Forget about what I said about having both Vanguard mutual funds and ETFs. Vanguard just announced they lowered the minimum investment requirement for Admiral shares in most broad index funds from $100,000 to $10,000.
Admiral shares are a different share class in the same Vanguard fund but with a lower expense ratio. In most funds that offer both Admiral shares and ETF shares, the expense ratio on Admiral shares is about the same as the expense ratio on ETF shares. Only 16 out of 30 Vanguard index funds offer Admiral shares. See list here.
With the new lower hurdle, it no longer makes sense to hold both mutual fund shares and ETF shares in the same Vanguard fund. If you invest in Vanguard funds and you prefer the simplicity of open-end mutual funds, just buy Admiral shares.
If you currently hold more than $10,000 in a Vanguard mutual fund that also offers Admiral shares, you can convert to Admiral shares. It’s really simple. I did it online in my own account yesterday.
Click on a fund name in the account. Then look for "Convert shares of this fund to Admiral shares" on the right hand side. A few more mouse clicks later, you are done.
In a taxable account, conversion to Admiral shares isn’t a taxable event. It’s different from selling investor shares and buying Admiral shares. Still, you may have to do some housekeeping for tracking the cost basis. It will depend on which IRS-approved basis tracking method you are currently using.
Average Basis
Vanguard uses this method by default. After you convert to Admiral shares, Vanguard will continue tracking your average basis and sending you average cost statements when you sell any shares in any year.
The average basis method isn’t as flexible in minimizing capital gains when you sell. I also don’t like replying on someone else for tracking my basis for tax purposes. Tracking cost basis is ultimately a taxpayer’s own responsibility. Vanguard is only doing it as a service. It will be big headache if Vanguard decides to discontinue the average cost service. It will also be a pain if you decide to move your shares somewhere else for whatever reason.
However, if you used average cost when you sold shares in the same fund in the past, you are stuck with it. Pray that Vanguard will do it forever and do it correctly.
FIFO or Specific Share Identification
If you use either the first-in-first-out (FIFO) or the specific share identification method, you should have your own records of every purchase. They may be in a financial software like Quicken or Microsoft Money, or they may be just in a spreadsheet.
You will need the conversion ratio between new shares and old shares. The conversion ratio is the inverse of the net asset values (NAVs) of the two share classes. In some funds, the NAVs of investor shares and Admiral shares happen to be exactly the same. In those cases, you are lucky and you can skip the adjustment step. The conversion ratio is exactly 1:1.
It’s a little more involved when the NAVs are different. For example, if you converted Vanguard Large Cap Index Fund from investor shares (VLACX) to Admiral shares (VLCAX) yesterday, the net asset value (NAV) for the two share classes were $21.37 and $26.72 per share respectively. Therefore every 2,672 shares in investor shares would convert to 2,137 shares in Admiral shares. The conversion ratio is 2,137 / 2,672 = 0.7997754 Admiral shares for each investor share.
If you use Quicken, you enter a new transaction of type "Corporate Acquisition (stock for stock)." You put investor shares as the "Company acquired", Admiral shares as the "Acquiring company", and the conversion ratio 0.7997754 as the "New shares issued per held share" number.
If you use Microsoft Money, you right click on the investment, do a "Split Shares" and enter a split of 2137 shares for 2672 shares. After splitting the shares, you change the ticker symbol for the fund.
If you use a spreadsheet, you multiply the number of shares for each purchase by the conversion ratio 0.7997754 and divide your per share purchase price by the same number.
If you converted mutual fund shares to ETF shares, the process for making adjustment to cost basis tracking is exactly the same as outlined above.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
indexfundfan says
Yeah, I hated having to track all the numbers after conversion in a spreadsheet. Luckily for me, the stock market downturn allowed me to flushed them out when I tax-loss harvested.
I converted my CA muni fund from VCAIX to VCADX earlier this year. Thankfully, they have the same NAV and I don’t have to deal with this issue.
KD says
Some more good old marketplace competition – http://www.tdameritrade.com/trade/etfs.html?tt11=TDA_HP_Module_ETFs_MOv1_L
TD Ameritrade Holding Corp. announced the launch of more than 100 commission-free exchange-traded funds
TFB, may be you can document how far we have come in the last couple of years. And the impact it will have on the investors who will save many millions in fees in years to come.
alredneck says
Thanks for the information! … however…
Quicken truncates “New shares issued:” and results in incorrect shares recorded in new position (with each of several lots wrong). Any suggestions?
Harry Sit says
alredneck – How exactly does it truncate? If you don’t have many lots, you can also adjust the purchase history manually in the same way you do to a spreadsheet – multiply the shares purchased by the conversion ratio and keep the total value the same, which automatically recalculates the purchase price. Or you can try the stock split method as in Microsoft Money.
alredneck says
TFB, thanks for the input. The field “New shares issued:” (which is the conversion ratio) was truncated to 6 places after decimal. (both Q2007 & Q2010) Your first suggestion is what I’ll probably do. The transaction I entered had several lots, but, it will not be hard to do the calculations manually & then edit the Quicken entries.
laffsf says
The “Stock Split” conversion in Quicken also suffers from a rounding error. I’m going to go with the original solution, editing the number of shares added for each index fund purchase so that they add up to the number of ETF shares received.
laffsf says
Thanks for this post! I was really dreading figuring out how to do the accounting on my conversion to ETF shares, and this made it way easier. It would have been easier still if I had never reinvested dividends …
RichUncle EL says
I was recently converted without any knowledge and the price per share difference between the two is funds is so huge that I feel a bit uneasy with this change. Any advice as to why it is such a big discrepancy between the two mutual funds if they hold the same stocks and have the same risk? Obviously the fee is less and the dividend is higher with the admiral shares but I am still uneasy with the change.
Harry says
Don’t worry about the price per share. If you owned 1,000 shares at $10 per share and now you own 100 shares at $100 per share, you still have the same amount of money invested in the same stocks through the fund.
RichUncle EL says
Thanks for that advice; what I am concerned about is the volatility in the higher priced admiral fund as compared to the lower priced investor fund. From researching stock prices higher priced per share funds fluctuate more than lower priced per share funds. Any input on that.
Harry says
The volatility of a mutual fund is only driven by the volatility of its underlying assets. Here the underlying assets are the same. If anything, the higher NAV in admiral shares only makes it *less* volatile due to the effect of rounding to $0.01.
Bob says
Newbie here, interested in learning more about Vanguard.
“In most funds that offer both Admiral shares and ETF shares, the expense ratio on Admiral shares is about the same as the expense ratio on ETF shares.”
If expense ratios are about the same, then what is the advantage one way or the other?
“If you invest in Vanguard funds and you prefer the simplicity of open-end mutual funds, just buy Admiral shares.”
In what ways are open-end mutual funds simpler than ETF shares?
If I can qualify for Admiral shares, is that always the better option?
Harry Sit says
Advantages of Admiral shares (open-end mutual fund): one price per day, everyone pays and receives the same price on that day.
Advantages of ETF shares: lower minimum, can hold it at Vanguard or outside Vanguard.
Dave says
Another (arguable) advantage of ETF shares: Buy or sell with limit and market orders
Bob says
Thanks for explaining! I guess those advantages on either side won’t really affect me, or maybe I just don’t know enough. I guess I’ll just tie break based on which has the lower expense ratio, even if the difference is really small.
Evan says
Hi Harry, this is an old post, but I’m looking at my lots of Vanguard Total Stock Market Admiral Class (VTSAX), and even though I have SpecID as my cost basis method, Vanguard has the same cost/share for all of them. I don’t know if this has anything to do with it, but in October 2018 I converted these from Investor Class to Admiral Class. Lots from both before and after this conversion have the same cost.
These are covered securities, so the (incorrect?) basis will be reported to the IRS and I will have to override this with the corrected basis. On Monday I will talk to Vanguard about this, but I wanted to see if you knew anything about this.
Harry Sit says
Tracking cost basis correctly is a weak spot for Vanguard. In order to carry over the cost basis for each lot, you must have had SpecID as your cost basis before you converted the shares to Admiral. Even then sometimes they don’t do it correctly. If you contact Vanguard customer service, they may be able to send a request to their cost basis team to fix it for you.
SS says
Thanks for a super helpful post. I have a quick qst on the adjustment to be done during the investor->admiral conversion.
I had several VG LargeCap Index lots that were converted over in 2013 to Admiral (VLCAX). I had Avg cost as the basis before and recently switched over to SpecId and VG now lists all the lots with the cost basis (both investor and admiral) that matches up with my account statements.I haven’t sold any positions since buying.
My question is that this exercise of applying adjustment is something that we as investors do for our records, so that we can report this, while selling the positions or we should request VG to update the price/# of shares of the investor lots prior to conversion.
For eg: my investor share lots still have their original price and # of shares, so if I were to execute a sale on one of those lots, VG’s 1099 B statements, the # of shares and price will be without the adjusted factor even though the cost basis remain the same. Wouldn’t this cause a discrepancy between what we report vs what VG sends over to IRS for tax purposes?
Thanks
Harry Sit says
This post was written before brokers were required to track the basis. It sounds like Vanguard is tracking the basis for you. I’ll delete this post shortly because it’s no longer necessary.
Brice says
Assume on 1/8/2008, I purchased 10 shares at $1/share of a Vanguard XYZ Mutual Fund Investor shares. They are considerd “Non Covered”. I convert those shares to Admiral Shares at a 0.8 ratio. Now I own 8 shares @ $1.25/share basis. When I sell those 8 shares, how to I complete the “Description of property” column on the Tax Form 8949-Sales and Other Dispositions of Capital Assets? The Date Acquired, Date Sold, Proceeds, Basis ($10) are clear. But the description should be “10 shares XYZ Fund” or “8 shares XYZ Fund”. 10 shares matches my purchase comfirmation statement, 8 shares matches my sell comfirmation.
Harry Sit says
Description of property is describing the property you sold. 8 shares XYZ Fund Admiral Shares.