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.
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Now, let's dive into the concepts mentioned in the article you provided.
Exchange-Traded Funds (ETFs)
An ETF, or exchange-traded fund, is an investment vehicle that combines the features of a mutual fund and a stock. It is designed to track the performance of a specific index, such as the S&P 500. ETFs are built like mutual funds and invest in potentially hundreds or thousands of individual securities, such as stocks or bonds. However, unlike mutual funds, ETFs trade on an exchange throughout the day like a stock. This means that their prices can change in real-time during the trading day, providing investors with transparency.
Benefits of ETFs
ETFs offer several advantages compared to other investment options:
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Diversification: Similar to index mutual funds, ETFs can contain hundreds or thousands of stocks or bonds, spreading out the risk exposure compared to owning just a handful of individual securities. This diversification can help reduce the impact of individual security performance on the overall investment.
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Lower Investment Minimums: The minimum investment for an ETF is typically the price of a single share, which could be as little as $50, depending on the specific ETF. In contrast, mutual funds may require higher initial investments, such as $1,000 or more.
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Transparent Pricing: ETFs provide real-time pricing, allowing investors to see their prices change throughout the trading day. In contrast, mutual funds are priced at the end of the trading day, so investors only know the price after placing their trade.
Tax Advantages of ETFs
ETFs, like conventional index mutual funds, aim to track an index's performance. This means that they only buy and sell stocks when their benchmark index does. As a result, big investment moves, such as when a company is removed from the index, happen rarely. Additionally, ETF managers can use capital losses to offset capital gains within the fund, potentially reducing or eliminating taxable capital gains passed on to fund shareholders at the end of each year.
Capital Gains and Dividend Distributions
Similar to mutual funds, ETFs distribute capital gains (usually in December each year) and dividends (monthly or quarterly, depending on the ETF). Although capital gains for index ETFs are rare, investors may face capital gains taxes even if they haven't sold any shares. If you own your ETFs in a Vanguard Brokerage Account, you can reinvest capital gains and dividends.
Converting Mutual Fund Shares to ETF Shares
Most funds that offer ETF Shares allow investors to convert from conventional shares of the same fund to ETF Shares. However, it's important to note that some bond ETFs may not 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 cannot convert ETF Shares back to conventional shares, and selling Vanguard ETF Shares and repurchasing conventional shares in the future could result in taxable transactions. Conversion fees may vary depending on your brokerage account, so it's advisable to contact your broker for more information.
Buying ETFs from Other Companies through Vanguard
Vanguard clients have access to ETFs and mutual funds from other companies, as well as individual stocks, bonds, and CDs. Vanguard offers $0 commission to trade ETFs and stocks online.
I hope this information helps you understand the concepts mentioned in the article. If you have any further questions or need clarification, feel free to ask!
