I converted my Vanguard mutual funds to their companion ETFs a few years ago. One significant reason was that Vanguard largely caused large capital gains distribution in its Target Date Funds at the end of 2021. It didn’t have an impact on investments held in IRA accounts, but it did create an unwelcomed surprise for those holding the funds in taxable accounts. This article from Morningstar details the problem and also mentions of similar adverse tax consequences in other mutual funds run by J.P. Morgan, Fidelity and T. Rowe Price. This article from State Street Global Advisors explains why ETFs are more tax efficient than mutual funds.
While large index funds typically do not have large capital gains distributions, I believe that it is prudent to own the investment in the ETF form when available.
I have always used the Specific Identification tax lot method for my former mutual funds and my current ETFs. However, when I converted my Vanguard mutual funds to their ETF equivalents, they were brought over at an average cost per share. Any subsequent purchases have been recorded with the Specific Identification tax lots. While I was disappointed that the initial individual tax lot information was not transferred over during the ETF conversion in my taxable account, my tax basis was very low, having owned the funds for decades, and it was not a material consideration for me.
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I converted my Vanguard mutual funds to their companion ETFs a few years ago. One significant reason was that Vanguard largely caused large capital gains distribution in its Target Date Funds at the end of 2021. It didn’t have an impact on investments held in IRA accounts, but it did create an unwelcomed surprise for those holding the funds in taxable accounts. This article from Morningstar details the problem and also mentions of similar adverse tax consequences in other mutual funds run by J.P. Morgan, Fidelity and T. Rowe Price. This article from State Street Global Advisors explains why ETFs are more tax efficient than mutual funds. While large index funds typically do not have large capital gains distributions, I believe that it is prudent to own the investment in the ETF form when available. I have always used the Specific Identification tax lot method for my former mutual funds and my current ETFs. However, when I converted my Vanguard mutual funds to their ETF equivalents, they were brought over at an average cost per share. Any subsequent purchases have been recorded with the Specific Identification tax lots. While I was disappointed that the initial individual tax lot information was not transferred over during the ETF conversion in my taxable account, my tax basis was very low, having owned the funds for decades, and it was not a material consideration for me.
Post: Smart idea or not? Converting Vanguard mutual funds to Vanguard ETFs
Link to comment from May 14, 2025