Author Topic: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI  (Read 2091 times)

FrugalRubles

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Hey All,
First off - just want to thanks MMM and the community for all of the advice and contributions over the years.

I've been using Personal Capital for aggregation the last year or so. I like to see what automated advice they provide, which usually gets me to add some items to my reading list. I was contacted by an adviser from there for a consultation, today I had my 2nd meeting with then. I'm still mushacian at heart, so I'm unlikely to engage them, but they've definitely made me question some assumptions.

I've long held VTSAX in a taxable brokerage account and he pointed out the tax loss ratio and PC said I would benefit from being in an ETF in any taxable account. I always focused on expense ratio primarily. I decided to call Vanguard and they told me I could convert VTSAX to VTI (but not vice versa) in a non-taxable event. The tax loss basis is slightly lower (4-17 bps, depending on where you read), but he also pointed out that as of last prospectus, VTI lowered their expense ratio to 0.03. That sealed the deal for me. I thought the lease I could do would be to point it out to the community for any other people holding VTSAX in their taxable.

Best of luck,
JB




secondcor521

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #1 on: May 22, 2019, 12:48:39 PM »
What is a tax loss ratio?  Of what use is it to a Vanguard index investor?

I just checked, and the expense ratio on VTSAX is 0.04%.  One basis point is not worth the hassle to me to switch, personally.

FrugalRubles

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #2 on: May 22, 2019, 01:12:09 PM »
So
What is a tax loss ratio?  Of what use is it to a Vanguard index investor?

I just checked, and the expense ratio on VTSAX is 0.04%.  One basis point is not worth the hassle to me to switch, personally.
http://www.morningstar.com/InvGlossary/tax_cost_ratio.aspx

Tax cost ratio is probably what they said. See above link.
Sorry, yes, tax loss ratio.


dandarc

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #3 on: May 22, 2019, 01:38:00 PM »
Dude is trying to sell you services and doesn't know one of the ways that Vanguard is special. In dude's defense, Vanguard's own materials, while not putting numbers on it, seem to agree with him that ETF's are more tax efficient than funds. But the specific funds in question VTSAX and VTI show a different story.

Vanguard has a proprietary structure to its funds which allows VTSAX to have the same tax consequences as VTI - namely there generally aren't any capital gains distributions from the fund. They have a class structure where ETF's are a class of shares in the same fund as the regular mutual fund. They did that so that the mechanism by which ETF's reduce capital gains taxes for investors can benefit the mutual fund shareholder's too. You can see from the link below, nothing except for dividend distributions for a long, long time. Realized gains negative.

https://investor.vanguard.com/mutual-funds/profile/distributions/vtsax


Compared to Schwab's distributions which include dividends (listed as income) and long and short-term capital gains.
https://www.schwabfunds.com/public/csim/home/products/mutual_funds/distributions.html?symbol=SWTSX

VTI and VTSAX hold the exact same portfolio. The dividend distributions will be the same. The capital gains distributions are also the same - namely zero. How exactly are you saving taxes by holding VTI vs. VTSAX?

Finally I'll note that ETFs have additional costs you may not have thought to look at - there is the bid-ask spread, which is pretty low at .01% for VTI. But even if it is real, you just paid that much up-front since you bought at the ask price. You'll pay it again when you sell at the bid price - any time you transact. There is also the premium / discount - as of right now they're quoting a $0.01 / share premium (rounds to .01%). So if you bought at that exact price, you paid a penny more than NAV for the shares. That can work either way, and for a liquid ETF such as VTI is minimal, but it is a potential additional cost on both buying and selling as well.

So basically, the differences in cost between VTI and VTSAX are minimal, and could favor either option depending on exactly where the market is when you transact. I'm using VTSAX because it is more convenient for me. I put the money in, I get NAV pricing at the end of the day. Very simple.

If you really want to be able to buy or sell throughout the day, or place limit orders or whatever, then VTI is obviously a better choice. Cost is a much less compelling choice in this case.

robartsd

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #4 on: May 22, 2019, 02:16:40 PM »
So basically, the differences in cost between VTI and VTSAX are minimal, and could favor either option depending on exactly where the market is when you transact. I'm using VTSAX because it is more convenient for me. I put the money in, I get NAV pricing at the end of the day. Very simple.
I find VTSAX more convenient too. Transact in dollars and automatically reinvest any earnings. Only advantage to me for VTI would have been minimum investment when starting out (I chose convenience instead and started out with Target Retirement funds).

FrugalRubles

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #5 on: May 22, 2019, 02:20:56 PM »
Thanks Dandarc - good to see your name again.

The guy selling for PC definitely pointed out the capital gains disadvantage but he must not have been familiar with the Vanguard structure, I'll be sure to educate him.

Surprisingly, when speaking with Vanguard, the contact seemed to agree with me when saying that the capital gains distribution was treated different between VTSAX and VTI, as well as the tax cost ratio difference listed on morningside (although that does vary depending on the time horizon).

I did not consider the bid-ask spread, thanks for bringing that up. I personally have no interested in buying/selling throughout the day, it's more long term for me.

dandarc

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #6 on: May 22, 2019, 02:34:38 PM »
Generally speaking, the tax thing is true about ETFs - just not with Vanguard necessarily. And they can't guarantee "no capital gains distributions" from the funds (or the ETF's for that matter), but VTSAX hasn't had one in at least 10 years.

Honestly it is pretty much a wash - nobody's going to say using VTI instead of VTSAX is a bad thing.

and we do sometimes get hung up on chasing expense ratios, but need to remember .04% vs. .03% is not nearly as big of a deal as .4% vs .3%, which is less of a deal than 2% vs. 1.5%.

FrugalRubles

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #7 on: May 22, 2019, 02:42:31 PM »
Generally speaking, the tax thing is true about ETFs - just not with Vanguard necessarily. And they can't guarantee "no capital gains distributions" from the funds (or the ETF's for that matter), but VTSAX hasn't had one in at least 10 years.

Honestly it is pretty much a wash - nobody's going to say using VTI instead of VTSAX is a bad thing.

and we do sometimes get hung up on chasing expense ratios, but need to remember .04% vs. .03% is not nearly as big of a deal as .4% vs .3%, which is less of a deal than 2% vs. 1.5%.

Thanks. I'm surprised Vanguard didn't point that out, particularly when you can only convert to VTI.
I still hold VTSAX is all my taxable accounts.

Agree completely on the expense ratio side of things. Do you have a journal? You're an impressively succinct writer.

FrugalRubles

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #8 on: May 22, 2019, 02:54:12 PM »
Found the journal, thanks for all your help.

dandarc

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #9 on: May 22, 2019, 03:21:09 PM »
Fair warning - journal sucks, and we're not exactly living a mustachian lifestyle right now.

secondcor521

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #10 on: May 22, 2019, 07:45:05 PM »
So
What is a tax loss ratio?  Of what use is it to a Vanguard index investor?

I just checked, and the expense ratio on VTSAX is 0.04%.  One basis point is not worth the hassle to me to switch, personally.
http://www.morningstar.com/InvGlossary/tax_cost_ratio.aspx

Tax cost ratio is probably what they said. See above link.
Sorry, yes, tax loss ratio.

Ah.  I looked them both up Morningstar and for 10 years VTI was at 0.49 and VTSAX was at 0.52.  Seems to me to be less relevant than tracking error, bid/ask, and transaction costs (like trading fees, if one is doing small lots).

I've owned VTSAX for years in taxable.  I don't think I've had any badly taxed distributions ever.  I don't remember ever having a STCG, and haven't had LTCG in a while.  About 98%-99% of dividends are qualified.  Good enough for me.

BECABECA

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #11 on: May 22, 2019, 08:28:28 PM »
I’d also thought about switching to VTI when they lowered the management fee to .03% but once I realized their taxes are near identical, I’d get hit with the bid/ask difference, and I wouldn’t be able to just set and forget for monthly contributions (and later withdrawals), I quickly decided that a savings of .01% is not worth it to me.

MustacheAndaHalf

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #12 on: May 23, 2019, 09:00:57 AM »
You might wait and see if Vanguard lowers the expense ratio of VTSAX as well.  Over time, Vanguard strives to lower expense ratios.

If you invest for 40 years, none of these 0.01% differences add up to anything significant: 1.0001 ^^ 40 = 1.004, or 0.4% over 40 years.

Also, there is no bid-ask spread when a Vanguard customer buys/sells VTI.  Yes, there's a bid-ask spread of $0.01.  But the orders always cross in the middle, exactly halfway between the bid and ask price.  Meaning those who sell get the exact same price as those who buy (until the market moves the price - but the spread of $0.01 remains the same).  That's not true for all ETFs, or even all Vanguard ETFs.  But it's true for VTI and a few of the very largest ETFs.

TomTX

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #13 on: May 23, 2019, 03:38:13 PM »
I switched from VTSAX to VTI in order to have Merrill Edge pay me $600 to do an in-kind transfer.

After a few months, I also had top tier status with BoA - the primary benefit is that my BoA credit cards get a 75% boost on cash back. So, my Cash Rewards card gets me 3.5% cash back at Costco instead of 2%.

dandarc

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #14 on: May 23, 2019, 03:46:17 PM »
That's some advanced mustache-ing TomTX. Mixing investments and credit card hacking - very smart!

FrugalRubles

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #15 on: May 24, 2019, 01:17:58 PM »
I switched from VTSAX to VTI in order to have Merrill Edge pay me $600 to do an in-kind transfer.

After a few months, I also had top tier status with BoA - the primary benefit is that my BoA credit cards get a 75% boost on cash back. So, my Cash Rewards card gets me 3.5% cash back at Costco instead of 2%.

Sorry - not following this. Can you elaborate?

dandarc

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #16 on: May 24, 2019, 01:30:28 PM »
I switched from VTSAX to VTI in order to have Merrill Edge pay me $600 to do an in-kind transfer.

After a few months, I also had top tier status with BoA - the primary benefit is that my BoA credit cards get a 75% boost on cash back. So, my Cash Rewards card gets me 3.5% cash back at Costco instead of 2%.

Sorry - not following this. Can you elaborate?
TomTx switched to VTI so he could transfer the shares over to Merrill Edge. They gave TomTX $600 cash money to do so.

Merril Edge is affiliated with bank of america - the large Merrill Edge balance got them top tier reward status ("Platinum Honors") with Bank of America, which has tangible benefits such as nearly doubling the cash back on BoA credit cards.

Costco takes Visa now, so if you've got a BoA Visa with a 3.5% reward, then that beats the Citi Costco Visa on everything except gas - rewards on the Costco Visa are 4% gas, 3% travel and dining (I think), 2% on all other Costco purchases, 1% on everything else. So you use the costco card for gas and the BoA Visa for everything else at Costco and you come out ahead.

Advanced techniques for getting even more value out of the investments that will now just be sitting there with Merrill Edge instead of Vanguard.

Padonak

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #17 on: May 24, 2019, 01:32:41 PM »
Newbie question: if you exchange VTSAX for VTI in a taxable account, won't you have to pay capital gains tax?

dandarc

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #18 on: May 24, 2019, 01:37:09 PM »
Newbie question: if you exchange VTSAX for VTI in a taxable account, won't you have to pay capital gains tax?
https://investor.vanguard.com/etf/faqs

Quote
Can I convert my conventional Vanguard mutual fund shares to Vanguard ETF Shares?
Yes. Most funds that offer ETF Shares will allow you to convert from conventional shares of the same fund to ETF Shares. (Four of our bond ETFs—Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—don't allow for conversions.)

Conversions are allowed from both Investor and Admiral™ Shares and are tax-free if you own your mutual fund and ETF Shares through Vanguard.

Keep in mind that you can't convert ETF Shares back to conventional shares. If you decide in the future to sell your Vanguard ETF Shares and repurchase conventional shares, that transaction could be taxable.

If you have a brokerage account at Vanguard, there's no charge to convert conventional shares to ETF Shares. If you have questions, call us at 866-499-8473.

If you own your Vanguard mutual fund shares through another broker, keep in mind that some brokers may not be able to convert fractional shares, which could result in a modest taxable gain for you. Other brokers may also charge a fee for a conversion. Contact your broker for more information.

TomTX

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #19 on: May 24, 2019, 03:21:08 PM »

Costco takes Visa now, so if you've got a BoA Visa with a 3.5% reward, then that beats the Citi Costco Visa on everything except gas - rewards on the Costco Visa are 4% gas, 3% travel and dining (I think), 2% on all other Costco purchases, 1% on everything else. So you use the costco card for gas and the BoA Visa for everything else at Costco and you come out ahead.

Actually the BoA Cash Rewards Visa is better on gas as well (with Platinum Honors status) - it's 5.25%.

The only reason I normally use the Costco Visa at Costco is for the extended warranty on electronics, or $70 off a set of tires for using the card (periodic offer.)

TomTX

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #20 on: May 24, 2019, 03:22:47 PM »
Advanced techniques for getting even more value out of the investments that will now just be sitting there with Merrill Edge instead of Vanguard.

Yep. I think I also get something like 100 free trades a month with Merrill Edge. I haven't had a month exceed one trade.

secondcor521

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #21 on: May 24, 2019, 04:37:10 PM »
Advanced techniques for getting even more value out of the investments that will now just be sitting there with Merrill Edge instead of Vanguard.

Yep. I think I also get something like 100 free trades a month with Merrill Edge. I haven't had a month exceed one trade.

Also, I think you can move the assets to Merrill, get the $600, wait 6 months, then move them back to Vanguard if you really want to and keep the $600.

flipboard

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #22 on: May 25, 2019, 10:35:29 AM »
You might wait and see if Vanguard lowers the expense ratio of VTSAX as well.  Over time, Vanguard strives to lower expense ratios.
Unlikely. ETF's are cheaper to administer (from Vanguard's perspective), they are probably trying to push people into ETF's to help reduce overall running costs.

TomTX

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Re: VTI lowers Expense Ratio to 0.03 // Exchanged VTSAX for VTI
« Reply #23 on: May 25, 2019, 12:18:09 PM »
Advanced techniques for getting even more value out of the investments that will now just be sitting there with Merrill Edge instead of Vanguard.

Yep. I think I also get something like 100 free trades a month with Merrill Edge. I haven't had a month exceed one trade.

Also, I think you can move the assets to Merrill, get the $600, wait 6 months, then move them back to Vanguard if you really want to and keep the $600.

Nah, if I wanted to play that game I would get another broker to pay me for transferring. :D