Is it worthwhile to pay the ETF conversion fee?

Based on my previous post on whether to convert my VEIEX (Vanguard Emerging Market Index Fund) holding to VWO (ETF class), I thought it would be a good exercise for me to try to build a simple calculator to compute the breakeven investment amount for investors who need to pay the \$50 conversion fee.

The calculator below will find the breakeven point which will make it worthwhile to perform the mutual fund to ETF conversion. The calculator inputs are as follows.

1. The conversion fee, currently \$50. Enter 50.
2. The ETF expense ratio saving. For example, VEIEX ER=0.37% and VWO ER=0.25%. The difference is 0.12%, enter as 12.
3. The investment horizon in years.
4. The expected annual return. If the expected annual return is 8%, enter 8.

When the investment amount to be converted is higher than that calculated, a conversion would be worthwhile (assuming the assumptions are true). Note that as mentioned in the previous post, taxes are not considered in the computations.

ETF Conversion Decision Calculator

 Conversion fee (in \$) Expense ratio saving (in bps; 100 bps = 1%) Investment horizon (in years) Expected return a year (in %) Investment should be at least (in \$)

1. One important point you missed out is the 0.5% load that you get when you sell the mutual fund that you will save with the ETF. Essentially, that would be reason enough to go with the change.

2. indexfundfan (Post author)

Zany, that’s true. For the VEIEX to VWO conversion, the redemption fee alone is probably enough to make the change.

But the calculator is meant to be more generic. An investor thinking of converting is essentially faced with the decision : convert to get the lower ER but have \$50 less to compound over the years OR stick to the mutual fund and has \$50 more to compound, but at a higher ER.

The calculator tries to figure that out. However, it does not take into account the expenses on the redemption part (which could include redemption fees, brokerage commission, trading spread costs, etc).

3. Ted

So if I have \$20k each in VTSMX and VGTSX that I plan to hold for the long haul in an IRA would you recommend I convert this to VTI and VEU?

4. Ted

?

5. indexfundfan (Post author)

Ted,

As far as I know, you can only convert VTSMX (to VTI). VGTSX, which is the Vanguard Total International Stock index fund cannot be directly converted to VEU. But if you want, you can sell VGTSX and buy VEU in two separate transactions.

If you hold for the long haul, and assuming that brokerage fees continues to drop to an insignificant amount in the future, the above calculator helps you to calculate if the lower ER of the ETF is worthwhile to pay the \$50 conversion fee. Basically the choice is between paying \$50 and get the lower ER OR not paying \$50 but continue with the higher ER. Keep in mind that the \$50 itself will also compound into a significant amount in future.

The bid/ask spread comes in only if you need to purchase or sell ETF shares in the open market. It does not apply to mutual fund to ETF conversions, like from VTSMX to VTI.