A growing number of mutual fund investors are wondering whether
it makes sense to trade their mutual funds in for exchange-traded
funds (ETFs). There are many advantages for making the switch, for
example, intraday liquidity, lower tax liabilities, and lower
annual expense ratios.
What about shareholders in Vanguard's index mutual funds? Is it
best to convert those mutual fund shares to Vanguard ETFs that
track them same index or leave it?
Here's the low down on Vanguard mutual fund to Vanguard ETF
Fees for Converting
Shareholders of Vanguard stock index funds that offer Vanguard ETFs
may convert their conventional shares to Vanguard ETFs of the same
fund. For instance, a shareholder who owns the Vanguard Total Stock
Market Index Fund Investor Shares (Nasdaq: VTSMX) could convert to
the Vanguard Total Stock Market ETF (NYSEArca: VTI).
There is no fee for Vanguard Brokerage clients to convert
conventional shares to Vanguard ETFs of the same fund. Other
brokerage providers may charge a fee for the conversion.
When you convert from the Vanguard mutual fund shares to Vanguard
ETFs, the conversion is generally tax-free. When might there be a
possible tax? Some brokerage firms may be unable to convert
fractional mutual fund shares, which could result in a potential
Four of Vanguard's bond ETFs - the Total Bond Market (NYSEArca:
BND), Short-Term Bond (NYSEArca: BSV), Intermediate-Term Bond
(NYSEArca: BIV), and Long-Term Bond (NYSEArca: BLV) do not allow
the conversion of bond index fund shares to bond ETF shares of the
same fund, however, the other eight Vanguard bond ETFs allow
Also keep in mind that your share class conversions are
irrevocable. Once you convert from conventional shares to Vanguard
ETFs, you cannot convert back to conventional shares. Conventional
shares held through a 401(k) account cannot be converted to
For cost sensitive investors, the low fees in Vanguard ETFs are
hard to beat. The Vanguard Emerging Markets Stock Index Fund
Investor Shares (Nasdaq: VEIEX) charges annual expenses of 0.35%
compared to the Vanguard Emerging Markets
(NYSEArca: VWO), which charges just 0.22%. At face value, these
cost differences may seem small, but they add up over the
Another advantage of the Vanguard ETF share class is no onerous
redemption charges. VEIEX charges a purchase fee of 0.25% and a
redemption fee of 0.25% whereas buying VWO only incurs a brokerage
commission charge. And if your brokerage account is held at
Vanguard, there is no commission charge for trading VWO.
While I deeply admire John Bogle, Vanguard's founder, I do not
share his radical view that ETFs are a sub-standard or faulty
choice. ETFs are a contemporary extension of the indexing
trend he started in the 1970s.
Personally, I think the ETF share class offers Vanguard investors
much more flexibility. Assuming your VanguardETFs has underlying
options, you can hedge your ETF shares with put options or sell
covered calls to generate additional monthly income. You cannot
execute these strategies with Vanguard's mutual fund share
Here's another thing: When it comes to selling your ETF shares -
you can determine the price you want to sell them at by placing
limit orders. You cannot do this with mutual funds, because you
never know the exact price at which your mutual fund trades are
going to settle at - because it's determined by the fund's net
asset value (
), which is calculated by the fund company after the market closes.
Ron DeLegge is the Editor of ETFguide.com and Author of '
Gents with No Cents: A Closer Look at Wall
Street, its Customers, Financial Regulators, and the Media
' (Half Full Publishing, 2011).