Author Topic: Any reason not to convert mutual funds to ETFs?  (Read 1923 times)

pnw_guy

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Any reason not to convert mutual funds to ETFs?
« on: December 29, 2021, 08:58:11 AM »
I have various tax advantaged accounts where I have Vanguard mutual funds (Total Stock Market, Total International Stock Market, etc.). However, I noticed that Vanguard's ETFs generally have (slightly) lower expense ratios than their mutual funds. Is there any reason not to exchange my mutual funds for their ETF equivalents?

It won't be a taxable event because the transactions would occur in tax advantaged accounts. Plus, I'd have lower expense ratios after making the move. The only downside I can think of is behavioral: Some would argue that it's advantageous to *not* be able to do the within-day trading that ETFs allow.

Is there any downsides that I'm not thinking of?

Ichabod

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #1 on: December 29, 2021, 10:40:34 AM »
I'm all ETFs, but cons of ETFs are no fractional shares and no automatic investments.

pnw_guy

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #2 on: December 29, 2021, 10:53:17 AM »
I'm all ETFs, but cons of ETFs are no fractional shares and no automatic investments.

What do you mean by no automatic investments?

YttriumNitrate

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #3 on: December 29, 2021, 11:01:57 AM »
I'm all ETFs, but cons of ETFs are no fractional shares and no automatic investments.
At least through Fidelity, you can setup automatic reinvestment of ETF dividends to get fractional shares. However, when buying new shares a whole number of shares must be bought.

index

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #4 on: December 29, 2021, 11:24:06 AM »
I'm all ETFs, but cons of ETFs are no fractional shares and no automatic investments.
At least through Fidelity, you can setup automatic reinvestment of ETF dividends to get fractional shares. However, when buying new shares a whole number of shares must be bought.

You can buy fractional shares at Fidelity using the dollar based investment instead of share based:

https://www.fidelity.com/trading/fractional-shares

It used to only be through the mobile app, but works on the online platform now as well.

YttriumNitrate

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #5 on: December 29, 2021, 11:32:27 AM »
You can buy fractional shares at Fidelity using the dollar based investment instead of share based:
https://www.fidelity.com/trading/fractional-shares
It used to only be through the mobile app, but works on the online platform now as well.
Neat. Thanks for pointing that out.

merlin7676

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #6 on: December 29, 2021, 03:27:13 PM »
I believe that vanguard now allows you to buy fractional shares of ETFs

Ichabod

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #7 on: December 29, 2021, 04:09:44 PM »
I believe that vanguard now allows you to buy fractional shares of ETFs
Apparently it's piloting this for some users. Good to know! https://citywireusa.com/professional-buyer/news/vanguard-pilots-fractional-shares-for-etfs/a1596002

What do you mean by no automatic investments?
With mutual funds, you can have automatic investment plans where you scheduled contributions that are automatically invested. E.g. Take $500 from my checking account every month and buy $500 of this fund.

Laserjet3051

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #8 on: December 29, 2021, 04:13:34 PM »
No bid/ask spread with MFs. For some thinly traded ETFs the spread can reflect a significant cost.

samanil

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #9 on: December 29, 2021, 05:01:16 PM »
With mutual funds, you can have automatic investment plans where you scheduled contributions that are automatically invested. E.g. Take $500 from my checking account every month and buy $500 of this fund.

I really like this function. I use it for my IRA and taxable accounts.

pnw_guy

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #10 on: December 29, 2021, 05:44:40 PM »
No bid/ask spread with MFs. For some thinly traded ETFs the spread can reflect a significant cost.

Would this be the case for mainstream Vanguard ETFs like VOO or VTI?

seattlecyclone

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #11 on: December 29, 2021, 06:50:28 PM »
No bid/ask spread with MFs. For some thinly traded ETFs the spread can reflect a significant cost.

Would this be the case for mainstream Vanguard ETFs like VOO or VTI?

The big Vanguard ETFs tend to have a spread of a penny or two. Not significant...unless you're switching funds to maybe save one basis point on expense ratios, in which case maybe that's enough to negate the difference.

pnw_guy

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #12 on: December 29, 2021, 07:40:08 PM »
No bid/ask spread with MFs. For some thinly traded ETFs the spread can reflect a significant cost.

Would this be the case for mainstream Vanguard ETFs like VOO or VTI?

The big Vanguard ETFs tend to have a spread of a penny or two. Not significant...unless you're switching funds to maybe save one basis point on expense ratios, in which case maybe that's enough to negate the difference.

I'm surprised to learn that there's only 1 basis point between VTSAX and VTI. It's definitely because VTSAX has gotten cheaper. I remember when they charged 7 basis points for an expense ratio and now it's down to 4 basis points. Amazing.

nalor511

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #13 on: December 30, 2021, 12:03:57 AM »
No cons. It's good to learn about ETFs anyway. You can't call VG, convert, and then if you like things like live chat, transfer out to Fidelity for a bonus

nalor511

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #14 on: December 30, 2021, 12:06:02 AM »
No bid/ask spread with MFs. For some thinly traded ETFs the spread can reflect a significant cost.

This is much Ado about nothing. MF NAV is also heuristic estimation and is no more intrinsically accurate than ETF shares price. It all evens out, non issue with VTI, VXUS, and most funds you'd likely want to buy.

Rdy2Fire

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #15 on: December 30, 2021, 08:21:06 AM »
I have both but do prefer with new investments to go the ETF route. Coincidentally I recently bought MSGR which is a new ETF that's invested in MRNA Technology. Also like all the QQQ's, CIBR, JETS and even a couple of ARK funds

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #16 on: December 30, 2021, 10:09:15 AM »
I have both but do prefer with new investments to go the ETF route. Coincidentally I recently bought MSGR which is a new ETF that's invested in MRNA Technology. Also like all the QQQ's, CIBR, JETS and even a couple of ARK funds

Is there a reason to buy expensive industry target ETFs like MSGR when you can replicate the ETF for free? I get some of the ETFs with large foreign holdings, but many for many of these industry target ETFs you can just buy the top 10 or 15 holdings and replicate 80-90% of the ETF and take advantage of tax loss harvesting. Replicating ETFs is really easy to do with IB and M1 and is a little more work at other brokers, but well worth the time to save $65 on a $10k investment per year.

ChpBstrd

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #17 on: December 30, 2021, 03:13:31 PM »
ETFs that have options markets are better because they allow you to run risk-reducing strategies like the covered call, protective put, and collar.

The downside of ETFs is a zig zag chart you have to watch go up and down, whereas MFs hide their fluctuating value from you.

DaTrill

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #18 on: January 01, 2022, 01:46:33 PM »
Stick with the largest 20 ETFs, steer clear of any managed ETFs, leveraged ETFs, or ETNs.  Top 10 holdings of almost all market mutual funds and ETFs are the same and mutual fund holders are paying more to hold.   

Rdy2Fire

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #19 on: January 02, 2022, 06:45:31 PM »
I have both but do prefer with new investments to go the ETF route. Coincidentally I recently bought MSGR which is a new ETF that's invested in MRNA Technology. Also like all the QQQ's, CIBR, JETS and even a couple of ARK funds

Is there a reason to buy expensive industry target ETFs like MSGR when you can replicate the ETF for free? I get some of the ETFs with large foreign holdings, but many for many of these industry target ETFs you can just buy the top 10 or 15 holdings and replicate 80-90% of the ETF and take advantage of tax loss harvesting. Replicating ETFs is really easy to do with IB and M1 and is a little more work at other brokers, but well worth the time to save $65 on a $10k investment per year.

If you have the money, time and interest to replicate it yourself then nope, no reason but since I'm not looking to do it for me it's worth about a half percent (give or take) to not have to think about it. Outside of that it gives a little more risk spread since I'd probably not buy all the stocks but to each his own. I've had pretty solid returns with my ETF's so I'll stick with it but understand your point/question.

dignam

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #20 on: January 06, 2022, 07:34:51 AM »
I've been doing some in service rollovers from my 401k to IRAs, specifically to get some of my investments to the ETF equivalents of FXAIX.  The #1 reason being the options market.  Currently selling monthly-ish covered calls on SPY.

MustacheAndaHalf

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #21 on: January 08, 2022, 05:28:09 AM »
No bid/ask spread with MFs. For some thinly traded ETFs the spread can reflect a significant cost.
Would this be the case for mainstream Vanguard ETFs like VOO or VTI?
There is literally no bid-ask spread for VOO and VTI.  You will see the bid-ask quoted as $0.01 apart, but a buy or sell happens exactly in the middle.  I've done it many times and seen the same behavior every time.  That's not true of all ETFs.

DaTrill

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Re: Any reason not to convert mutual funds to ETFs?
« Reply #22 on: January 08, 2022, 01:26:52 PM »
No bid/ask spread with MFs. For some thinly traded ETFs the spread can reflect a significant cost.
Would this be the case for mainstream Vanguard ETFs like VOO or VTI?
There is literally no bid-ask spread for VOO and VTI.  You will see the bid-ask quoted as $0.01 apart, but a buy or sell happens exactly in the middle.  I've done it many times and seen the same behavior every time.  That's not true of all ETFs.

Yep, hundreds of ETFs have 0.01 spread, place a $0 limit order at the Bid, problem solved.  I've never had a trade not executed doing this.  Mutual funds also hold more cash for liquidity purposes and a drag on performance relative to fully invested ETFs.  The only people who recommend MFs are paid to.  There are ZERO reasons to own MFs over standard ETFs for all investors in all cases.  Run away quickly from any "guru" who recommends MFs.