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Common ETF questions

General


What is an ETF?

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.

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.

What's the difference between an ETF and a mutual fund?

Actually, there are more similarities than differences between ETFs and mutual funds. But the biggest differences are that:

  • ETFs have 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.
  • ETFs have more transparent pricing. ETFs provide real-time pricing, so you can see their prices change throughout the trading day. A mutual fund isn't priced until the trading day is over, so you don't know your price until after you've place your trade.

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 for index ETFs 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.

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 have questions, call us at 866-499-8473.

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. With a Vanguard Brokerage Account, you can buy ETFs and mutual funds from other companies, as well individual stocks, bonds, and certificates of deposit (CDs).

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Trading & pricing


What types of ETF trades can I place?

You can place any type of trade that you would with stocks, including:

  • Limit orders, which ensure that you get a price in the range you set—the maximum you're willing to pay or the minimum you're willing to accept.
  • Market orders, which are likely to execute immediately at the best available price, but you have less control over the price you pay or receive.
  • Stop orders, which combine multiple steps: First, you set a trigger price. When the price of the ETF moves past your trigger price, a market order is immediately created.
  • Stop-limit orders, which also combine multiple steps: Like a stop order, you first set a trigger price. But when the price of the ETF moves past your trigger price, a limit order is immediately created.

You can also buy on margin or sell short, but you'll need to be preapproved for these types of transactions based on your level of experience.

How is the market price of an ETF determined?

The market price of an ETF is determined by the prices of the stocks and bonds held by the ETF as well as market supply and demand.

The market price can change throughout the trading day and may be above or below the total value of the stocks and bonds the ETF invests in. Though the difference is usually small, it could be significant when the market is particularly volatile.

Why is the market price sometimes different from the net asset value (NAV) of an ETF?

The market price of an ETF is driven in part by supply and demand. Depending on these market forces, the market price may be above or below the NAV of the fund, which is known as a premium or discount.

For historical information on the daily closing market price and NAV for a specific Vanguard ETF, look for the Price & Performance tab on the ETF's profile page.

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REFERENCE CONTENT

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In-kind redemptions

Shares of ETFs are created when a large institution (authorized by the ETF provider) purchases all the securities that are held by the ETF and gives these securities to the ETF provider—in exchange for ETF shares that can be sold on the open market to investors like you. Similarly, when the institution returns ETF shares back to the ETF provider, it receives securities rather than cash. As a result, no securities are sold and the ETF doesn't realize capital gains or losses.

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Buy on margin

To buy a security using money borrowed from a broker. If the price of the security rises before you sell it, you keep all the gains after repaying the loan (and interest). However, if the price of the security drops substantially, you could lose more than your initial investment.

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Sell short

To borrow shares of a security from a broker in order to sell them. To complete the transaction, you'd then repurchase identical shares and return them to the broker. If the price of the security has dropped, you'd make a profit by selling the borrowed shares for more money than it cost you to repurchase them. However, if the price of the security rises, there's no limit on the amount you could lose.