How do I convert mutual funds to ETF?
After a fund company decides to convert a specific mutual fund to an ETF, there are several steps to complete. Typically, the fund company will notify the mutual fund's existing investors of their intention. In some cases, this may require a shareholder vote to approve the conversion.
Exchange-traded fund (ETF) and mutual fund capital gains resulting from market transactions are taxed based on whether the investment was held short-term or long-term. Capital gains distributions from mutual funds (and ETFs on occasion) are taxed at the long-term capital gains rate.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
ETFs typically have lower expense ratios than mutual funds because they offer minimal shareholder services. Though mutual funds may be slightly more costly, fund managers provide support services.
Since the first conversion was executed by Guinness Atkinson in 2021, a number of issuers have followed suit. Since 2021, 32 sponsors have converted 71 mutual funds to ETFs, representing $70 billion in ETF AUM at the time of conversion.
Brokerage account holders simply get the value of their mutual fund investment transferred tax-free into the ETF version. The new ETF has the same managers and portfolio that the mutual fund had. If you were happy with your mutual fund, you don't have to take any action in response to the conversion.
However, there are disadvantages of ETFs. They come with fees, can stray from the value of their underlying asset, and (like any investment) come with risks.
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
| Exchange-traded fund (ticker) | Assets under management | Yield |
|---|---|---|
| Vanguard 500 Index ETF (VOO) | $406.2 billion | 1.4% |
| Vanguard Dividend Appreciation ETF (VIG) | $75.6 billion | 1.9% |
| Vanguard U.S. Quality Factor ETF (VFQY) | $298.0 million | 1.4% |
| SPDR Gold MiniShares (GLDM) | $6.1 billion | 0.0% |
In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns. Stocks are usually riskier than bonds, and corporate bonds come with somewhat more risk than U.S. government bonds.
Why would someone choose an ETF over a mutual fund?
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.
ETFs offer numerous advantages including diversification, liquidity, and lower expenses compared to many mutual funds. They can also help minimize capital gains taxes. But these benefits can be offset by some downsides that include potentially lower returns with higher intraday volatility.
There are many ways an ETF can stray from its intended index. That tracking error can be a cost to investors. Indexes do not hold cash but ETFs do, so a certain amount of tracking error in an ETF is expected. Fund managers generally hold some cash in a fund to pay administrative expenses and management fees.
Yes. Many of the index mutual funds at Vanguard are eligible for tax-free conversion into ETF shares if the process is completed while the securities are held at Vanguard.
Most mutual funds are actively managed while most ETFs are passive investments that track a particular index. ETFs can be more tax-efficient than actively managed funds due to lower turnover and fewer capital gains.
Under the Investment Company Act, private investment funds (e.g. hedge funds) are generally prohibited from acquiring more than 3% of an ETF's shares (the 3% Limit).
Generally speaking, the best time to trade ETFs is closer to the middle of the trading day rather than the beginning or end.
You must fill out a switch form if you want to change mutual fund houses. Specify the units to be transferred from the current mutual fund scheme to the destination fund scheme in that switching form. Both switch-in and switch-out must meet the requirements for the minimum investment amount.
This flexibility to switch funds can be a helpful tool for investors who wish to leave their choices open. Investors can switch mutual funds without selling their shares and paying capital gains taxes, which allows them to change their investment approach.
Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.
Which ETF has the highest return?
| Symbol | Name | 5-Year Return |
|---|---|---|
| SOXX | iShares Semiconductor ETF | 29.41% |
| FBGX | UBS AG FI Enhanced Large Cap Growth ETN | 27.60% |
| ITB | iShares U.S. Home Construction ETF | 25.09% |
| XLK | Technology Select Sector SPDR Fund | 24.97% |
These are VanEck Vectors Semiconductor ETF SMH, Invesco NASDAQ 100 ETF QQQM, Communication Services Select Sector SPDR Fund XLC, Vanguard Mega Cap Growth ETF MGK, and Vanguard Consumer Discretionary ETF VCR. These funds are likely to continue outperforming should the existing trends prevail.
| Symbol | Name | Dividend Yield |
|---|---|---|
| CYA | Simplify Tail Risk Strategy ETF | 101.03% |
| NGE | Global X MSCI Nigeria ETF | 85.38% |
| TSL | GraniteShares 1.25x Long Tesla Daily ETF | 80.99% |
| KLIP | KraneShares China Internet and Covered Call Strategy ETF | 65.57% |
Exchange-traded funds (ETFs) are ideal for beginning investors due to their many benefits, which include low expense ratios, instant diversification, and a multitude of investment choices. Unlike some mutual funds, they also tend to have low investing thresholds, so you don't have to be ultra-rich to get started.
Key Takeaways. Exchange-traded funds have different tax rules, depending on the assets they hold. For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains.
