Tag Archive: ETF

Muni ETFs with in-cash creations

Indexuniverse has an interesting article on in-cash ETF share creations for muni ETFs as opposed to in-kind creations. The article attempts to explain how in-kind creations can help to eliminate ETFs trading premiums in cases where the underlying securities are relatively illiquid.

The following figure shows the trading premiums of the two types of ETFs.

2009-08-06_Etf_cash_creations_heading

2009-08-06_Etf_cash_creations

Clearly allowing cash creations helped to reduce the trading premiums.

It sure looks like there is yet another factor to consider when purchasing ETFs, especially if the underlying assets are illiquid.

Taxable investment-grade bond ETFs

I am looking for an investment-grade bond ETF to round up my portfolio. The criteria I used include the following:

  • Low expenses : the lower the expense ratio, the better.
  • Diversification : for investment grade bond funds, generally the more holdings, the better.
  • Amount of assets & trading volume : generally the larger the better (improves liquidity, smaller trading spreads).
  • Duration : duration is a measure of the sensitivity of the fund price to interest rate changes. At this juncture in the economy, I would prefer not to go too long on duration.
  • Credit quality : no junk bond fund for me.

The ETFs that I narrowed down to include BSV, CSJ, AGG, BIV, CIU and LQD. These are listed in the table below:

From the look of it, I would probably go with CSJ,  the iShares Barclays 1-3 year credit bond ETF.

Review of VEIEX to VWO ETF conversion at VBS

For various reasons already discussed (Should I convert…? and Is it worthwhile to pay the ETF conversion fee?), I recently converted my Vanguard Emerging Markets Index mutual fund holding (VEIEX) to the ETF class of the fund (VWO). The following is a review of the conversion process.

Prior to conversion

My VEIEX holding is in the taxable account with Vanguard. From the prospectus, it is stated that:

If you convert your conventional shares to ETF Shares through Vanguard Brokerage, all conventional shares for which you request conversion will be converted into ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does not impose a conversion fee over and above the fee imposed by Vanguard.

I was especially curious about the “100% tax-free” part because it implies that VBS must be supporting some kind of fractional share tracking. I sent Vanguard a secure email, asking specifically if VBS supports the trading of partial ETF shares. The following is their reply:

With regard to your question, depending on the conversion rate of the fund, it could be possible for you to end up with fractional shares of an ETF. In order to sell fractional shares in your brokerage account, you would need to sell your entire whole share position in the given security. Any remaining fractional shares will automatically be sold on the settlement date of the transaction, which is normally three business days after the trade date. For example, if you own 500.346 shares of XYZ Inc., you would simply enter an order to sell 500 shares of XYZ. When the trade settles three business days later, the fractional shares are automatically liquidated and no additional commissions are charged.

I think their reply is reasonable: VBS does not support the trading of partial shares; but if you sell the entire holding, the partial shares will be liquidated automatically without any additional charge.

Note: I asked the same question on the Bogleheads forum and received answers from jeffarvon and stan1 even before Vanguard replied.

The conversion

I called up Vanguard Flagship service on a Wednesday morning and told the rep what I wanted to do. He first made sure that I already have a VBS account and then transferred me to the VBS department. The VBS rep confirmed the following:

  • No fees for the conversion for Flagship clients.
  • The conversion is completely tax free. Vanguard will exchange fractional shares if necessary.

I was also told that I can enter the cost basis of the tax lots into the system at VBS after the conversion. The tax lots can be broken into fractional share if necessary. I told the rep to go ahead with the conversion.

On Wednesday night, I noticed my VEIEX holding was zeroed out. Under the “Transaction History” tab, an entry with transction type “Conversion from” was added. The mouse-over balloon shows the information on the conversion prices (for VEIEX and VWO) and the number of shares of VWO I would get. At this point, the VWO shares have not been deposited into my VBS account.

On Thursday night, the correct number of VWO shares were deposited into my VBS account.

After the conversion

What that is left for me to do after the conversion is to enter in the tax lot information. I had already prepared this information before hand and calculated the equivalent number of VWO shares for each tax lot in a spreadsheet.

To enter the cost basis, I clicked on the “Cost Basis” link under the VBS account, and then followed by the “Enter cost” link. This takes me to the following page:

2008-04-12-vwo-tax-lots.png

By default, only five lines for data entry are available but more lines can be added by using the “save and insert more lines” link. I successfully entered in 32 tax lots. After I submitted the information, it took one business day for the data to be updated.

Overall, the conversion process was done without any hiccups. The most painful part was actually for me to get information of the 32 tax lots and then enter them into the system.