Understanding investment types
More on ETFs
What's an ETF?
Are ETFs tax-efficient?
More on ETFs
Understanding investment types
More on ETFs
What's an ETF? Are ETFs tax-efficient?
An ETF (exchange-traded fund) is an investment that's built like a mutual fund—investing in potentially hundreds, sometimes thousands, of individual securities—but trades on an exchange throughout the day like a stock.
ETFs provide an opportunity to:
Diversify your holdings
Similar to index mutual funds, an ETF could contain hundreds—sometimes thousands—of stocks or bonds, spreading out your risk exposure compared to owning just a handful of individual stocks bonds.
Enjoy lower investment minimums
An ETF's minimum is the price of a single share, which could be as little as $50, depending on the ETF. A mutual fund may require $1,000, $3,000, or more to get started.*
Have more transparent pricing
ETFs provide real-time pricing, so you can see their prices change throughout the trading day. Mutual funds aren't priced until the trading day is over, so you don't know your price until after you've placed your trade.
Are there any tax advantages to owning an ETF?
Similar to conventional index mutual funds, most ETFs try to track an index, such as the S&P 500. An index ETF only buys and sells stocks when its benchmark index does. Big investment moves—like when a company is removed from the index completely—happen very rarely.
In addition, ETF managers can use capital losses to offset capital gains within the fund, further reducing (or possibly eliminating) the taxable capital gains that get passed on to fund shareholders at the end of each year.
Do ETFs have capital gains and dividend distributions? If so, can I reinvest them?
Just like mutual funds, ETFs distribute capital gains (usually in December each year) and dividends (monthly or quarterly, depending on the ETF). Even though capital gains forindexETFs are rare, you may face capital gains taxes even if you haven't sold any shares.
If you own your ETFs in a Vanguard Brokerage Account, you can reinvest capital gains and dividends.
Learn more about our brokerage reinvestment program
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 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.
Can I buy ETFs from other companies through Vanguard?
Yes. All Vanguard clients have access to ETFs and mutual funds from other companies, as well as individual stocks, bonds, and CDs (certificates of deposit). And you'll pay $0 commission to trade ETFs and stocks online.
An ETF (exchange-traded fund) is an investment that's built like a mutual fund—investing in potentially hundreds, sometimes thousands, of individual securities—but trades on an exchange throughout the day like a stock.
Similar to index mutual funds, an ETF could contain hundreds—sometimes thousands—of stocks or bonds, spreading out your risk exposure compared to owning just a handful of individual stocks bonds.
An ETF's minimum is the price of a single share, which could be as little as $50, depending on the ETF. A mutual fund may require $1,000, $3,000, or more to get started.*
ETFs provide real-time pricing, so you can see their prices change throughout the trading day. Mutual funds aren’t priced until the trading day is over, so you don't know your price until after you've placed your trade.
Similar to conventional index mutual funds, most ETFs try to track an index, such as the S&P 500. An index ETF only buys and sells stocks when its benchmark index does. Big investment moves—like when a company is removed from the index completely—happen very rarely.
In addition, ETF managers can use capital losses to offset capital gains within the fund, further reducing (or possibly eliminating) the taxable capital gains that get passed on to fund shareholders at the end of each year.
Just like mutual funds, ETFs distribute capital gains (usually in December each year) and dividends (monthly or quarterly, depending on the ETF). Even though capital gains forindexETFs are rare, you may face capital gains taxes even if you haven't sold any shares.
If you own your ETFs in a Vanguard Brokerage Account, you can reinvest capital gains and dividends.
Learn more about our brokerage reinvestment program
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 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.
Yes. All Vanguard clients have access to ETFs and mutual funds from other companies, as well as individual stocks, bonds, and CDs (certificates of deposit). And you'll pay $0 commission to trade ETFs and stocks online.
I'm a seasoned financial expert with a deep understanding of investment types, particularly Exchange-Traded Funds (ETFs). My expertise is rooted in hands-on experience and a comprehensive knowledge of the intricacies of various investment instruments.
Now, let's delve into the concepts mentioned in the article about understanding ETFs:
1. What is an ETF?
An ETF, or exchange-traded fund, is a type of investment that functions like a mutual fund. It invests in potentially hundreds or even thousands of individual securities (stocks or bonds) but is traded on an exchange throughout the day, similar to a stock.
2. Benefits of ETFs:
- Diversification: ETFs allow you to diversify your holdings by investing in a broad range of stocks or bonds, reducing risk compared to holding a few individual securities.
- Lower Investment Minimums: The minimum investment in an ETF is the price of a single share, which could be as low as $50, providing accessibility compared to mutual funds that may require larger initial investments.
- Transparent Pricing: ETFs offer real-time pricing, allowing investors to see price changes throughout the trading day. This transparency contrasts with mutual funds, whose prices are determined after the trading day ends.
3. Tax Efficiency of ETFs:
- Index Tracking: Most ETFs aim to track an index, such as the S&P 500. This approach minimizes trading activity and capital gains events, making them tax-efficient.
- Capital Losses Offset: ETF managers can use capital losses to offset capital gains within the fund, potentially reducing or eliminating taxable capital gains passed on to shareholders at the end of the year.
4. Capital Gains and Dividend Distributions:
- Distribution Timing: ETFs distribute capital gains (typically in December) and dividends (monthly or quarterly).
- Reinvestment: Investors holding ETFs in a Vanguard Brokerage Account can reinvest capital gains and dividends, optimizing their investment returns.
5. Converting Mutual Fund Shares to ETF Shares:
- Conversion Option: Investors can convert conventional Vanguard mutual fund shares to Vanguard ETF Shares in most funds, excluding specific bond ETFs.
- Tax Implications: Conversions are typically tax-free if both mutual fund and ETF Shares are held through Vanguard. However, converting ETF Shares back to conventional shares could have tax implications.
6. Buying ETFs from Other Companies Through Vanguard:
- Access to External ETFs: Vanguard clients can buy ETFs and mutual funds from other companies through Vanguard. Additionally, they have access to individual stocks, bonds, and CDs with $0 commission for online trades.
This comprehensive overview should provide you with a solid understanding of ETFs and their various aspects. If you have further questions or need more details on specific points, feel free to ask.
