This would affect both share classes equally, so it isn't a disadvantage for the ETF side. When Vanguard ETFs have distributed capital gains, the gains were the same for both the mutual fund and ETF share classes. It is a theoretical disadvantage for Vanguard's dual-share-class structure; redemptions from the mutual fund could force sales, which might lead to capital gains.Yes and no.And, since VTSAX is just another share class of the same fund as VTI, VTSAX is just as good as VTI for most purposes, no?
Capital gains are calculated at the fund level. As such the fund is able to wash out the tax lots with a low cost basis. As such, when mutual fund shares need to be liquidated to meet redemptions the fund can use high cost basis tax lots and thus minimize, if not eliminate capital gains.
However there is a low probability edge case where there is a large mutual fund redemption that would actually trigger capital gains. In this case both mutual fund and ETF shares would distribute capital gains.
I consider this as a disadvantage, but maybe only for the ETF side.
However, it doesn't seem to have been a cost in practice; the only two diversified Vanguard stock ETFs ever to distribute capital gains did so for reasons unrelated to redemptions. Vanguard FTSE All-World Ex-US Small-Cap started near the 2009 market bottom, doubled in value in its first year, and had to sell stock for capital gains to meet index changes; with everything way up, it couldn't use the ETF redemption process to get rid of enough low-basis shares. Vanguard International Dividend Achievers Index distributed a capital gain when it changed indexes, requiring it to sell a lot of stock at once.
Statistics: Posted by grabiner — Wed Sep 11, 2024 9:27 pm