Vanguard Mutual Fund to ETF Tax-Free Conversion via Taxable Brokerage Account

[ItsTime]

Hi All,

With the ability to convert a mutual fund to its ETF version (e.g. Total Stock Index VTSAX to VTI) with no tax consequences, I was hoping to understand if anyone here has done a conversion at Vanguard and if you are aware of the ability to do this yourself via Vanguard's website.

I searched the forum for past posts on this subject but no luck. That said, thanks in advance if you can point me to any articles or provide any feedback based on your experience.

 

[Alan]

I did the conversion to VTI some years ago and it was very easy. My reason was that the VTI ETF reports into the UK tax system and gets the very favourable tax treatment equities get.

This was 2015 or 2016 so I can’t remember where I heard about it exactly

 

[MichaelB]

I’ve had a conversion done. It’s a simple phone call and could not be easier.

I don’t remember any option to do it myself on the Vanguard website. This was some time ago. I do recall losing the unit cost basis. That is, the resulting ETF didn’t show any cost basis info and I had to create and keep my own cost records. It was some time ago, so this may have changed.

 

[OldShooter]

Just curious; why do you want to do this?

 

[Alan]

Just curious; why do you want to do this?

No cap gains distributions in VTI in the years I have had it. I can’t recall if VTSAX does them

 

[MichaelB]

No cap gains distributions in VTI in the years I have had it. I can’t recall if VTSAX does them

VTSAX would have the same distributions as VTI as a % of NAV, and no cap gain distributions. All the passive mutual funds with ETF class enjoy this advantage.

 

[RunningBum]

VTSAX would have the same distributions as VTI as a % of NAV, and no cap gain distributions. All the passive mutual funds with ETF class enjoy this advantage.

They don't.

A .01% lower expense for some ETFs over the corresponding admiral fund is one reason. $100 per $million per year. Some are even lower. VXUS is .04% lower.

Another reason is that if you want to transfer your funds to another brokerage, I think it is cheaper to sell an ETF rather than a VG fund elsewhere. I don't know the details or if this is still accurate.

 

[MichaelB]

They don't.

A .01% lower expense for some ETFs over the corresponding admiral fund is one reason. $100 per $million per year. Some are even lower. VXUS is .04% lower.

Another reason is that if you want to transfer your funds to another brokerage, I think it is cheaper to sell an ETF rather than a VG fund elsewhere. I don't know the details or if this is still accurate.

You’re right, the fund expense is higher so ghr distribution is slightly lower. I think I was trying to make a different point but was not clear.

In addition to ease of transfer and lower expenses, another reason to hold the ETF instead of the mutual fund might be if the mutual fund has a minimum holding period requirement.

 

[OldShooter]

... Another reason is that if you want to transfer your funds to another brokerage, I think it is cheaper to sell an ETF rather than a VG fund elsewhere. I don't know the details or if this is still accurate.

No reason to sell to move assets; just transfer in kind.

 

[RunningBum]

No reason to sell to move assets; just transfer in kind.

Yes, transfer in kind now, but if later you want to sell I think it may cost more to sell a VG fund over an ETF at another brokerage? And once a fund is at that brokerage you can't convert it to an ETF. I don't know the details on this, I've just heard that if you want to transfer your VG account you probably should convert fund to ETFs (where available) first.

 

[OldShooter]

... I think it may cost more to sell a VG fund over an ETF at another brokerage? ...

And it may not. ...

I just sold $150K total of a couple of VG mutual funds at Schwab last week for zero fee.

 

[ItsTime]

Thanks all for the responses and feedback. @OldShooter, I hold a significant position with VTSAX and attempting to reduce fees where possible. Where the ETF expense ratio is less than the same mutual fund, I am considering conversions here. Open to any suggestions as always! Appreciate the community help!

 

[Stwicky]

I'm interesting in doing this with my Fidelity funds. Is it as simple as calling and having it done? It it taxable if done in a non-retirement account?

 

[Exchme]

I'm interesting in doing this with my Fidelity funds. Is it as simple as calling and having it done? It it taxable if done in a non-retirement account?

No taxes are due, the underlying securities are the same, just the form of your holding changes to ETF. We did it a few months ago, you just have to call, can't be done from the website.

There is a very small fee reduction (often 0.01%) to own the ETF vs. the mutual fund and ETFs trade instantly during the day vs. mutual funds that trade at the closing price of the day regardless of the time of day you transacted. Other than that, you won't notice much difference. It may take a couple days for the cost basis history to migrate.

Vanguard mutual funds that have an ETF equivalent don't have the problem of the unexpected capital gains distributions as Vanguard spreads out the market making activities that can lead to those CGDs to the ETF, that has eliminated CGDs for those mutual fund owners.