Tax Basis -- Converting Vanguard funds to ETFs

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SlowMovingInvestor
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Tax Basis -- Converting Vanguard funds to ETFs

Post by SlowMovingInvestor » Thu Oct 26, 2017 10:20 am

I'm thinking of asking Vanguard to convert some of my fund holdings into ETFs. I've done this before for one fund (that seemed to work OK), but that had only covered shares. Here are the questions, I had, mostly dealing with the mechanics of purchases and cost basis transfers

1) Does VG use the closing price of the MF and the ETF to do the conversion ? MF's closing prices are fine, but ETFs can also trade in extended hours. Or do they just transfer NAV (which might make more sense) ?

2) Since the MFs and ETFs have different share prices, I'm assuming that VG just converts an old MF holding into the ETF using whatever ETF price will preserve the same cost basis, rather than the actual ETF price(s) on that date (since the ETF may not even have existed on that date) ?

3) I assume VG will be able to convert non covered shares properly, although some may fall into a time period when ETFs should be covered, whereas MFs don't need to be covered (since my recollection is that IRS rules required ETFs be covered a year or 2 before MFs).

I didn't check these items for the only fund I converted previously (I did check cost basis, which was OK). I do remember VG asking me why I wanted to convert, which struck me as a little odd.

Thanks for any responses.
Last edited by SlowMovingInvestor on Thu Oct 26, 2017 10:26 am, edited 1 time in total.

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jhfenton
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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by jhfenton » Thu Oct 26, 2017 10:26 am

SlowMovingInvestor wrote:
Thu Oct 26, 2017 10:20 am
1) Does VG use the closing price of the MF and the ETF to do the conversion ? MF's closing prices are fine, but ETFs can also trade in extended hours. Or do they just transfer NAV (which might make more sense) ?
VG uses the closing price of the MF and the end-of-day NAV of the ETF to do the conversion. The math for the shares you'll receive is the same as if you sold the MF and bought the ETF at NAV.

If you call to do the conversion during market hours, your conversion will be based on that day's closing MF price and closing ETF NAV. The MF shares will disappear overnight, and your account will be short the converted shares for that day. The second morning, your new ETF shares will appear.
SlowMovingInvestor wrote:
Thu Oct 26, 2017 10:20 am
2) Since the MFs and ETFs have different share prices, I'm assuming that VG just converts an old MF holding into the ETF using whatever ETF price will preserve the same cost basis, rather than the actual ETF price(s) on that date (since the ETF may not even have existed on that date) ?
Your assumption is correct. After the conversion, each lot will have the same total cost basis as before, spread out over a different number of ETF shares (calculated the same as for the overall purchase).
SlowMovingInvestor wrote:
Thu Oct 26, 2017 10:20 am
3) I assume VG will be able to convert non covered shares properly, although some may fall into a time period when ETFs should be covered, whereas MFs don't need to be covered (since my recollection is that IRS rules required ETFs be covered a year or 2 before MFs).
I do not know the answer to this, but I suspect uncovered MF shares will remain uncovered after the conversion into ETFs.

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triceratop
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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by triceratop » Thu Oct 26, 2017 11:04 am

Please do not rely on being able to do anything in particular with the shares for a while after converting. When I converted shares the cost basis information was corrupted and took nearly a month for them to correct the error after they were notified (unacceptable). Fortunately I was still able to transfer the funds out and into Merrill Edge.
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SlowMovingInvestor
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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by SlowMovingInvestor » Thu Oct 26, 2017 11:07 am

triceratop wrote:
Thu Oct 26, 2017 11:04 am
Please do not rely on being able to do anything in particular with the shares for a while after converting. When I converted shares the cost basis information was corrupted and took nearly a month for them to correct the error after they were notified (unacceptable). Fortunately I was still able to transfer the funds out and into Merrill Edge.
How did you convince them that it was corrupted ? Did you keep cost basis screen dumps, or dig up old statements/transactions etc. ? Also, was this during a high traffic time (tax time, or end of year) ?

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triceratop
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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by triceratop » Thu Oct 26, 2017 11:11 am

SlowMovingInvestor wrote:
Thu Oct 26, 2017 11:07 am
triceratop wrote:
Thu Oct 26, 2017 11:04 am
Please do not rely on being able to do anything in particular with the shares for a while after converting. When I converted shares the cost basis information was corrupted and took nearly a month for them to correct the error after they were notified (unacceptable). Fortunately I was still able to transfer the funds out and into Merrill Edge.
How did you convince them that it was corrupted ? Did you keep cost basis screen dumps, or dig up old statements/transactions etc. ? Also, was this during a high traffic time (tax time, or end of year) ?
I did have screen shots in anticipation of this event. It helped that the tax basis information was clearly corrupted since the total cost for some ETFs was identical to the total cost for other ETFs which is highly unlikely. Yes, this was at the end of the year.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by SlowMovingInvestor » Sat Oct 28, 2017 7:41 am

I did my first conversion, and the cost basis transferred perfectly.

Rather surprisingly, I actually got a small bonus during conversion (a few 10s of a percentage point), but it was a large holding so a few hundred dollars. I presume that is because of NAV/market price differences. It also seems that may be a way to get an ETF at NAV if it trades at a persistent premium to NAV, but then again I don't intend to sell for many years, by which time who knows what the relationship between NAV and market price for that ETF might be.

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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by SlowMovingInvestor » Sun Oct 29, 2017 1:10 pm

SlowMovingInvestor wrote:
Sat Oct 28, 2017 7:41 am
I did my first conversion, and the cost basis transferred perfectly.

Rather surprisingly, I actually got a small bonus during conversion (a few 10s of a percentage point), but it was a large holding so a few hundred dollars. I presume that is because of NAV/market price differences. It also seems that may be a way to get an ETF at NAV if it trades at a persistent premium to NAV, but then again I don't intend to sell for many years, by which time who knows what the relationship between NAV and market price for that ETF might be.
To continue this thread a little bit -- I was wondering if anyone knew why I might have gotten a small bonus when converting an admiral MF to an ETF. Premium to NAV for the ETF if the conversion was based on ETF NAV at market close the previous day ? And of course, this process could work in reverse if the shares were selling at a discount.

Now the actual %age is small (less than the ETF typically fluctuates in a day), but I'm going to be doing some large conversions, and am curious what's going on.

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jhfenton
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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by jhfenton » Mon Oct 30, 2017 9:32 am

The conversions are done at mutual fund NAV to ETF NAV, not ETF market price. So the market value of your resulting position will be higher than you started with if the ETF is trading at a premium (and lower if it is trading at a discount). In the case of VSS, which is the ETF I'm usually converting to, the premium is usually substantial (25-50 bp on a normal day). (U.S. equity funds typically have insignificant premiums or discounts. Other international ETFs often have some premium, but the others are smaller and less consistent than VSS.)

I actually use this to my advantage with the VSS/VSFVX pair. For the most part, I only buy VSFVX (at NAV), and I only sell VSS (at a premium). I do periodic conversions of most of my VSFVX to VSS so that I don't pay the higher ER of VSFVX for very long.

SlowMovingInvestor
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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by SlowMovingInvestor » Mon Oct 30, 2017 12:09 pm

jhfenton wrote:
Mon Oct 30, 2017 9:32 am
The conversions are done at mutual fund NAV to ETF NAV, not ETF market price. So the market value of your resulting position will be higher than you started with if the ETF is trading at a premium (and lower if it is trading at a discount). In the case of VSS, which is the ETF I'm usually converting to, the premium is usually substantial (25-50 bp on a normal day). (U.S. equity funds typically have insignificant premiums or discounts. Other international ETFs often have some premium, but the others are smaller and less consistent than VSS.)

I actually use this to my advantage with the VSS/VSFVX pair. For the most part, I only buy VSFVX (at NAV), and I only sell VSS (at a premium). I do periodic conversions of most of my VSFVX to VSS so that I don't pay the higher ER of VSFVX for very long.
Thanks, that's exactly what I was thinking too. I did change an international fund (but not VSS). And that's a useful method to avoid paying premiums for international ETFs too.

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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by jhfenton » Mon Oct 30, 2017 12:58 pm

SlowMovingInvestor wrote:
Mon Oct 30, 2017 12:09 pm
Thanks, that's exactly what I was thinking too. I did change an international fund (but not VSS). And that's a useful method to avoid paying premiums for international ETFs too.
It is. In most cases, though, like VEMAX/VWO, I'm happy just buying and holding the Admiral Shares at the same expense ratio as the ETF. The issue with VSS/VSFVX is that there are no Admiral Shares, just the more expensive Investor Shares (27 bp vs 13 bp). So I don't want to hold VSFVX indefinitely.

spacecadet610
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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by spacecadet610 » Mon Oct 30, 2017 6:29 pm

I actually just converted from admiral funds to ETF: both VBR and VXUS.

I called to do the conversion on 10/23 and the ETF showed up on 10/24.

However, my new tax basis has not showed up yet. When i go to the tax basis screen, the new shares don't show up.

I am worried the tax basis won't show up. How long does it usually take? I called vanguard last week, they said to wait until this week.

I already put a transfer in of the new ETFs to MErrill Edge. I hope the cost basis goes through.

SlowMovingInvestor
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Re: Tax Basis -- Converting Vanguard funds to ETFs

Post by SlowMovingInvestor » Tue Oct 31, 2017 9:29 am

spacecadet610 wrote:
Mon Oct 30, 2017 6:29 pm
I actually just converted from admiral funds to ETF: both VBR and VXUS.

I called to do the conversion on 10/23 and the ETF showed up on 10/24.

However, my new tax basis has not showed up yet. When i go to the tax basis screen, the new shares don't show up.

I am worried the tax basis won't show up. How long does it usually take? I called vanguard last week, they said to wait until this week.

I already put a transfer in of the new ETFs to MErrill Edge. I hope the cost basis goes through.
In my case, the tax basis transfer happened simultaenously with asset transfer, but I use only one brokerage account at VG for everything. It might be differernt if you have a combination of Mutual Fund and brokerage accounts.

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