R Wins wrote:
See Principles of Tax-Efficient Fund Placement.
I have seen this reference many times throughout this site but the reference confuses me because the article is inconsistent with many Vanguard fund Asset Classes in regard to the tax efficiency rating from Lipper Leaders Ratings. For example, a Large Cap Value fund should be efficient according to the Principles of Tax-Efficient Fund Placement, however it scores relatively low on tax efficiency with the Lipper Leader Ratings. Can anyone please clarify?
A large-cap value ETF
(including a Vanguard fund with an ETF class) is relatively tax-efficient, because the ETF structure allows it to avoid capital gains, It is still less tax-efficient than a blend index because of a higher dividend yield, although the lower tax rate on qualified dividends means that the higher dividend yield doesn't cost as much.
Most large-cap value funds are tax-inefficient. When a value stock rises in price, it often becomes a growth stock, and value funds will sell it, leading to tax bills on capital gains. Thus, even though there haven't been many capital gains in recent years (because 2007-2009 gave funds large losses to offset against gains), Vanguard's actively managed value funds have a significantly higher 10-year tax cost than Value Index does.