ETF or Mutual Fund

[Stormy Kromer]

I would appreciate any advice on what you think would be my best option to invest long term (10 years plus) assets in a taxable account.

Tax efficient growth is my objective. I've been using Vanguard Tax Managed Capital Appreciation Fund. I have a reasonably high risk tolerance and am a long time investor.

My goal is to delay current dividends and income in a growth fund. I'll pay the LTCG's when I sell (if ever). There's a good chance these funds will pass to heirs and get a stepped up basis years down the line.

I've never considered EFT's and haven't studied them much. Given my time frame and objectives, Do you think a Vanguard ETF may be a better option for my taxable account ?

Thank you.

 

[sengsational]

Dividends hit ETF's and mutual funds with the same impact, but ETF's are a bit more tax efficient overall, I think, because in a mutual fund, if someone cashes-in their shares, the underlying securities must be sold (depending on cash on hand and general magnitude of inflows and outflows, of course). In an ETF, the shares can go from the hands of one owner to the next and no underlying shares need to be sold. But you'll still want to pick an ETF that's "tax efficient". I've heard that just a plain old index fund is a pretty good choice, but I'm sure there will be smarter people than I to come along and provide more wisdom.

 

[HI Bill]

I just compared VOO (Vanguard S&P 500 ETF) with the Vanguard Tax Managed Capital Appreciation Fund. Look at the section titled "Average Annaul Total Return After Taxes on Distributions and Sale of Fund Shares. VOO does slighlty better over a 5-year horizon (no 10-year data is available) than your fund. But they're close.

https://personal.vanguard.com/us/funds/vanguard/compare?navigatingFrom=6

 

[bloom2708]

I would pick the mutual fund version. (every time)

The no fractional shares for ETFs is a pain for regular buy/hold investing. Bid/Ask spreads can come into play.

It sounds cooler to say ETF. Not much else.

 

[HI Bill]

I would pick the mutual fund version. (every time)

The no fractional shares for ETFs is a pain for regular buy/hold investing. Bid/Ask spreads can come into play.

It sounds cooler to say ETF. Not much else.

I sold all my mutual funds and bought ETFs. The ability to sell intraday was the only reason. If I'm sellling something, and I'm trying to time the bottom or the top, a lot can happen between when you hit sell and the time a mutual fund sale finalizes at the close of business (next day, often, for me in Hawaii).

 

[bloom2708]

I sold all my mutual funds and bought ETFs. The ability to sell intraday was the only reason. If I'm sellling something, and I'm trying to time the bottom or the top, a lot can happen between when you hit sell and the time a mutual fund sale finalizes at the close of business (next day, often, for me in Hawaii).

Even within a day market timing doesn't work. But you can lock in a price you think is reasonable.

How may late day rallies or late day swoons happen? For most, if you want to market time it would be another reason to go mutual fund and take away that option.

 

[HI Bill]

Even within a day market timing doesn't work. But you can lock in a price you think is reasonable.

How may late day rallies or late day swoons happen? For most, if you want to market time it would be another reason to go mutual fund and take away that option.

Correct. But let's say you're going to take a distribution, and at the end of the day, when your mutual fund sale is about to execute, the the fund value tanks. You don't have a choice, and you're stuck taking the price. The big risk when selling mutual fund is exactly what you said, a late day swoon!

If you're selling an ETF, and the markets are falling, you can watch, and wait for a recovery; or you can put in a bid/ask. I'm not day trading, just trying to have some control over the price at which I sell, and not sell as prices are actively falling.

 

[audreyh1]

If tax efficiency is your primary goal, then yes, you should consider ETFs. Vanguard has a nice selection of them.

Personally I find the stock-like buying and selling (limit orders, watching prices, checking spreads, etc.) at open market of ETFs to be a pain, so I don't use them.

But they are more tax efficient than the equivalent mutual fund.

 

[Animorph]

ETF's are probably the better tax-efficient investment. I'd be a little concerned about heirs having to sell ETF's if they were not used to stocks.

I've been moving to all mutual funds to simplify my portfolio and its maintenance. If DW has to take over and make the occasional sale, mutual funds will be much easier. I'm already not giving it enough attention to worry about buying and selling at my trigger points like I used to.

 

[LOL!]

Vanguard ETFs are just a different share class of Vanguard mutual funds with a few exceptions, so they have the EXACT SAME tax efficiency. This is different for non-Vanguard products.

Here is a list of pros/cons for one to consider:

https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

You will see that the choice boils down to your personality and not tax-efficiency. It is thus a personal choice.

I use both ETFs and mutual funds because I have a split personality.

 

[sengsational]

Vanguard ETFs are just a different share class of Vanguard mutual funds with a few exceptions, so they have the EXACT SAME tax efficiency.

So are you saying that the line from the wiki you referenced does NOT apply to Vanguard ETF's?

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.

If so, that would seem like a disadvantage to Vanguard ETFs vs other ETFs.

 

[audreyh1]

Vanguard ETFs are just a different share class of Vanguard mutual funds with a few exceptions, so they have the EXACT SAME tax efficiency. This is different for non-Vanguard products.

Here is a list of pros/cons for one to consider:

https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

You will see that the choice boils down to your personality and not tax-efficiency. It is thus a personal choice.

I use both ETFs and mutual funds because I have a split personality.

No, they do not have the same tax efficiency. The Vanguard mutual funds will pay out capital gains distributions. Due to their different structure, the equivalent ETFs do not (or far less). Thus the ETFs generate less taxable income. It's a not insignificant difference.

For someone going for max tax efficiency, ETFs are the way to go.

Oh I see - for the Vanguard case they claim they are as tax efficient as the equivalent ETF. Something patented through 2023 so this advantage is unique to Vanguard.

Tax efficiency: the mutual fund shares benefit from the disposition of capital gains through ETF shares, making Vanguard funds with ETF share classes as efficient as an ETF.

OK - that explains why their total distributions (cap gains and dividends) tend to run about 1% lower than other index funds.

 

[LOL!]

So are you saying that the line from the wiki you referenced does NOT apply to Vanguard ETF's?
If so, that would seem like a disadvantage to Vanguard ETFs vs other ETFs.

I cannot tell if you stopped reading the article when you quoted what you quoted or you simply ignored what you read in the few lines following the lines you quoted.

 

[LOL!]

Oh I see - for the Vanguard case they claim they are as tax efficient as the equivalent ETF. Something patented through 2023 so this advantage is unique to Vanguard.

Yes, some Vanguard mutual funds do NOT have an ETF share class. Those Vanguard funds generally are NOT as tax-efficient as the Vanguard funds that have an ETF share class.

But folks also need to know that ETFs can pay out capital gains distributions. And folks know that bond funds are not generally tax-efficient anyways. Do you see how Vanguard bond index funds AND their ETFs paid out capital gains distributions in past years?

 

[HI Bill]

Y...folks also need to know that ETFs can pay out capital gains distributions.

In 2018, the total dividends paid on my VTI, VOO, and VUG ETFs were similar to the dividends I received in 2017 on the mutual fund equivalents of those ETFs.

 

[LOL!]

In 2018, the total dividends paid on my VTI, VOO, and VUG ETFs were similar to the dividends I received in 2017 on the mutual fund equivalents of those ETFs.

Yes, those mutual funds and their ETF share classes did not pay out any capital gains distributions in 2017 nor in 2018.

Also note that the percentage of dividends that were qualified is the same for the mutual fund and ETF share classes.

 

[sengsational]

I cannot tell if you stopped reading the article when you quoted what you quoted or you simply ignored what you read in the few lines following the lines you quoted.

I stopped reading. Then I went back later and saw the Vanguard-specific comments.

 

[BigMoneyJim]

I just dipped my toes into ETFs a week or two ago and have been reading about them. Most of the stated advantages seem to revolve around being able to trade them intraday and otherwise do stock-ish things with them. As a patient buy-and-hold'er those advantages never interested me.

But with so many available commission free and low-fee I recently decided to try them out. I do like that in a rapid or sell-off an ETF fund won't have to generate capital gains to me because of it because of the creation/redemption mechanism.

The bid/ask spread is initially disconcerting, but my research says it's a wash with the hidden bid/ask inside open-ended funds. (shrug)

A common criticism I see of them that I don't care about is that people worry in a rapid decline in the market, authorized participants may not keep NAV and share price in line. But I'm not going to be selling in a rapid decline, so that's almost a plus for me.

On a practical level the biggest difference is that I can open my tracking spreadsheet multiple times day and watch my assets go up and down intraday as opposed to the open-ended funds updating share price once a day. That can be good or bad depending on your point of view.

And I just learned in this thread that some funds avoid capital gains by using their ETF equivalents to cash out redemptions. Cool.

 

[DSC800]

I've been moving into ETF's from MF's for my taxable accounts over the last few years and I'm a dividend growth investor expecting to live off of ~3% yield, equal to my WR. My only taxable MF is RPMGX, but I keep a couple other MF's in my retirement accounts.

ETF's are generally more nimble than MF's as they can be traded frequently, efficiently and there is no penalty for frequent trading (that I know of). Many MF's penalize you for short term trading.

ETF's are generally more tax efficient since they are not actively managed. Actively managed MF's may be churned more often producing forced capital gains. Not necessarily bad if they do perform, but can produce a large tax bill.

ETF's generally have less fees, larger ones averaging less than .2% and they don't have loads. I believe the average MF fees run at .9%. Quite a difference over time. My RPMGX fund is .7%, but proven worth it.

ETF's are option-able, if you are so inclined. MF's are not.

ETF's are margin-able, if you are so inclined. With MF's it depends on your broker.

 

[samclem]

>Most< of my taxable holdings are in Vanguard mutual funds, and these particular Vanguard funds are just as tax efficient as any ETF. They can also be exchanged for ETFs without causing a taxable event (this is a trait unique to Vanguard funds, and is patented). However, they cannot be exchanged back into mutual funds once they've been converted to ETFs without paying taxes on gains. So, I'm very happy to keep holding them in their mutual fund form.