Bond ETF vs Bond Fund

[lawman]

What are the pros and cons of each?

 

[lawman]

I should have said Bond ETF and Bond Mutual Fund.

 

[Sunset]

In general ETF's are (IMHO) better in taxable accounts because of the taxation implication when other people sell the fund.
With Funds, when other people sell the fund, the fund has to recognize capital gains and you (a non-seller) get a declared capital gain in Dec, even though the fund price stayed the same or even went down, it could also go up but not needed for the declaration.
With ETF's, when other people sell their ETF's, they get the capital gain and you don't share in any common declared capital gain.

So from a tax planning perspective, I prefer ETF's in a taxable account. In an IRA/ROTH/401K it doesn't matter as nothing is taxable until withdrawal, and it's all at the income tax rate.

 

[lawman]

In general ETF's are (IMHO) better in taxable accounts because of the taxation implication when other people sell the fund.
With Funds, when other people sell the fund, the fund has to recognize capital gains and you (a non-seller) get a declared capital gain in Dec, even though the fund price stayed the same or even went down, it could also go up but not needed for the declaration.
With ETF's, when other people sell their ETF's, they get the capital gain and you don't share in any common declared capital gain.

So from a tax planning perspective, I prefer ETF's in a taxable account. In an IRA/ROTH/401K it doesn't matter as nothing is taxable until withdrawal, and it's all at the income tax rate.

Thanks...did not know that

 

[audreyh1]

Bond funds are not known for paying out large cap gains distributions. IMO it would be a wash.

 

[COcheesehead]

In general ETF's are (IMHO) better in taxable accounts because of the taxation implication when other people sell the fund.
With Funds, when other people sell the fund, the fund has to recognize capital gains and you (a non-seller) get a declared capital gain in Dec, even though the fund price stayed the same or even went down, it could also go up but not needed for the declaration.
With ETF's, when other people sell their ETF's, they get the capital gain and you don't share in any common declared capital gain.

So from a tax planning perspective, I prefer ETF's in a taxable account. In an IRA/ROTH/401K it doesn't matter as nothing is taxable until withdrawal, and it's all at the income tax rate.

ETFs buy and sell too declaring cap gains as well. Don’t confuse NAV and market value. They are separate. The cap gains you reference are market gains. Both types still have NAV gains or losses too.
Index ETFs are likely to have less cap gains or losses due to their nature of following an index, but there are proprietarily managed bond ETFs too.

 

[Graybeard]

In general ETF's are (IMHO) better in taxable accounts because of the taxation implication when other people sell the fund.
With Funds, when other people sell the fund, the fund has to recognize capital gains and you (a non-seller) get a declared capital gain in Dec, even though the fund price stayed the same or even went down, it could also go up but not needed for the declaration.
With ETF's, when other people sell their ETF's, they get the capital gain and you don't share in any common declared capital gain.

So from a tax planning perspective, I prefer ETF's in a taxable account. In an IRA/ROTH/401K it doesn't matter as nothing is taxable until withdrawal, and it's all at the income tax rate.

Vanguard Total Stock Market Index in a taxable account, is the ETF more tax efficient than the mutual fund or is it so close that it barely matters? I've read that is an excellent MF holding in taxable as it produces the least cap gains or dividends or both, can't remember exactly which.

 

[audreyh1]

Yes, with the Vanguard index funds the mutual funds are just as tax efficient as the corresponding ETF.

 

[Sunset]

What I said earlier holds true for most ETF's vs Funds regarding taxation.
However, Vanguard is a special case as their setup of ETF's is different from the others.

Which does mean the Funds are about as efficient as the ETF's for taxes.

"Vanguard holds a patent on a unique fund structure, a mutual fund/ETF hybrid. Most of its ETFs were bolted onto existing mutual funds. This is distinct from its competitors' ETFs, which stand on their own."


https://www.morningstar.com/articles/962031/vanguards-unique-etf-structure-presents-unique-tax-risks#:~:text=Vanguard%20holds%20a%20patent%20on%20a%20unique%20fund,its%20competitors'%20ETFs,%20which%20stand%20on%20their%20own.

 

[Montecfo]

It depends on the liquidity of the fund or ETF and the underlying securities During the Covid selloff, ETF prices got out of sync with the NAV. Generally, I would avoid bond ETFs that reason.

Liquidity is a huge issue. You can have bond ETFs that hold relatively illiquid securities.

You really have to know not just the vehicle, but what it contains. You want the underlying securities to be just as liquid as the ETF.

Liquidity issues occur with open end bond funds as well. But the are often better established, more heavily traded and of course only get priced once per day.

 

[big-papa]

A couple of very small things to consider.

1. Perhaps you have a favorite bond index you wish a bond fund to track. Not all indexes are covered by both ETFs and Mutual Funds. But you're likely to find "close enough" with a little searching.
2. The usual ETF vs. Mutual Fund potential problem with behavioral issues. There are some people don't like ETFs in general since they trade all day long and they feel that they might be tempted to market time when they purchase or sell a fund.

Other than that, pretty much the same. And unless it was a muni bond ETF/Mutual Fund, I wouldn't hold either in a taxable account.

Cheers
Big Papa