Common ETF questions
Trading & pricing
What is an ETF?
An exchange-traded fund, or ETF, 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 a Vanguard ETF?
Because Vanguard ETFs are shares of conventional Vanguard index funds, they can take full advantage of the tax-management strategies available to both conventional funds and ETFs.
Conventional index funds can offset taxable gains by selling securities that have declined in value at a loss. In addition, they tend to trade less frequently than actively managed funds, which means less taxable income gets passed on to shareholders. Vanguard ETFs can also use in-kind redemptions to remove stocks that have greatly increased in value (which trigger large capital gains) from their holdings.
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.
What's the difference between a Vanguard ETF and a Vanguard mutual fund?
Each Vanguard ETF is a share class of a Vanguard index mutual fund, so many characteristics—like the fund's objective, holdings, and management—are identical.
The main difference is that Vanguard ETFs trade on an exchange like stocks, so they're priced—and can be bought and sold—throughout the trading day. Because they're traded on an exchange, they must be bought and sold through a brokerage account.
Vanguard ETF Shares also have lower expense ratios and investment minimums than Investor Shares of the same fund.
Will I get capital gains and dividend distributions with Vanguard ETFs? If so, can I reinvest them?
Yes, Vanguard ETFs are a share class of Vanguard index funds, so they'll declare dividends whenever the other share classes do. Capital gains, if any, will be distributed annually each December.
If you invest through a Vanguard Brokerage Account, you can reinvest dividends and capital gains. If you invest through another broker, ask whether it offers a reinvestment option.
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).
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 you can use when you know the price at which you want to buy or sell but want to avoid constantly monitoring the market.
- Market orders, which are likely to execute immediately at the current market price. These orders give you less control over the price you pay or receive.
- Stop orders, which you can use to buy a security when its price begins to rise (in order to get in early) or to sell a security when its price begins to fall (in order to lock in gains or avoid losses).
- Orders to buy on margin or sell short. You'll need to be preapproved for these types of transactions based on your level of experience.
An order to buy or sell a security if it reaches a specified price (the "limit price") or better during the specified time frame. Limit orders may not execute, even if they're triggered, if there aren't enough buyers or sellers available at that price. For that reason, you'd place a limit order if the price at which you want to buy or sell is more important to you than certain execution.
An order to buy or sell immediately at the best available price. You'd place a market order if immediate execution is more important to you than the specific price at which you buy or sell.
An order that triggers a market order if a security reaches a specified price (the "stop price") during the specified time frame. If the security's price continues to rise or fall, stop orders could execute at a price significantly different from the stop price.
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.
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.
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.