Some investors are receiving notices that their mutual funds are converting to exchange-traded funds (ETFs). That’s generally good news, but there can be complications.

Since 2021, about 40 mutual funds with more than $60 billion have converted, including funds run by Fidelity, Franklin Templeton and JPMorgan. These companies are hoping the conversion will attract assets because investing in an ETF has advantages over investing in mutual funds, including…

Better tax efficiency. According to The Wall Street Journal, ETFs provide an extra 0.2 percentage points a year, on average, in post-tax performance. That can quickly add up over time.

Lower annual expense ratios. ETFs usually don’t tack on marketing and distribution fees as many mutual funds do.

Trading flexibility. ETF shares can be traded intra-day like stocks. Mutual funds trade only once a day.

When a mutual fund converts to an ETF, your fund manager continues to invest with the same style and hold all the same investments. The conversion is a tax-free event, and your total investment amount remains the same. But there are three caveats to keep in mind…

ETFs must be traded and held in a brokerage account. If you don’t keep your mutual fund at a brokerage firm, you may have to transfer ETF shares.

ETFs are sold in round lots, unlike mutual funds, which allow investors to buy and sell fractions of one share. In a conversion, you may have to liquidate your fractional mutual fund shares.

ETFs can’t close to new investors if they suddenly draw inflows of assets. A bloated ETF can be a problem if it invests in small companies—the manager may have too much money to execute his/her investing style.

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