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 am an investment enthusiast with extensive knowledge and experience in the world of finance. Over the years, I have actively participated in investment activities, keeping a keen eye on market trends, and exploring various investment vehicles. My expertise extends to understanding the intricacies of different investment types, including ETFs (exchange-traded funds).
Now, let's delve into the concepts mentioned in the article "Understanding Investment Types" and related information on ETFs:
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What is an ETF?
- An ETF is an investment vehicle structured like a mutual fund, investing in potentially hundreds or thousands of individual securities.
- Unlike traditional mutual funds, ETFs trade on an exchange throughout the day, similar to stocks.
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Advantages of ETFs:
- Diversification: ETFs, much like index mutual funds, offer diversification by containing a broad range of stocks or bonds, spreading out risk exposure.
- Lower Investment Minimums: ETFs have a lower investment minimum, often the price of a single share, making them accessible with as little as $50.
- Transparent Pricing: ETFs provide real-time pricing, allowing investors to see price changes throughout the trading day.
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Tax Efficiency of ETFs:
- Most ETFs aim to track an index, such as the S&P 500, and only buy/sell stocks when the benchmark index does.
- ETF managers can use capital losses to offset capital gains within the fund, potentially reducing taxable capital gains passed on to shareholders.
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Capital Gains and Dividend Distributions:
- ETFs, like mutual funds, distribute capital gains (usually in December) and dividends (monthly or quarterly).
- Vanguard offers a brokerage reinvestment program, allowing investors to reinvest capital gains and dividends if holding ETFs in a Vanguard Brokerage Account.
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Converting Mutual Fund Shares to ETF Shares:
- Most funds offering ETF Shares allow conversion from conventional shares of the same fund to ETF Shares.
- Conversions are typically tax-free if both mutual fund and ETF Shares are held through Vanguard.
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Buying ETFs from Other Companies through Vanguard:
- Vanguard clients have access to ETFs and mutual funds from other companies, along with individual stocks, bonds, and CDs.
- Trading ETFs and stocks online through Vanguard incurs $0 commission.
Understanding these concepts provides a solid foundation for making informed investment decisions, particularly in the realm of ETFs. If you have any specific questions or if there's another aspect you'd like to explore further, feel free to ask.
