Is it time to do tax-free conversions to Vanguard ETF share classes?
I’ve long been a proponent of using Vanguard Admiral Share class mutual funds over their ETFs. But things sometimes change. Recently, Vanguard announced the following changes in ETF expense ratios:
|Ticker||Fund||New Expense Ratio %|
|BNDX||Vanguard Total International Bond ETF||0.09|
|VEU||Vanguard FTSE All-World ex-US ETF||0.09|
|VGK||Vanguard FTSE Europe ETF||0.09|
|VPL||Vanguard FTSE Pacific ETF||0.09|
|VTEB||Vanguard Tax-Exempt Bond ETF||0.08|
|VWO||Vanguard FTSE Emerging Markets ETF||0.12|
|VXUS||Vanguard Total International Stock ETF||0.09|
|VSS||Vanguard FTSE All-World ex-US Small-Cap ETF||0.12|
|VYM||Vanguard High Dividend Yield ETF||0.06|
|VT||Vanguard Total World Stock ETF||0.09|
I almost missed the announcement that noted, “As a result, the ETF share class of these 10 funds is now lower than their Admiral share class counterparts.” Vanguard spokesperson John Woerth told me this is the first time ETF share classes were lowered below Admiral share classes.
I quickly saw that my favorite Total International Stock Index Mutual Fund (VTIAX) was left with a 0.11% annual expense ratio, 0.02 percentage points higher than its ETF share class (VXUS). This translates to an extra $2 a year per $10,000 invested. Though not huge, it can add up over time.
“What’s largely driving these changes is the increasing adoption of ETFs by Vanguard investors as their index vehicle of choice, which has enabled us to pass along the cost savings of scale,” Woerth said. “To put some numbers around it, even though ETFs make up only about 20% of our assets, they’ve garnered more than 35% of Vanguard’s net cash flow over the past three years.”
Elisabeth Kashner, head of ETF research at FactSet, confirmed that ETFs are less expensive for Vanguard because it saves the administrative costs around record-keeping, which gets transferred from the asset manager to the brokerage firm.
In addition, Vanguard saves money on not taking client calls on Vanguard ETFs held at non-Vanguard brokerage firms, according to John Rekenthaler, vice president of research at Morningstar.
Change Is Easy
The nice thing about most Vanguard mutual funds is that they allow for tax-free conversions to the ETF share class for the vast majority of mutual funds where ETF share classes exist. If done at Vanguard, there are no fee or tax consequences, other than a possible minor gain from having to sell a fractional share since the conversion must be in whole numbers of ETF shares.
Further, the conversions are done at net asset value, Woerth says. In other words, $10,000 of VTIAX would be converted to the same $10,000 NAV of VXUS, though you may see a little more or a little less depending on whether VXUS is trading at a premium or discount.