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Swapping Mutual Funds For ETFs

I’ve always respected Vanguard founder Jack Bogle, he is considered to be the “Father of the Index fund” and has saved investors many billions of dollars in fees by creating low cost index funds, starting a new industry within the financial services market.
The natural follow on to index mutual funds are the ETFs which are now also commonplace. Vanguard recently announced that if you hold a Vanguard Index fund for which they also offer an ETF, you can now swap the fund for the EFT with no tax consequence, and only a nominal fee ($50). Here is the Q&A from the Vanguard site:

Can I convert conventional Vanguard mutual fund shares to Vanguard ETFs?

Shareholders of Vanguard stock index funds that offer Vanguard ETFs may convert their conventional shares to Vanguard ETFs of the same fund. This conversion is generally tax-free, although some brokerage firms may be unable to convert fractional shares, which could result in a modest taxable gain. (Bond ETFs do not allow the conversion of bond index fund shares to bond ETF shares of the same fund.)

Vanguard will charge $50 for each conversion. (This fee is waived for Flagship clients.) Your brokerage provider may charge an additional fee for this service. For more information, contact your brokerage firm, or call 866-499-8473.

Once you convert to Vanguard ETFs, you cannot convert back to conventional shares. Also, conventional shares held through a 401(k) account cannot be converted to Vanguard ETFs.

When the market is up from where you bought in, this can let you make the swap without having to declare capital gains. In this down market, it can benefit you by not forcing you to declare a loss when it may not be advantageous to do so.

If you are looking for a broker check out Craig Ford’s How to Find an Online Discount Stock Broker, a great read.

Joe

  • Mario Brothers January 30, 2010, 5:27 pm

    What would be the reason someone would want to swap mutual funds for their corresponding ETF’s?

  • JOE February 5, 2010, 8:05 pm

    ETFs are traded during the day, real time. If, for whatever reason, one needs to buy or sell during the day, it can be frustrating to wait till day’s end to se ethe closing price.

    Mutual funds spit out capital gains at year end, sometimes when the fund even fell in value from the beginning of the year. ETFs distribute their dividends but this cap gain issue is avoided.

  • Jehnavi December 10, 2010, 6:39 am

    ETFs can be bought and sold throughout the day. This kind of intraday liquidity is a significant advantage, especially when market precise trades, portfolio rebalancing and raising cash quickly matters most. On the other hand, mutual funds are bought and redeemed once a day at their NAV (net asset value) price, a competitive disadvantage.

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