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ETFs are more tax efficient, if these are being held in a taxable account, when compared with their open end MF counterparts. That's because on large share redemptions the ETF can pay its institutional holders in-kind with the most appreciated shares of a stock as opposed to a MF which must first sell the shares into the market thus realizing the capital gain.

BruceM


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Thanks Bruce, that is the clearest explanation I have read about why an ETF can provide a cap gains tax advantage in a taxable accoumt.
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I can think of several advantages the ETF has over the MF, but is there any advantage the MF has over the ETF?

It used to be that because of the inability to buy fractional ETF shares, if you wanted to make automatic periodic investments, a mutual fund was the best option. Now that some brokerages are allowing you to purchase fractional shares, even that advantage may be moot. That said, since I no longer have a paycheck coming in, so I haven't wanted to make automated buys, I haven't really investigated if that's the case. But for making a one-time investment, I can't think of any advantages of a MF when both an ETF and a MF are available.

AJ
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A free standing mutual fund usually has higher expenses to take care of customers questions, statements, 1099s, etc.

The ETF usually sends all that to your broker. If you have a brokerage account, the etf will usually have a lower expense ratio.
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A free standing mutual fund usually has higher expenses

Actually, that is just the opposite with some Vanguard funds. Their S&P 500 index mutual fund is cheaper than their ETF, by 0.01%. Fidelity's Index MF is also only 0.01% (no idea what their ETF costs but is is higher than 0.01%).

I can only speculate on the reason why. I would guess that the frequent trading that happens on the ETF (all day every day), actually makes it slightly more expensive than the MF version.

As to the OPs question, there used to be this thing where Vanguard could push their taxable gains of their ETFs onto their MFs. I don't recall the details but I am sure others here can elaborate. If you are not buying in a taxable account, and you are not a frequent trader, then the only real difference to you will likely be the internal cost.
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>>I can think of several advantages the ETF has over the MF, but is there any advantage the MF has over the ETF?<<

It used to be that because of the inability to buy fractional ETF shares, if you wanted to make automatic periodic investments, a mutual fund was the best option. Now that some brokerages are allowing you to purchase fractional shares, even that advantage may be moot. That said, since I no longer have a paycheck coming in, so I haven't wanted to make automated buys, I haven't really investigated if that's the case. But for making a one-time investment, I can't think of any advantages of a MF when both an ETF and a MF are available.

AJ


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I couldn't either but I was concerned that I may have missed something.

Thank you for the re-assurance, bhm.
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A free standing mutual fund usually has higher expenses to take care of customers questions, statements, 1099s, etc.

The ETF usually sends all that to your broker. If you have a brokerage account, the etf will usually have a lower expense ratio. - pauleckler


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In my case, the MF and the brokerage account holding the ETF would both be at Vanguard. The ETF is slightly cheaper by 0.01% (VOO) or 0.02% (VIG) but every little bit helps. There are other attractive features of the ETF as well - such as the ability of use limit orders.

It was more favorable treatment of cap gains by the ETF than the MF in an after tax account that got me interested in this but then it started making sense to shift my Traditional and Roth IRA's while I am at it.

thanks, bhm
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Actually, that is just the opposite with some Vanguard funds. Their S&P 500 index mutual fund is cheaper than their ETF, by 0.01% - Hawkwin

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Hawkwin - the info you have about the VNG ETF being more expensive may be outdated info. See #2 below.

My two biggest holdings are

1) Vanguard Dividend Appreciation Index, Admiral shares, VDADX, expense ratio 0.08%. If I move to their ETF equivalent VIG, the expense ratio is 0.06%. That .02% diff is only $20 per $100K invested so not a lot but it will a buy a few margaritas on top of the other ETF advantages.

2) Vanguard S&P 500 Index, Admiral shares, VFIAX, expense ratio 0.03%. If I move to their ETF equivalent VOO, the expense ratio is 0.03%. So that is another $10 per $100K into the margarita budget.

As to the OPs question, there used to be this thing where Vanguard could push their taxable gains of their ETFs onto their MFs. I don't recall the details but I am sure others here can elaborate. If you are not buying in a taxable account, and you are not a frequent trader, then the only real difference to you will likely be the internal cost. - Hawkwin

Actually I would be buying, commission free using Vanguards Brokerage, in all three account types - After Tax, Traditional, and Roth. About 50% in the Roth and 25% each in the traditional and the after tax. I am not a frequent trader at all. I move money between accounts a few times per year, Roth conversions, balancing, consolidation, that sort of thing plus buy/sell two or three individual stocks and that is about it for a typical year.

It was the ETF's favorable treatment of cap gains in a taxable account that was discussed in an earlier thread that got me interested in this. But the more I thought about it, it seems like the best strategy for all the account types. Before I pulled that trigger, I wanted to check in with this board for re-assurance.

thanks, bhm
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I am considering shifting high six figures to ETF and don't want to miss something.

Like another said, check expense ratios.

DW has her stuff with Vanguard, after you reach a certain amount invested you get kicked over to "admiral shares" (or some such), no big difference other than lower expense ratios and you tend to get a "personal helper" when you call.

JLC
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For high six figures, take a close look at owning the best performing stocks in the etf and avoiding that expense ratio all together.

Most index funds own both winners and losers. You can beat the fund performance by simply omitting the losers. (Some losers will eventually turn around but it can take years.)
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I am confused. Their lowest cost admiral shares (vfiax) cost 4 basis points, and their etf (voo) costs 3 basis points. A much narrower margin than ten years ago, but the etf is still cheaper. I think.

I actually buy the etfs because I can put in a limit buy on the etf instead of having to wait to the end of the day for the mutual fund to close. Lazy? Need instant gratification? Think I can save a few pennies?
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I actually buy the etfs because I can put in a limit buy on the etf instead of having to wait to the end of the day for the mutual fund to close. Lazy? Need instant gratification? Think I can save a few pennies?
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I like the fact that when you SELL an ETF, it's like a stock - the proceeds are "available-to-trade" immediately to buy something else, whereas with a mutual fund, you put in a sell order, have to wait until the market closes for the trade to execute, and another day to settle.

Bill
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There is also the small risk of buying/selling at a discount or premium to NAV with an ETF, which is not an issue with an open end mutual fund.

There may also be a minimum holding period requirement with a mutual fund there would not be with an ETF.

ETFs are more tax efficient, if these are being held in a taxable account, when compared with their open end MF counterparts. That's because on large share redemptions the ETF can pay its institutional holders in-kind with the most appreciated shares of a stock as opposed to a MF which must first sell the shares into the market thus realizing the capital gain.

BruceM
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No. of Recommendations: 2
ETFs are more tax efficient, if these are being held in a taxable account, when compared with their open end MF counterparts. That's because on large share redemptions the ETF can pay its institutional holders in-kind with the most appreciated shares of a stock as opposed to a MF which must first sell the shares into the market thus realizing the capital gain.

BruceM


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Thanks Bruce, that is the clearest explanation I have read about why an ETF can provide a cap gains tax advantage in a taxable accoumt.
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Also, probably not applicable to most here... and certainly not BHM's six figures!, but as Vanguard likes to advertise, you can get started on one share of the ETF flavor, where as most of the Investor MF's have a higher $3K minimum. For starting out or on a limited investing budget, the ETF makes it easier to get started, mostly cheaper costs & tax friendlier.
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