Yes. Most funds that provide ETF Shares will allow you to convert your traditional shares into ETF Shares. (Conversions aren’t possible with four of our bond ETFs: Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond.)
Conversions from Investor and AdmiralTM Shares are allowed, and they are tax-free provided you own your mutual fund and ETF Shares through Vanguard.
Keep in mind that ETF Shares cannot be converted back to regular shares. If you decide to sell your Vanguard ETF Shares and repurchase traditional shares in the future, the transaction may be taxed.
Converting traditional shares to ETF Shares is free if you have a Vanguard brokerage account. If you have any questions, please contact us.
Our response:
Mutual funds and exchange-traded funds (ETFs) are two different types of investments; you can’t transfer money from one to the other. You must sell your mutual funds first and then invest in ETFs.
Because ETFs trade like stocks, you may not be able to buy them at the same financial institution where you presently hold your mutual funds. To trade them, you’ll need to create a trading account with a full-service or online investment dealer. Learn more about ETFs and how to buy and sell them.
If you invest in mutual funds through a registered plan, such as an RRSP, you won’t have to pay taxes on any capital gains as long as the funds stay in the plan (i.e. you plan to hold the ETFs in the same registered plan). To avoid a tax bill, if you are transferring funds between two financial institutions, the transfer must be conducted directly by the financial institution. There could be charges for the transfer.
Is it possible to convert mutual funds to ETFs?
According to Mr. Atkinson, converting a mutual fund to an E.T.F. is legally a merging of the old and new funds, and hence is not a taxable event.
Vanguard is utilizing a different method to allow investors in 47 of its index mutual funds, 36 of which own stocks and the rest bonds, to transfer their assets to E.T.F.s without incurring any tax repercussions. Each E.T.F. was created as a share class of an equivalent mutual fund, which is a nontaxable transfer according to the law.
According to Rich Powers, Vanguard’s head of E.T.F. and index product management, the company has no plans to convert any mutual funds, nor does it expect to create E.T.F. share classes for any actively managed mutual funds.
Other fund companies provide exchange-traded funds (ETF) versions of their huge index-based mutual funds, but Vanguard holds a patent on the process of tax-free share class transfers. Mr. Powers said there had been negotiations with other fund providers about licensing it, but none had taken the plunge yet, possibly because the patent expires in two years and other companies are holding off on offering such transfers until then.
Companies that follow in the footsteps of Guinness Atkinson and Dimensional in converting data are unlikely to become industry giants. Several of the top fund companies, including BlackRock, Vanguard, T. Rowe Price, and Fidelity, have stated that they have no plans to convert their mutual funds.
Is Vanguard an ETF retailer?
Although ETFs, like stocks, can be exchanged at any time of day, most investors choose to buy and keep them for the long term. To buy Vanguard ETFs and ETFs from more than 100 other businesses, you’ll need a Vanguard Brokerage Account. Almost every exchange-traded fund (ETF) is available commission-free through your Vanguard account.
Is it taxable to convert a mutual fund to an ETF?
Some mutual funds have stated that they intend to convert to exchange-traded funds (ETFs). ETFs are similar to mutual funds in that they are traded on a stock exchange. They are both pooled investment vehicles that invest in a variety of assets, but they have different structures. This Investor Bulletin is being issued by the Office of Investor Education and Advocacy to inform investors about some of the issues that may arise as a result of these conversions.
How do I know if my mutual fund plans to convert into an ETF?
If you own shares in a mutual fund that proposes to convert to an ETF, you will be notified by the mutual fund. In many cases, you will receive a document outlining the differences between your current mutual fund and the new ETF, as well as a discussion of the ETF’s main risks. It will also inform you whether shareholder approval is necessary for the conversion and, if so, how you can vote to approve (or reject) the conversion.
What do I need to do if my mutual fund is going to convert?
To begin, learn the differences between the two types of funds and why one could be best for your scenario. To learn more about mutual funds and exchange-traded funds (ETFs), read our investor bulletin, Characteristics of Mutual Funds and Exchange-Traded Funds (ETFs).
Second, decide if you want to keep your shares when the fund becomes an ETF. Consider the factors listed below to assist you in making your decision.
- You won’t need to do anything with your mutual fund shares if they’re already in a brokerage account. They will be converted to shares of the new ETF automatically.
- You’ll need to open a brokerage account to hold ETF shares if your mutual fund shares are held directly with the mutual fund.
- The value of your investment will not change as a result of the conversion at the time of conversion.
If you don’t want to keep the investment once it becomes an ETF, you can:
- Before the mutual fund transforms to an ETF, redeem your mutual fund shares back to the mutual fund. You may also be given the option of transferring your shares to a different mutual fund. You may be subject to tax repercussions as a result of each of these transactions.
In either scenario, be sure you understand the conversion’s timing, and if you need more information, call the mutual fund’s shareholder services phone number or a financial adviser.
What should I consider if my mutual fund is converting to an ETF?
- The investment was a good fit. Check to see if the investment still suits your financial circumstances and objectives. When a mutual fund converts to an ETF, it may make changes to its portfolio holdings, or the investments it owns.
- Account with a brokerage. If you don’t already have a brokerage account for the mutual fund, you’ll need to open or designate one to hold the shares after the conversion and to purchase and sell ETF shares in the future. Shares in mutual funds are bought and sold through the mutual fund, and you don’t always have to keep them in a brokerage account. ETF shares must be held in a brokerage account and are bought and sold on a national securities exchange.
- Shares that are fractional. ETFs, unlike mutual funds, rarely issue fractional shares. If you own fractional shares of the mutual fund, you may be able to redeem them and have them changed to cash before the conversion. This redemption may be considered a taxable event, and you may owe taxes as a result of it.
- Taxes. Determine whether you will owe taxes as a result of the conversion. In most cases, converting a mutual fund to an ETF is designed in such a way that it is not a taxable event for shareholders. However, if the mutual fund sells investments in its portfolio before the conversion, the mutual fund may have to recognize capital gains, which could result in taxable payouts to shareholders. You may owe taxes on these distributions if this happens.
- Efficient taxation. Investors who own mutual fund shares in a taxable account must normally pay taxes on any capital gain distributions received from the fund. Any capital gains dividends from the ETF may also be subject to taxation. However, because many ETFs acquire and sell portfolio securities in-kind (rather than for cash), they often have fewer capital gain distributions than mutual funds, resulting in lower taxation for ETF shareholders on a comparable investment.
- Reduced costs. ETFs have tended to be less expensive to operate than mutual funds that invest in a comparable fashion because ETFs require slightly different services than mutual funds. These savings are passed on to investors in the form of lower total expenditures in ETFs. When you purchase and sell ETF shares, you may have to pay brokerage commissions and other trading costs.
- Dividends and payouts are reinvested.
- Mutual fund distributions or dividends are often reinvested automatically by investors back into the fund. Investors in exchange-traded funds (ETFs) may have to make these additional trades on their own. The funds you received will not be invested until you reinvest these distributions. When you reinvest these distributions, you may also have to pay transaction costs.
- Buying and selling during the day. ETF shares are bought and sold on national securities markets, unlike mutual fund shares, which are purchased and redeemed through the fund. This allows investors to buy and sell ETF shares at any time during the day. However, there is a risk that a trading market may not develop, making it impossible to sell your shares at their current net asset value.
- NAV Premium or Discount Mutual funds are purchased and redeemed at the end of the trading day’s net asset value (NAV). On a national securities exchange, ETFs are purchased and sold at the current market price. This can provide you more options with your shares, but the market price of ETF shares may be greater or lower than the NAV. A premium is paid for shares that sell at a higher price than the NAV, while a discount is paid for shares that sell at a lower price than the NAV.
- Increases the amount of money it invests. ETFs, unlike mutual funds, do not have to buy back or redeem shares from ordinary investors. As a result, ETF managers are less concerned than mutual fund managers with continual redemptions. This may allow ETF managers to invest a greater portion of their funds.
Do mutual funds outperform exchange-traded funds (ETFs)?
While actively managed funds may outperform ETFs in the near term, their long-term performance is quite different. Actively managed mutual funds often generate lower long-term returns than ETFs due to higher expense ratios and the inability to consistently outperform the market.
Is it possible to convert mutual funds to stocks?
The receiving brokerage initiates a brokerage account transfer. Set up a new brokerage account and fill out the account transfer request form to move your mutual fund and other investment holdings. Your mutual fund shares will be held at the brokerage or at the mutual fund company, according on the transfer form. The new brokerage will use the Automated Customer Account Move Service ACATS to electronically transfer your fund investments to the new account once you submit the transfer request form.
What exactly is the distinction between VTI and Vtsax?
Maybe you’re trying to diversify your investing portfolio, or maybe you’re a first-time investor searching for a place to start. In this article, we will compare and contrast VTSAX with VTI.
We strongly advise you to explore investing in low-cost mutual funds or exchange-traded funds (ETFs). Vanguard’s Total Stock Market Index funds are VTSAX (Vanguard Mutual Fund) and VTI (Vanguard ETF).
Why should new investors think about these tax-advantaged options? According to a research of thousands of shares conducted by Longboard Capital Management over a 25-year period, substantially more equities would underperform than outperform. The primary distinction between VTI (exchange traded fund) and VTSAX (mutual fund) is the minimum initial investment required.
Investing in a single stock can be extremely dangerous, but an index fund can assist to reduce the risk of losing money.
Do dividends in Vanguard ETFs automatically reinvest?
It’s pre-programmed. You’re buying at different prices and averaging the price per share over time. By regularly adding more shares, you’re compounding the growth of your investment, which will generate dividends of their own.