Grabiner: Tax-Managed International or Total International?

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Rushmore
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Grabiner: Tax-Managed International or Total International?

Post by Rushmore »

Hello BHs. I am getting ready to "get off the sidelines" and invest some long-held cash. We are in the 33% bracket. If you were in my situation and "starting from scratch," would you choose Tax-Managed International (perhaps adding Emerging Markets separately) or Total International? I understand that Total International is more diversified (e.g., includes emerging markets), though its expense ratio is 6 bps higher.

I understand "grabiner" is knowledgeable about this subject.

Not to complicate matters, but we already have very small positions in Total International Index (L-T gain of $1K) and in FTSE All-World Ex-US Index (L-T gain of $10K).

Thanks - Rushmore
NYBoglehead
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Re: Grabiner: Tax-Managed International or Total Internation

Post by NYBoglehead »

I'd go with Total International Stock Index. Yes, it is 6 bps more expensive the tax-managed fund, but if you look at the portfolio breakdown the tax-managed fund does not have any emerging market exposure and is mostly large caps, where TISM provides exposure to the emerging markets and small caps.
livesoft
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Re: Grabiner: Tax-Managed International or Total Internation

Post by livesoft »

Qualified vs non-qualified dividends are going to be a big deal tax-wise and much more important than the expense ratio difference.

I suppose it will depend on whether one can put VWO and VSS in a tax-advantaged account while leaving VEA in a taxable account.
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letsgobobby
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Re: Grabiner: Tax-Managed International or Total Internation

Post by letsgobobby »

What is the source of the cash and how long have you held it? Why now do you want to invest it?
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Rushmore
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Re: Grabiner: Tax-Managed International or Total Internation

Post by Rushmore »

Hello BHs. All of our tax-advantaged space is basically old 401ks where Vanguard funds are not options. (Vanguard funds may be options in these old 401ks if we were to research the self-directed brokerage options, but we have never put in the effort on that front -- maybe we should?) We have decided not to rollover these old 401ks to allow us to continue doing backdoor Roth IRAs each year.

The source of the cash is long-term savings from my wife and me (mid-30s). Our work years have witnessed the 2001-2002 and 2008-2009 financial crashes, and we've been too chicken to invest. But now we realize, invest we must, there is no other choice.

Thanks - Rushmore
pkcrafter
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Re: Grabiner: Tax-Managed International or Total Internation

Post by pkcrafter »

Welcome, Rushmore. Considering your last post we really need to start from the top, so please follow the suggest portfolio presentation guidelines in this link--

http://www.bogleheads.org/forum/viewtopic.php?t=6212

Were you in the market during the crashes of 2000 and 2008? What was your AA before and after? Please list 401k holdings and available options and Roth holdings.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
letsgobobby
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Re: Grabiner: Tax-Managed International or Total Internation

Post by letsgobobby »

More important than whether or not to use tax advantaged - which is certainly fiddling on the margins - is a disciplined plan whose risk and volatility you can live with. It concerns me that you want to invest now, after a 130% increase in the stock market over four years. What asset allocation are you proposing? Will you be able to stay the course better this time than in 2000 or 2008?
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Re: Grabiner: Tax-Managed International or Total Internation

Post by zotty »

letsgobobby wrote:More important than whether or not to use tax advantaged - which is certainly fiddling on the margins - is a disciplined plan whose risk and volatility you can live with.
Agree. We all make money mistakes, but it's important to learn from them. What happens if this rally turns out to be transient? Something bad happens in europe and we sink again? Would it be a money mistake to invest now? If you sell low again, yes. it would be a repeat.

This happens to a lot of people, including me. Bogleheads provide a rational strategy to deal with this, but in the end, it takes nerves of steel. I don't have nerves of steel either, but manage to make fewer (smaller) money mistakes that i would have otherwise. I still screw up, but now my screw ups are at the margin. Why? because I have a strategy and i believe in it.

It's the #1 thing.
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Rushmore
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Re: Grabiner: Tax-Managed International or Total Internation

Post by Rushmore »

Hello BHs. Thanks for all of the replies. I will do a proper portfolio post so you guys and gals can have the full picture. To answer one question, we are in mid-30s, and we never "bailed" on the market because we have never invested to begin with. (We've just been saving in short-term cash vehicles, like bank products, short-term bond funds, etc.)

Thanks - Rushmore
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grabiner
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Re: Grabiner: Tax-Managed International or Total Internation

Post by grabiner »

Here's my most recent estimate of the differences:

Tax-Managed fund recommendations given new tax laws

First, you need to decide what international stocks you want to hold. Total International includes both large-caps and small-caps from developed and emerging markets. Tax-Managed International includes only large-caps from developed markets; if you want small-caps or emerging markets, you have to add them separately with Emerging Markets Index and FTSE All-World Ex-US Small-Cap (preferably as the ETF VSS). 65% TM International, 20% Emerging Markets Index, and 15% FTSE Small-Cap is an approximately equivalent allocation to Total International.

According to my estimates in that article, the three-fund combination would save eight basis points annually in a 33% tax bracket, but you may have your own capital gains costs in rebalancing it. If you want to hold a total-market portfolio, I would still recommend Total International for simplicity and to reduce. If you want to overweight small-cap and emerging markets, you'll need a three-fund portfolio anyway, and you might as well use TM International as the core.

I do overweight small-cap and emerging markets, and I use the three-fund portfolio (actually four with EEMS for emerging markets small-cap).
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letsgobobby
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Re: Grabiner: Tax-Managed International or Total Internation

Post by letsgobobby »

livesoft wrote:Qualified vs non-qualified dividends are going to be a big deal tax-wise and much more important than the expense ratio difference.

I suppose it will depend on whether one can put VWO and VSS in a tax-advantaged account while leaving VEA in a taxable account.
how do you TLH from VEA?
livesoft
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Re: Grabiner: Tax-Managed International or Total Internation

Post by livesoft »

Many ways, but one could use as replacement shares:
FSIVX, EFA, VEU, VXUS, (VGK+VPL), etc. depending on how close one wanted to get to VEA.
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Rushmore
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Re: Grabiner: Tax-Managed International or Total Internation

Post by Rushmore »

Thank you David Grabiner. Very helpful post, in fact an amazing analysis that Vanguard ought to publish on its website in its tax center. Every Vanguard CFP ought to have this one down given the number of huge accounts at Vanguard; they don't currently.

One follow-up question: I can follow your math -- 8 bps annually in using the three-fund international combination vs. Total International in the 33% bracket is worth something, but I do wonder if it is worth the extra complexity and portfolio management. Herein lies the judgment I suppose. Would you or others put the benefit in the category of "life is too short" or worthwhile?

Incidentally, do some folks take the approach of "tilting" by holding Total International and then holding Emerging Markets and International Small-Cap as well?

Thanks - Rushmore
letsgobobby
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Re: Grabiner: Tax-Managed International or Total Internation

Post by letsgobobby »

Rushmore wrote:Thank you David Grabiner. Very helpful post, in fact an amazing analysis that Vanguard ought to publish on its website in its tax center. Every Vanguard CFP ought to have this one down given the number of huge accounts at Vanguard; they don't currently.

One follow-up question: I can follow your math -- 8 bps annually in using the three-fund international combination vs. Total International in the 33% bracket is worth something, but I do wonder if it is worth the extra complexity and portfolio management. Herein lies the judgment I suppose. Would you or others put the benefit in the category of "life is too short" or worthwhile?

Incidentally, do some folks take the approach of "tilting" by holding Total International and then holding Emerging Markets and International Small-Cap as well?

Thanks - Rushmore
I tilt to VSS but not emerging markets, and I don't currently use VEA. I will probably make the switchover with new money starting this year.
sscritic
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Re: Grabiner: Tax-Managed International or Total Internation

Post by sscritic »

Rushmore wrote:T
Incidentally, do some folks take the approach of "tilting" by holding Total International and then holding Emerging Markets and International Small-Cap as well?
Only half of that, and that was by accident. If you tilt by accident, is that a tilt or just an accident?
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Re: Grabiner: Tax-Managed International or Total Internation

Post by livesoft »

Rushmore wrote:Incidentally, do some folks take the approach of "tilting" by holding Total International and then holding Emerging Markets and International Small-Cap as well?
But of course! That's the natural way to do it.
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grabiner
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Re: Grabiner: Tax-Managed International or Total Internation

Post by grabiner »

Rushmore wrote:Thank you David Grabiner. Very helpful post, in fact an amazing analysis that Vanguard ought to publish on its website in its tax center. Every Vanguard CFP ought to have this one down given the number of huge accounts at Vanguard; they don't currently.

One follow-up question: I can follow your math -- 8 bps annually in using the three-fund international combination vs. Total International in the 33% bracket is worth something, but I do wonder if it is worth the extra complexity and portfolio management. Herein lies the judgment I suppose. Would you or others put the benefit in the category of "life is too short" or worthwhile?
You have to see what 8 basis points is, and whether it's worth your time. 8 basis points on a $100K investment is $80, which may not be worth it; you'll lose some of that $80 to trading spreads (expect to lose about 0.1% every time you buy or sell VSS), and your time is worth something. 8 basis points on a $500K investment is $400, and that's worth spending a few hours on.
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rehoman
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Re: Grabiner: Tax-Managed International or Total Internation

Post by rehoman »

If I were to start now I would have all my international exposure in just two funds:

1. Vanguard Tax Managed International (I've been in this for years and the distributions are minimal)

2. Schwab Emerging Markets ETF (I am in Vanguard's ETF, but Schwab's expense ratio is just 0.15 percent, undercutting Vanguard)

I swore off managed international funds years ago and never looked back.

Just my thoughts. -rehoman
Vanguard investor since 1984.
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Kevin M
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Re: Grabiner: Tax-Managed International or Total Internation

Post by Kevin M »

I would just go with Total International.

I added a tiny tilt to international small with VSS between August and October 2011, when it seemed to be "on sale". Lowest price paid was a little under $75; would have bought more if it dropped to $70. Not a Boglehead approach, but I wanted to dip my toe in the small international water, and you asked, so I'm sharing.

Since then VTI has done much better than VSS, but I didn't even realize that before I checked just now; less than two years is too short of a time to matter. EDIT: :oops: I compared to the wrong fund! Turns out VXUS has done a little better than VSS, but of course US (VTI) has done much better since mid 2011. On the other hand international (especially Europe) has done better since last May, when I last rebalanced into international.

If I were to sell international for rebalancing purposes (which I have been doing lately, and will be doing more of), I would not sell VSS, but instead some of the international funds holding large-cap stocks.

My target is to own market weight of emerging markets, but I do own some separate developed and emerging market funds as a result of tax-loss harvesting. I also own Europe and Pacific funds in a 60/40 ratio, also mostly because of tax-loss harvesting as I recall.

Kevin
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grabiner
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Re: Grabiner: Tax-Managed International or Total Internation

Post by grabiner »

rehoman wrote:If I were to start now I would have all my international exposure in just two funds:

1. Vanguard Tax Managed International (I've been in this for years and the distributions are minimal)

2. Schwab Emerging Markets ETF (I am in Vanguard's ETF, but Schwab's expense ratio is just 0.15 percent, undercutting Vanguard)
This is a good plan, but you are missing developed small-cap, as Vanguard's fund has no small-cap and Schwab's IEMG does. You might add VSS to get small-cap with a slight overweight in emerging small-cap, or use Schwab's SCHC for developed-only small-cap.

I am in a similar situation. I currently hold Vanguard's TM International, Emerging Markets, and FTSE Small-Cap, and iShares' EEMS for emerging markets small-cap. If I were starting over, I might use IEMG (although I am concerned that it either won't last or will increase expenses); not only is it less expensive than Vanguard's fund, but it includes small-caps, which would reduce the amount I need of the very expensive EEMS. However, I have huge gains in Vanguard Emerging Markets and thus can't switch for the potential small savings.
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Kevin M
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Re: Grabiner: Tax-Managed International or Total Internation

Post by Kevin M »

In addition to the expense ratios, things to consider when using ETFs instead of mutual funds, or one ETF instead of a comparable one, are the bid/ask spread and the premium/discount. The former is a definite expense, the cost of which, relative to ER, decreases the longer the holding period. The latter is simply an additional risk; i.e., that you may buy at a higher premium/discount than when you sell; this too has a declining impact as holding period increases.

I recall the bid/ask spreads on the Schwab ETFs being higher than the comparable Vanguard ETFs, but it has been a year or two since I paid attention to this.

Kevin
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Rushmore
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Re: Grabiner: Tax-Managed International or Total Internation

Post by Rushmore »

Thanks all. This was a good discussion of the various "recipes" for doing international exposure. After reading through the various threads, I feel pulled between trying to be clever (i.e., using multiple funds to create the highest after-tax return) and Taylor's the "majesty of simplicity" (i.e., just using Total International and fuggedaboutit).

Thanks - Rushmore
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