What To Consider
While converting your mutual funds is easy, tax-free and cost-free, it may still not be the right thing to do. That’s because mutual funds still have such advantages as:
- Can buy at NAV with no bid/ask spread
- Can buy at NAV with no premium or discount
- Ability to purchase fractional shares
- Ability to set up automated purchases such as monthly amounts to buy or sell
- Dividends get reinvested faster, so there is less of a cash drag
Also, if you choose “specific lots” for tax reporting (which is more tax efficient), make sure you identify this before you do the conversion. Vanguard says lots purchased before Jan. 1, 2012 will revert to the average cost basis. If, however, you hold the mutual fund shares outside of Vanguard, the rules could be different.
Should You Convert?
I think it’s a close call. The automation may be worth a few basis points. On the other hand, you can have your cake and eat it too if you convert your current holdings to ETFs and make new automated purchases in the Admiral mutual fund share class. Of course, that creates complexity.
And conversion is a one-way street. While Vanguard allows the conversion of mutual funds to the ETF share class, it doesn’t allow the reverse.
Ultimately, however, this change may be good for all share classes. Kashner noted ETFs help increase tax efficiency for the entire portfolio, as redemptions allow for the removal of low-basis stock.
If Vanguard is expecting redemptions—perhaps if the market turns negative for an extended period—they might be positioning themselves to take advantage of the opportunity to decrease potential tax liability.
(Disclosure: I own VTIAX and VGTSX.)
Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for CBS MoneyWatch.