It appears that ira smilovitz <ira.sm...@gmail.com
>Different classes of mutual funds aren't swaps or exchanges. You still own the same mutual fund, with the same holdings, - the only difference is that the sponsor adjusts the fees it charges you.
It's a little more complicated than that. Some Vanguard funds are both
conventional funds and ETFs, and they will let you do a one-time
conversion of fund shares into ETFs, also tax free. I presume it's
because they're still a claim on the same bundle of assets.
Funky Tax quirk: most mutual funds do a taxable distribution of realized
capital gains at tne end of each year, but someone noticed that those
Vanguard funds don't.
ETFs work by a system in which wholesale stock brokers pretentiously
known as Authorized Participants can exchange large blocks of ETF
shares for the equivalent bundle of the stocks or bonds that the fund
holds and vice versa. The APs arbitrage the ETF shares against the
fund assets to keep the ETF price the same as the asset value. Mutual
funds have always been allowed to redeem in kind which is treated as
an exchange so it's tax free. This means that an ETF has no capital
gains and your ETF shares are like any other shares, you pay tax only
when you sell them. This also means that ETFs need keep no cash
reserve since they never have to redeem shares for cash.
For the Vanguard funds that have both regular and ETF shares, Vanguard
and some friendly APs arranged to exchange out all the assets they
would otherwise had to sell and exchange in what they would have had
to buy, all without realizing any capital gains. At the moment no
other fund manager does this since Vanguard has a patent on adding ETF
shares to a conventional fund, but when the patent expires in a few
years I expect they'll all do it.
John Levine, jo...@taugh.com
, Primary Perpetrator of "The Internet for Dummies",
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