half asleep.

I have studied the same decision for several years now. #4 on your list is the best reason I have to leave well enough alone. I also wonder about the bid/ask spread when selling ETFs. I also don't like the ability to sell during the trading session as it may lead me to bad decisions........

 

[RunningBum]

I don't follow your somewhat conflicting point 1) in each part. The fees are posted for both, so you can compare for yourself if they are the same or different.

I'm mulling converting my admiral shares to ETF because I could more easily move them to another broker if I hit my limit with VG's issues. I'm close.

I like that I can do a mid day trade of an ETF and not have to worry about a late market rally or fall that might change my decision. I less like the Bid/Ask spread but it's probably pretty small. I'm also not sure that I can specify an exact dollar amount I want to buy or sell, but rather have to figure out how many shares for my target price, and it's even more uncertain if I buy/sell at Market price. Do they have the capability to buy by dollar amount and buy/sell partial shares?

 

[BigMoneyJim]

I started dabbling in ETFs a year or so ago. I've been more or less all Boglehead for almost 30 years.

Most of the touted benefits of ETFs are a list of reasons why I don't bother with stocks in the first place. However, I've found some compelling pro-ETF reasons for a passive index investor:

- Many VG funds have frequent-trader restrictions. Why? Because the churn causes them to have to sell and buy assets, resulting in inefficiency. (Or something like that.) In a market event where lots of folks all buy or sell at once, it impacts me slightly even if I stay put. ETFs don't have that problem as shares are created and destroyed by privileged traders who keep the ETF price in line with NAV.

- Recently retired, I've had to start thinking about spending down my retirement savings. Sometimes the market swings a fair bit in that last half hour of trading. With ETFs it's kind of nice to be able to know at sell time what price I'll get, or even better to set a long-term limit sell order. I guess that's arguably market timing, but I at least like the feeling of control.

I'm mulling converting my admiral shares to ETF because I could more easily move them to another broker if I hit my limit with VG's issues. I'm close.

And there's this. This is exactly why I spent the last two weeks converting (almost) all my open-ended funds into ETFs in what I called a daily "dance" of ordering an open-ended sale and then buying ETF with free cash in the last trading hour, maintaining a constant AA, because you can't go straight from fund to ETF, or at least I didn't know how to.

And for somewhat uncommon reasons I might have otherwise been forced to move my money out of a Vanguard brokerage account, and as long as my investments were in open-ended funds the only way to move them is for VG to sell everything, mail me a check to sign which I then have to mail to the new place. That is my nightmare scenario.

But it only very recently dawned on me that I could transfer ETFs in-kind between institutions (I hope), and I don't currently have the brokerage restrictions, so I made the conversion. I even put my "cash" into what amounts to a MM ETF. (SHV, BIL, or SCHO are examples.) I'm guessing that's easier to transfer in-kind than EFTing cash.

Vanguard seems to be forcing a brokerage account on everyone, anyway, so why not at least dabble?

That said, I'm still keeping open-ended funds in my Roth accounts (in my destination institution). I want my Roth accounts to grow with dividend reinvestments for at least 9 more years, and I like the simplicity and set-it-and-forget-it-ness of open-ended funds growing and reinvesting for years. I know DRIPs might be available for ETFs, but I haven't bothered to look into that so far.

 

[gerntz]

To pay capital gains and trade fees?

 

[Brat]

I have a Vanguard ETF in my Fidelity account. Fidelity charges a small fee when you sell an ETF so even my investments in ETFs are long term.

 

[Texas Proud]

I don't follow your somewhat conflicting point 1) in each part. The fees are posted for both, so you can compare for yourself if they are the same or different.

I'm mulling converting my admiral shares to ETF because I could more easily move them to another broker if I hit my limit with VG's issues. I'm close.

I like that I can do a mid day trade of an ETF and not have to worry about a late market rally or fall that might change my decision. I less like the Bid/Ask spread but it's probably pretty small. I'm also not sure that I can specify an exact dollar amount I want to buy or sell, but rather have to figure out how many shares for my target price, and it's even more uncertain if I buy/sell at Market price. Do they have the capability to buy by dollar amount and buy/sell partial shares?

I am at the end with Vanguard.... but my problem is that I do not really like any of the alternatives... so I just keep delaying moving to another place...


Thought I was going to Fidelity, but they have crap for interest of free cash... and they have restricted me buying preferred shares for some reason.. even though they say I can call it in I change my price a few cents here and there to capture shares... I do not want to have to call in every time...


The other options are ETrade and Merrill Edge.... again, nothing paid on free cash... and I do NOT want to have to move my free cash into a MM fund all the time..



My brother like Merrill as they have a CC you can get bonus rewards at over 5% if you have enough money in them...

 

[audreyh1]

To pay capital gains and trade fees?

Trades on Vanguard ETFs at Vanguard are free. And there isn’t a difference in realized capital gains between funds or ETFs.

The conversion from fund to corresponding ETF itself has no tax consequences.

I personally wouldn’t do it for other reasons, the main ones being the hassle of trading during the day, and particularly the nasty deviations from underlying NAV (discounts) that can occur with ETFs during market stress. Saw some shocking differences thus past March. Fine if you are a buyer, I guess.

 

[marinauser]

One reason to convert to ETFs is if you trade very frequently. You can run into Vanguard's buy/sell rules and get locked out of a purchase for 30 days in the mutual funds. You don't have to worry about that with their ETFs. I have seen this in a foundation account where you can get incoming funds to be invested and grants being paid out that can trigger a frequent trading rule for mutual funds.

 

[GalaxyBoy]

I’m interested in this question too. I’ve accumulated quite a bit of BND in my Schwab IRAs back when Schwab didn’t offer Admiral shares, and before that in my old 401(k) that had lousy fund choices but offered a self directed brokerage window where I could buy ETFs for a somewhat reasonable fee. Now I can access VG Admiral shares at Schwab or the corresponding Schwab funds.

My concern of late is the premium or discount of an ETF vs. its corresponding fund. For example, in late March BND varied from its fund by as much as 6%. That’s a bit scary if you were forced to sell under those circumstances.

See the chart at https://ycharts.com/companies/BND/discount_or_premium_to_nav for example. Change the date range to YTD to see it more clearly.

 

[CRLLS]

Presuming the account is not an IRA or Roth, is not the ETF a better tax vehicle? Within an IRA/Roth I don't think there is much of a difference taxwise. Somebody here can confirm this, I'm sure.

 

[MRG]

Do ETFs have as many issues with tax reporting as funds do?

 

[pb4uski]

Do ETFs have as many issues with tax reporting as funds do?

What issues with tax reporting are you referring to? AFAIK the reporting is similar.

 

[MRG]

What issues with tax reporting are you referring to? AFAIK the reporting is similar.

Pushing the deadline for tax reporting and frequency of reworked 1099s.

 

[audreyh1]

My concern of late is the premium or discount of an ETF vs. its corresponding fund. For example, in late March BND varied from its fund by as much as 6%. That’s a bit scary if you were forced to sell under those circumstances.

See the chart at https://ycharts.com/companies/BND/discount_or_premium_to_nav for example. Change the date range to YTD to see it more clearly.

Yes, I remember witnessing that in real time. Even though I knew it was theoretically possible, I was still shocked. If you’d been trying to sell bonds to buy stocks, that would have hurt.

 

[OldShooter]

... Even though I knew it was theoretically possible, I was still shocked. ...

My guess is that was due to the "authorized participants" getting nervous and deciding to sit on their hands. (https://www.investopedia.com/terms/a/authorizedparticipant.asp)

I think that many ETF holders do not realize that there is this third player at the table. The authorized participants' only interest is in their own P&L. They have no loyalty or obligation to the fund holders and their only goal with the fund company is to behave well enough that they don't get kicked off the arbitrage gravy train.

I have zero direct evidence of this being the cause of the problems, but am hoping that a Jason Zweig (WSJ), Roger Lowenstein ("When Genius Failed"), or Michael Lewis ("The Big Short") will dig into it and report. What I do know for certain is that when all the participants in a project do not have similar goals, bad things can happen.

 

[Ed_The_Gypsy]

I’m interested in this question too. I’ve accumulated quite a bit of BND in my Schwab IRAs back when Schwab didn’t offer Admiral shares, and before that in my old 401(k) that had lousy fund choices but offered a self directed brokerage window where I could buy ETFs for a somewhat reasonable fee. Now I can access VG Admiral shares at Schwab or the corresponding Schwab funds.

My concern of late is the premium or discount of an ETF vs. its corresponding fund. For example, in late March BND varied from its fund by as much as 6%. That’s a bit scary if you were forced to sell under those circumstances.

See the chart at https://ycharts.com/companies/BND/discount_or_premium_to_nav for example. Change the date range to YTD to see it more clearly.

I think this is similar to a Flash Crash. No?

 

[audreyh1]

No, because it persisted for at least 2 days I think. Closed-end Funds trade at premiums and discounts all the time, sometimes quite large. With ETFs you typically see much smaller discounts and premiums and often close to zero. But when there is veryheavy volume, you can see the divergence between ETF and the underlying NAV.

Basically it meant that the sellers wanted out and didn’t care that they weren’t getting paid the underlying value. Now they might have been selling stuff they could, to cover other investments that had gone very bad. That’s pretty typical under extreme market stress. Everything is hit - even treasuries had rates spike for a few days around that time.

 

[HI Bill]

To pay capital gains and trade fees?

ETFs and MFs in tax-deferred accounts don't pay capital gains; sale of ETFs and MFs in taxable accounts can result in LTCG and STCG tax liabilities. Trading fees are essentially the same (free) for most. I don't think either of these are valid statements, for most funds.

 

[HI Bill]

To me, the only real difference is the ability to make intra-day trades, and deciding at what point you'd like to buy or sell. Clicking "Sell" on an MF, and then seeing the value decline at the end of the day seems like something I'd like to avoid. Also, you can only track MF values once a day, several hours after market close; ETFs can be tracked in real time throughout the trading day.

 

[BigMoneyJim]

I should add to my previous comment that pretty much all my investments are in IRAs and Roth IRAs, so taxes weren't a concern for me between open-ended funds and ETFs.

Also, in my case I'm aware that market value can stray from NAV, but as a long-term passive investor in spend-down mode with a large cash cushion, brief straying from NAV doesn't concern me. So, another ETF not-negative for passive investors.

 

[audreyh1]

If I were rebalancing during a market meltdown, I think I’d be annoyed at a 6% loss to NAV due to a discount. Of course one way to avoid this is to not trade ETFs during crazy market days.

For the Vanguard OEFs versus ETFs, I believe that they are equally tax efficient. Vanguard has some patented mechanism that keeps the OEFs as efficient.

Personally I don’t like the trading shares aspect of ETFs and am fine with end of day prices on mutual funds.

 

[tdv2]

I also didn't realize, until the recent past, that the departure from price paid or received, relative to the NAV of the securities held, could get as high as 5%-6% on an open ended fund. I saw some of this phenomena in bond mutual funds that I hold. I recall others posting about their ETF's being seemingly mis-priced during the recent stress. For me, not being a "trader" I only need to be careful when re-balancing....might be best to execute when the market is not moving parabolic.

 

[CRLLS]

Maybe I'm wrong. I just consider that an ETF is basically a stock in and of itself. This is why it can be traded real time. The NAV of the securities held by the ETF is its book assets. One doesn't own the securities held by the ETF, just the ETF "stock". Yes there is a constant buying and selling of securities in an attempt to keep things at a equal level. There would have to be really. Just like a SP500 "mutual fund" doesn't exactly own the exact SP500 makeup and ratios.

It doesn't concern me that there might be a few % disconnect between the ETF and the NAV of the securities held. Maybe I'm too simplistic in my understanding.

 

[big-papa]

If I were rebalancing during a market meltdown, I think I’d be annoyed at a 6% loss to NAV due to a discount. Of course one way to avoid this is to not trade ETFs during crazy market days.

For the Vanguard OEFs versus ETFs, I believe that they are equally tax efficient. Vanguard has some patented mechanism that keeps the OEFs as efficient.

Personally I don’t like the trading shares aspect of ETFs and am fine with end of day prices on mutual funds.

Yep Vanguard definitely has some special sauce that pretty much keeps their mutual funds under control when it comes to capital gains distributions. Some of their ETFs have microscopically lower e/r than their already cheap mutual funds, but other than that, pretty much equivalent.

Outside of that, ETFs usually have the advantage as they seldom have capital gains in general due to their structure. I'm in no sense a day trader, but I actually like the ability to trade shares at any time and to know exactly what price they were traded at in more or less real time.

Fidelity has a decent pro/con for mutual funds vs ETFs in the link below. It's a little old as it mentions one con of ETFs is commissions (which Fidelity doesn't charge anymore), but otherwise a decent quick read:

https://www.fidelity.com/learning-c...to market,individually redeemed from the fund.

Cheers.