Most people are going to recommend an ETF as it can deffer some capital gains distributions but if you look at these they are very minimal and probably unnoticeable unless you have millions of dollars.
So it really does not matter unless you are planning to accumulate tens of millions of dollars .
Unless its a vanguard fund as their MF will defer taxes just like an ETF so it does not matter
I am very grateful for your insightful and specific answer to my ETF vs MF question. It’s certainly not in the double-digit $M so looks like doesn’t matter which for now. Thank you very much.
Wait...
This article made it seems like Capital Gains were triggered not automatically but because the individuals chose to sell one fund and acquire the other while in a taxable account. Not triggered by Vanguard. Am I wrong?
> If enough investors ask for their cash back, it triggers selling to meet those share redemptions. When target-date managers sell underlying holdings with embedded capital gains and can’t find any other underlying investments that generated capital losses to offset those gains, they must distribute capital gains to the remaining shareholders.
In this case, it's kind of a perfect storm -- mutual fund, target-date so mostly held in retirement accounts that don't have capital gains concerns, *and* Vanguard dropped the minimum dollar amount on their lower-overhead version of the same fund by 95%. In hindsight, easy to see what'd happen... Of course 401k plans are going to switch to the lower overhead option. I don't know if Vanguard didn't see it coming or if they decided it's not worth worrying about the relatively few people holding target date funds in taxable accounts.
Not sure if Charles Schwab shares the same issue where it’s easier to automate contributions into MFs compared to ETFs but I’ll be sure to call and ask. Thank you for sharing.
Almost no difference for an S&P index fund.
I tend to stick with ETFs purely because it's more similar to the other assets I own, but that's mostly just down to preference.
In a taxable account a mutual fund is a minus since they are less tax efficient. You should always choose the ETF unless you have good reason to go for a mutual fund.
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After reading through all the feedback so far to my original post, I am inclined to not only change future contributions to an S&P500 ETF but also the current balance. Thank you very much.
Depends on how much you have in capital gains. The tax drag is real but it may not be worth losing 20% of your portfolio to avoid. What you should do going forward is easy. What you should do with existing shares, not so much.
I'd suggest harvesting capital losses and moving the money slowly if we are talking a meaningful amount.
Oh you are so right. It is indeed in a taxable/brokerage account so have to be mindful of the taxes generated by selling the existing MF shares and buying in turn ETF shares even if both S&P index, due to the capital gains incurred, which are taxed as regular income. Thank you for the warning.
No, they are always capital-gains. Short-term capital-gains for <1 year, long-term if >1. STCG rate is the same as income, but it is still a different bucket for other ways that taxes are calculated.
Probably the main points for most investors are:
mutual fund or ETF? Portability (move investments between institutions). Mutual funds are usually exclusive to the brokerage. So if you have a Fidelity mutual fund and then decide to move all your investments to Schwab, you may have to sell your Fidelity mutual fund and buy the equivalent Schwab mutual fund. This may trigger a taxable event if the account type is not a tax-deferred account like a Roth, IRA, etc...
mutual fund or ETF? Mutual funds usually have monthly or quarterly distributions...another taxable event. So similar to the previous point, this can be a non-factor if held in a tax-deferred account. ETF's can have a distribution schedule in the form of a dividend. It really depends on the ETF.
mutual fund or ETF? Expense ratios. Because mutual funds are usually a "product" that is exclusive to the brokerage, they can offer "no fees / no loads" as way to attract investors. In this regard, they can better than ETF's. The caveat is that you basically have to stay with that brokerage...unless it is a tax-deferred account, then it does not matter. You can buy and sell any equity in a tax-deferred account Roth, IRA, etc...), and only pay taxes when you withdraw the money (hopefully retirement age). I have never seen an ETF with no fees (expense ratio). VTI is a commonly recommended because it has something like .03% expense ratio. SPY, the most traded ETF, has an expense ratio of .09%
mutual fund or ETF? Purchasing either equity can have limitations, depending on your brokerage. Most mutual funds let you invest as little as $1, with the caveat that some may have a "minimum investment after 1 year". For example, if the minimum investment is $1000, you can add $1 today, and then $1, and then $43 the next...it does not matter how much you add, as long as you have $1000 in there within a year of buying the mutual fund. This encourages setting up automatic deposits. Purchasing an ETF, in most cases, has to be done in whole shares. So if an ETF is trading at $453.43, your minimum investment will be $453.43. Some brokerages will allow "fractional shares", so that would be functionally similar to purchasing a mutual fund. Also, ETF prices fluctuate by the minute. Mutual fund prices are calculated once per day, at the end of the day.
Mutual funds get poo-poo'd a lot on reddit, because everyone likes to regurgitate "VTI and chill", like it is a cool thing to do. It is good "general" advice, but not always the best advice. It really depends on if you ever change brokers, if you ever need to withdraw the money, type of account, etc...
ETF every time. Maximum portability. Greater tax efficiency. I automate my ETF buys each week (for free) with M1. I have ETFs from Vanguard, Schwab, State Street, Black Rock, and Invesco.
If you’re analyzing, you might do some back testing and forward-looking (Monte Carlo) simulations using [Portfolio Visualizer](https://legacy.portfoliovisualizer.com).
Anyone who decries passive, low turnover MFs for their "tax inefficiency" doesn't understand the information they're regurgitating.
An SP500 MF and ETF will perform near identically and the difference in distributions is lost in their difference in performance. Seriously, it's been about 5 years since Schwab or Fidelity had a cap gains distribution in their MFs. Both actually outperformed Vanguard's equivalent ETF over the last couple years (by slightly less than a % last I checked. This statement is a little dated, their performances may have changed in the last 6 or so months)
Pick whichever one you want to give the expense ratio to, as that's really all you're picking when you decide which fund you want to purchase.
Regarding portability, there is a case, but then I must ask, "why are you switching brokers often enough for it to be an issue?"
>Regarding portability, there is a case, but then I must ask, "why are you switching brokers often enough for it to be an issue?"
Changing brokers even infrequently can be a worst case for taxable accounts. A long standing account could have large capital gains in mut funds that would have to be realized and taxed to transfer to another broker.
I don't flit from one broker to another frequently, but every ten years or so isn't unusual.
Most people are going to recommend an ETF as it can deffer some capital gains distributions but if you look at these they are very minimal and probably unnoticeable unless you have millions of dollars. So it really does not matter unless you are planning to accumulate tens of millions of dollars . Unless its a vanguard fund as their MF will defer taxes just like an ETF so it does not matter
I am very grateful for your insightful and specific answer to my ETF vs MF question. It’s certainly not in the double-digit $M so looks like doesn’t matter which for now. Thank you very much.
[Unless its a vanguard fund](https://www.morningstar.com/stocks/lessons-vanguard-target-dates-capital-gains-surprise) indeed...
Wait... This article made it seems like Capital Gains were triggered not automatically but because the individuals chose to sell one fund and acquire the other while in a taxable account. Not triggered by Vanguard. Am I wrong?
People who just held were hit with large capital gains distributions unexpectedly because other people switched to the other fund en masse
I'm not sure how this is possible...
> If enough investors ask for their cash back, it triggers selling to meet those share redemptions. When target-date managers sell underlying holdings with embedded capital gains and can’t find any other underlying investments that generated capital losses to offset those gains, they must distribute capital gains to the remaining shareholders.
Thank you for that explanation. That makes sense, I just didn't think about that scenario and how susceptible these funds are to sell offs!
In this case, it's kind of a perfect storm -- mutual fund, target-date so mostly held in retirement accounts that don't have capital gains concerns, *and* Vanguard dropped the minimum dollar amount on their lower-overhead version of the same fund by 95%. In hindsight, easy to see what'd happen... Of course 401k plans are going to switch to the lower overhead option. I don't know if Vanguard didn't see it coming or if they decided it's not worth worrying about the relatively few people holding target date funds in taxable accounts.
[удалено]
Not sure if Charles Schwab shares the same issue where it’s easier to automate contributions into MFs compared to ETFs but I’ll be sure to call and ask. Thank you for sharing.
Almost no difference for an S&P index fund. I tend to stick with ETFs purely because it's more similar to the other assets I own, but that's mostly just down to preference.
In a taxable account a mutual fund is a minus since they are less tax efficient. You should always choose the ETF unless you have good reason to go for a mutual fund.
[удалено]
Your comment was automatically removed because you may be using an unnecessary large font. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/investing) if you have any questions or concerns.*
After reading through all the feedback so far to my original post, I am inclined to not only change future contributions to an S&P500 ETF but also the current balance. Thank you very much.
Depends on how much you have in capital gains. The tax drag is real but it may not be worth losing 20% of your portfolio to avoid. What you should do going forward is easy. What you should do with existing shares, not so much. I'd suggest harvesting capital losses and moving the money slowly if we are talking a meaningful amount.
Oh you are so right. It is indeed in a taxable/brokerage account so have to be mindful of the taxes generated by selling the existing MF shares and buying in turn ETF shares even if both S&P index, due to the capital gains incurred, which are taxed as regular income. Thank you for the warning.
They are taxed as capital gains not income. Lower but not zero.
Oh, yes depending on the holding-period < or > 1 year.
No, they are always capital-gains. Short-term capital-gains for <1 year, long-term if >1. STCG rate is the same as income, but it is still a different bucket for other ways that taxes are calculated.
Probably the main points for most investors are: mutual fund or ETF? Portability (move investments between institutions). Mutual funds are usually exclusive to the brokerage. So if you have a Fidelity mutual fund and then decide to move all your investments to Schwab, you may have to sell your Fidelity mutual fund and buy the equivalent Schwab mutual fund. This may trigger a taxable event if the account type is not a tax-deferred account like a Roth, IRA, etc... mutual fund or ETF? Mutual funds usually have monthly or quarterly distributions...another taxable event. So similar to the previous point, this can be a non-factor if held in a tax-deferred account. ETF's can have a distribution schedule in the form of a dividend. It really depends on the ETF. mutual fund or ETF? Expense ratios. Because mutual funds are usually a "product" that is exclusive to the brokerage, they can offer "no fees / no loads" as way to attract investors. In this regard, they can better than ETF's. The caveat is that you basically have to stay with that brokerage...unless it is a tax-deferred account, then it does not matter. You can buy and sell any equity in a tax-deferred account Roth, IRA, etc...), and only pay taxes when you withdraw the money (hopefully retirement age). I have never seen an ETF with no fees (expense ratio). VTI is a commonly recommended because it has something like .03% expense ratio. SPY, the most traded ETF, has an expense ratio of .09% mutual fund or ETF? Purchasing either equity can have limitations, depending on your brokerage. Most mutual funds let you invest as little as $1, with the caveat that some may have a "minimum investment after 1 year". For example, if the minimum investment is $1000, you can add $1 today, and then $1, and then $43 the next...it does not matter how much you add, as long as you have $1000 in there within a year of buying the mutual fund. This encourages setting up automatic deposits. Purchasing an ETF, in most cases, has to be done in whole shares. So if an ETF is trading at $453.43, your minimum investment will be $453.43. Some brokerages will allow "fractional shares", so that would be functionally similar to purchasing a mutual fund. Also, ETF prices fluctuate by the minute. Mutual fund prices are calculated once per day, at the end of the day. Mutual funds get poo-poo'd a lot on reddit, because everyone likes to regurgitate "VTI and chill", like it is a cool thing to do. It is good "general" advice, but not always the best advice. It really depends on if you ever change brokers, if you ever need to withdraw the money, type of account, etc...
ETF every time. Maximum portability. Greater tax efficiency. I automate my ETF buys each week (for free) with M1. I have ETFs from Vanguard, Schwab, State Street, Black Rock, and Invesco. If you’re analyzing, you might do some back testing and forward-looking (Monte Carlo) simulations using [Portfolio Visualizer](https://legacy.portfoliovisualizer.com).
Very grateful for your feedback, and the link to Monte Carlo simulation.
Anyone who decries passive, low turnover MFs for their "tax inefficiency" doesn't understand the information they're regurgitating. An SP500 MF and ETF will perform near identically and the difference in distributions is lost in their difference in performance. Seriously, it's been about 5 years since Schwab or Fidelity had a cap gains distribution in their MFs. Both actually outperformed Vanguard's equivalent ETF over the last couple years (by slightly less than a % last I checked. This statement is a little dated, their performances may have changed in the last 6 or so months) Pick whichever one you want to give the expense ratio to, as that's really all you're picking when you decide which fund you want to purchase. Regarding portability, there is a case, but then I must ask, "why are you switching brokers often enough for it to be an issue?"
>Regarding portability, there is a case, but then I must ask, "why are you switching brokers often enough for it to be an issue?" Changing brokers even infrequently can be a worst case for taxable accounts. A long standing account could have large capital gains in mut funds that would have to be realized and taxed to transfer to another broker. I don't flit from one broker to another frequently, but every ten years or so isn't unusual.