I'm not placing blind faith. As Interest Compound has pointed out they have the option of keeping capital gain distributions to the ETF share class. On that note Interest Compound didn't say the mutual funds would distribute stocks in kind to the investors. He said they would distribute the gains to the ETF share class. These are TOTALLY different things. I'm not sure you fully understand what Interest Compound is getting at. I would read the links he provided. I know you gave the example of the mining fund as a fund that did distribute a capital gain. For starters I would like to know the ticker symbol of that fund because to my knowledge the only Vanguard mining fund is an ACTIVE mutual fund, not an index fund. And as Interest Compound pointed out if that fund didn't have an ETF counterpart it wouldn't be able to direct the gains like that.
Do YOU understand how redemptions on ETFs would work? It's not a magical instrument that lets you bypass capital gains entirely just because the fund ends with ETF instead of mutual fund. Here's one more quote from Joshua (emphasis mine):
"......"
The ticker has been mentioned in the thread previously, along with links, it definitely has the ability to direct gains like an ETF would because they have the ability to distribute in kind, which is the ONLY way to avoid massive embedded gains
I personally believe blind trust in any institution, even one as admirable as Vanguard, is dangerous. I think they do a giganticly important service for the public by leading the world towards low cost investing, but you shouldn't drop the "trust but verify" mindset because of the effect of any halo disposition you have towards the institution itself
At the end of the day, it's not a huge risk because 1) the LIKELIHOOD of the scenario happening isn't big, 2) for the posters in the forum, the likely tax bill isn't something that couldn't be managed and 3) what's the alternative if you're a self directed investor who doesn't want to spend too much time on investing? But it IS an embedded risk and I don't understand the massive denial. Index funds have flaws, whether its market cap methodology, float adjustment, whatever, it's not a big deal because at the end of the day, it still represents the best effort-value ratio you can get as an individual investor. The intelligent thing to do is to acknowledge and know those flaws/risks, and, if you have no interest in studying investing any deeper, continue to buy them
Do I know how redemptions on ETFs work? First, I was never talking about that, I was talking about mutual funds move gains into the ETF share class. Second, do you know how redemptions on ETFs work? It is an interesting question because mutual funds have redemptions, ETFs trade on an exchange(they don't normally do redemptions). An average investor is never going to see an ETF redemption. Goldman might, but honestly they would probably have to request it. That is what I'm getting at. Interest Compound, and now myself, are talking about how Vanguard takes the unrealized gains in the mutual fund and moves it to the ETF share class. That way when someone sells the mutual fund... the embedded capital gains are gone! We aren't talking about the mutual fund or the ETF doing in kind distributions to investors. I'll address that as a second matter.
Step by step in case it isn't clear:
Vanguard 500 index fund admiral shares has a bunch of stocks they bought last week that don't have gains, and they have a bunch of stocks they bought 30-40 years ago with a ton of gains. Shares of AAPL from 1985 would be a good example.
The company that creates the ETF units for VOO comes along and says they need to make more units of VOO.
Vanguard gives them shares to create the new units of VOO.
In a stroke of genius someone at Vanguard said, "Hey, why don't we specifically give VOO the stock shares within VFIAX we bought decades ago that have a lot of appreciation we never want to realize?"
Now those shares of AAPL from 1985 are in VOO which sells like a stock, and doesn't have to do cash redemptions. Ah ha! The gains can be embedded essentially till the end of time! [Unless a big company(like Goldman) specifically requests an in kind distribution(unlikely).]
Since AAPL use to be a tiny piece of the index there are fewer shares from 1985 than there are from 2014 so VFIAX can get rid of ALL of the shares from 1985 and still keep the allocations right in both VFIAX and VOO. Copy this example for all 500(ish) holdings.
Now the mutual fund VFIAX which does have to do cash distributions has less embedded gains to worry about.
Mission accomplished. The embedded gains have been removed from the mutual fund that has to do cash distributions. Does it remove all of them? Of course not, but every time this happens there are less embedded gains to worry about in the future. So this isn't something VFIAX would do the day people are requesting distributions. It is something they have been doing for years so that in the event of future redemptions many of the embedded gains have already been removed.
In kind distributions: It seems you are worried they would do this. 1. your link to a prospectus went to the Vanguard Precious metals and mining fund. Again, that is an ACTIVE fund. By design it isn't tax efficient so we should probably be using different examples. 2. Mutual funds aren't going to do in kind distributions to average investors. The investor would need enough money in the fund for the fund to be able to distribute at least 1 whole share of each investment in the proper proportions. In the case of the 500 index that is a LOT of money, and even more with the total stock market index. If a hedge fund or something similar was trying to day trade one of the funds they might do it to them. Otherwise the only way you are going to get an in kind distribution is if you have a ton of money in the fund and you 'request' it. This is really a separate issue from the ETFs. I don't know why this Joshua clickbait guy is trying to drag it all together other than to make it look more confusing than it really is.
In the event of another 1929. We already had it, it was called 2008... I didn't see mass in kind distributions to investors, did anyone else? Some mutual funds also existed in 1929, and guess what... still didn't do in kind distributions!
Talk about turning an Ant hill into mount Everest. Could the problem Joshua is describing happen? Yes. Could it happen to a Vanguard index funds that benefits from having the ETF share class? Yes, but it is even less likely than with other index funds. Being worried about this is like buying flood insurance when you live at the peak top of a mountain.
And even if you are super worried about this.... buy the ETF instead of the mutual fund.