Converting Vanguard Mutual Funds To ETFs

May 24, 2019

Though I’ve been an indexer for three decades, my religion has been in mutual funds, not ETFs, as I believed mutual funds were superior in six ways.

But Vanguard has now lowered expense ratios for my three core index funds in the ETF share class but not the Admiral Share class mutual funds. Because Vanguard allows tax-free conversions in some funds, I thought I’d convert a small portion of my account before deciding upon a recommendation to others.

Here’s my analysis and decision as to whether I’ll be converting the rest of my portfolio.

Background

Several weeks ago, I wrote about Vanguard lowering the costs of ETFs and asking, is it time to convert? Now Vanguard has done the same to all three of my core index funds.

 

 

With lower expense ratios, it was time for me to give it a try. So I took about $36,000 of my Vanguard Total International Stock Index Fund Admiral Share class (VTIAX) with gains and converted it to the ETF share class Vanguard Total International Stock ETF (VXUS).

Wowed By Conversion Process

Understand that my mutual fund was held by Vanguard and the conversion process might be different or even not allowed at other custodians. Even so, I expected the process to take a few weeks.

I called my Vanguard advisor to start the process, as a Vanguard spokesperson notes this conversion is only available by phone at this time.

First, I made sure I had identified the cost basis on my mutual fund so that it would carry over (for covered shares) to the ETF. Then, speaking with my advisor and a Vanguard broker, I gave them the instructions to convert. They made sure I knew this conversion was only one-way, meaning I couldn’t return to VTIAX without selling and paying taxes.

By the very next day, I was able to see a confirmation that had two pleasant surprises, even beyond the speed of the conversion:

  • The VXUS shares were purchased at the closing NAV [net asset value] on the day I placed the order, so I didn’t pay a bid/ask spread or premium or discount.
  • I was able to purchase fractional shares. I had been told I could only purchase whole number of shares and would end up receiving a little bit of cash and a gain. That might be the case at non-Vanguard custodian.

It took a few days for the ETF shares to show up in my brokerage account and several days for the cost basis to show up with the specific lots ID method I selected. I had an older legacy account, and Vanguard said newer accounts would receive cost basis information sooner.

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