Author Topic: Is it better to own mutual funds as stocks or ETFs?  (Read 369 times)

jojoguy

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Is it better to own mutual funds as stocks or ETFs?
« on: November 19, 2019, 04:52:32 AM »
After signing in to my Vanguard account, there is a front page saying that I could convert my mutual funds into ETFs tax free. Would it be worth it?

habanero

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Re: Is it better to own mutual funds as stocks or ETFs?
« Reply #1 on: November 19, 2019, 05:45:55 AM »
After signing in to my Vanguard account, there is a front page saying that I could convert my mutual funds into ETFs tax free. Would it be worth it?

If the underlying reference is the same it shouldn't really make any difference. When you buy or sell a mutual fund you trade at an unknown price (end-of-day price) while if you buy and sell ETFs you have more control at which price a trade gets executed, this might be better or worse than the end-of-day and in the long run will be the same on average.

The big pro for mutual funds is that they discourage trading. If you have a slight urge to try and buy, sell, time and be smart about it, mutual funds are likely to be a better option as the former strategy is highly unlikely to give equally good results to just buy and hold.

ETF might or might not have a lower minimum amount (you can buy just 1 share), mutual funds might have a higher minimum amount. This might or might not be relevant for you. Mutual funds are also better suited to repeating orders such as "buy this fund for 1000 dollars on the 10th or each month" or whatever.

As long as you just buy and hold they will be very, very similar as long as the unerlying index is the same.

terran

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Re: Is it better to own mutual funds as stocks or ETFs?
« Reply #2 on: November 19, 2019, 06:13:23 AM »
At most brokerages ETFs are somewhat more tax efficient (only matters in a taxable account) as they have a way of getting rid of capital gains without distributing them to the people holding the investment, but this isn't true at Vanguard as they hold a patent that lets there mutual funds do the same thing (incidentally, this is the same reason they can convert mutual funds to ETFs tax free, I think).

Some of the Vanguard ETFs have a slightly lower expense ratio than the equivalent mutual fund.

ETFs might be easier to transfer in kind to another brokerage as you're more likely to be able to trade Vanguard ETFs commission free than Vanguard mutual funds now that so many places are offering commission free ETF trading.

This is a one way transaction, you won't be able to convert back to mutual funds tax free (without selling the ETF and buying the mutual fund).

ETFs are a little harder to buy/sell as you want to set a limit price rather than just saying to sell at the end of day market price like mutual funds.