IWN vs VBR for SCV tilt

[15202guy]

In my portfolio review thread, I indicated that I was considering using IWN (iShares Russell 2000 Value Index ETF) to add an SCV tilt to my portfolio. One poster suggested looking instead at VBR (Vanguard Small-Cap Value ETF) because of its lower expense ratio (.37% for IWN vs .21% for VBR). However, my previous research (on this site) led me (perhaps erroneously) to the conclusion that IWN was the preferred choice because it was more faithful to the small and value asset classes and did not overweight real estate. However, now that I am studying the specifics of the two funds, I am not so sure...certainly, it is true that IWN is "smaller" and "more valuey" and has less real estate, but in comparison to VBR, the differences seem minimal. So I thought it might be worth revisiting this issue...which is preferred? Or is there a better option? Personally, I will be investing in Fidelity (so iShares trade free, other trades are $8), if this makes a difference.

[livesoft]

What happened to IJS? I used to use IJS/VBR as a tax-loss harveting pair, but since VBR now has a huge unrealized gain I don't look at this stuff anymore.

Actually, I am worried about the research tools at Fidelity now if you came across IWN and not IJS. What's up with Fidelity? Are they broken?

[15202guy]

What happened to IJS? I used to use IJS/VBR as a tax-loss harveting pair, but since VBR now has a huge unrealized gain I don't look at this stuff anymore.

Actually, I am worried about the research tools at Fidelity now if you came across IWN and not IJS. What's up with Fidelity? Are they broken?

I did look at IJS (S&P Small-Cap 600 Value ETF) as well, but my reading of the numerous posts on these funds still led me to IWN. My impression is that there was more contention between whether IWN or IJS was the better choice, but the VBR fans seemed to be clearly outnumbered.

Don't infer anything at all about the Fidelity research tools...I started researching here by looking at SCV fund recommendations, not by using a Fidelity screening tool. And ironically, I used Vanguard's comparison tool to look at the particulars of each fund (just by chance, not because of an explicit preference over Fidelity's tools).

[livesoft]

Here you go: http://www.google.com/search?rls=en&q=i ... eheads.org

[Cuzz35]

Keep in mind this fund is changing it's benchmark or is set to change it. If I remember correctly from an earlier thread,this change removed REITs from the fund.

[15202guy]

Here you go: http://www.google.com/search?rls=en&q=i ... eheads.org

livesoft, with all due respect, I've done the search and read the threads. But I guess I came to a different conclusion than you did. If you would like to highlight some specific threads or posts, that would be helpful and appreciated.

[15202guy]

Keep in mind this fund is changing it's benchmark or is set to change it. If I remember correctly from an earlier thread,this change removed REITs from the fund.

By "this fund" do you mean VBR?

[Cuzz35]

Keep in mind this fund is changing it's benchmark or is set to change it. If I remember correctly from an earlier thread,this change removed REITs from the fund.

By "this fund" do you mean VBR?

Yes. It is a different share class of the mutual fund so I assume all share classes would change.

[Ketawa]

Keep in mind this fund is changing it's benchmark or is set to change it. If I remember correctly from an earlier thread,this change removed REITs from the fund.

By "this fund" do you mean VBR?

Yes. It is a different share class of the mutual fund so I assume all share classes would change.

I do not believe this is correct. I looked through the CRSP Index Methodology Guide and couldn't find anything saying that REITs are excluded from any capitalization or style indexes. The CRSP indexes do exclude BDCs.

Also just wanted to note that the expense ratio of VBR is 0.21%. This is the "Total Annual Fund Operating Expenses". However, 0.11% is due to "Acquired Fund Fees and Expenses" from BDCs. The real expense ratio of VBR is 0.10%. I would expect the reported expense ratio to drop quite a bit once the transition to the CRSP index is complete.

[Cuzz35]

Keep in mind this fund is changing it's benchmark or is set to change it. If I remember correctly from an earlier thread,this change removed REITs from the fund.

By "this fund" do you mean VBR?

Yes. It is a different share class of the mutual fund so I assume all share classes would change.

I do not believe this is correct. I looked through the CRSP Index Methodology Guide and couldn't find anything saying that REITs are excluded from any capitalization or style indexes. The CRSP indexes do exclude BDCs.

Also just wanted to note that the expense ratio of VBR is 0.21%. This is the "Total Annual Fund Operating Expenses". However, 0.11% is due to "Acquired Fund Fees and Expenses" from BDCs. The real expense ratio of VBR is 0.10%. I would expect the reported expense ratio to drop quite a bit once the transition to the CRSP index is complete.

You are right. My mistake. I just finished rereading the original post.

[livesoft]

This probably showed up in other links, but Eric Haas's site is always nice to check when looking for funds in an asset class.
http://www.altruistfa.com/USsmallcapvaluefunds.htm

[igghy]

........but since VBR now has a huge unrealized gain I don't look at this stuff anymore....

What happens if you buy shares in a fund with a huge unrealized gains? Thank you.

[Don Christy]

........but since VBR now has a huge unrealized gain I don't look at this stuff anymore....

What happens if you buy shares in a fund with a huge unrealized gains? Thank you.

I think Livesoft is saying that HE has large unrealized gains from holding VBR now and so no longer looks for alternatives in this asset class for tax loss harvesting.

Apologies if this is incorrect.
Don

[livesoft]

^ Don has it right.

[igghy]

Thank you.

[grabiner]

........but since VBR now has a huge unrealized gain I don't look at this stuff anymore....

What happens if you buy shares in a fund with a huge unrealized gains? Thank you.

Eventually, the fund may sell the stocks with unrealized gains, and turn them into realized gains, which are taxable to you. However, with most ETFs, this isn't likely, because the shares with gains can be given away in redemptions.

In any case, VBR itself has a large realized loss to offset any gains it realizes, and a small unrealized gain. As other posters have mentioned, livesoft's issue is that he can't switch because of his own gain.

[igghy]

^Thank you. That's what I was wondering. I don't quite understand. If the fund's cost basis is $100M, unrealized capital gains $100M when I buy a share for $100, how does that play out?

[grabiner]

^Thank you. That's what I was wondering. I don't quite understand. If the fund's cost basis is $100M, unrealized capital gains $100M when I buy a share for $100, how does that play out?

An unrealized gain is the difference between what was paid for an asset and what the asset is now worth. When the asset is sold, that is a realization of the gain, and tax is owed. Thus an unrealized gain represents a potential tax burden.

In your example, the fund's net assets would be $200M, with a cost basis of $100M and another $100M in unrealized gains. Suppose that 2% of the fund is in the XYZ Corporation, which is now trading at $20; your own $100 investment thus includes $2 worth of XYZ, or 1/10 of a share. If the fund bought XYZ for $10, then it has an unrealized gain of $10 per share of XYZ. If it sells the XYZ stock, it has a capital gain of $10 per share, and tax is owed on that $10. The fund does not pay taxes itself; instead, it will make a capital-gains distribution at the end of the year; with your one share of the fund, you own $1 of the capital gain and will pay tax on that $1.

But you only pay tax if the gain is realized by a sale. If you hold a stock and never sell it, you don't pay any tax. If you give the stock to charity, the IRS does not consider it to be sold, and you don't pay any tax.

Similarly, if a fund never sells the stock (which is a common situation for index funds), you don't pay any tax. If the fund gives the stock away (which is what happens in an ETF redemption), the unrealized gain disappears. Thus most stock ETFs rarely distribute capital gains.

You will still owe taxes on your own gains in an ETF, and this is the reason for livesoft's quote. If he bought VBR at $40, then he will have a big tax bill when he sells, because the fund is now worth $71.37. Thus he doesn't want to sell the fund to switch to another fund, as he will have less money to reinvest after paying taxes. Presumably, he plans to sell the fund when he needs the money (likely in retirement).

[igghy]

I am good with ETF/fund share price going up after I buy and getting CG. What I don't understand is how a fund's unrealized gains affect me when I buy. In your example, When I buy a share of the fund, doesn't the share price reflect the increased market value of XYZ cooperation at the moment? Or somehow I pay a higher price for the fund because of the unrealized gain and yet I don't benefit from it?

[grabiner]

I am good with ETF/fund share price going up after I buy and getting CG. What I don't understand is how a fund's unrealized gains affect me when I buy. In your example, When I buy a share of the fund, doesn't the share price reflect the increased market value of XYZ cooperation at the moment? Or somehow I pay a higher price for the fund because of the unrealized gain and yet I don't benefit from it?

The price of a mutual fund is the net asset value, which is the market value of all its holdings. The price of an ETF is usually close to that value, because institutions can convert the ETF to the individual holdings or vice versa. Thus, if a mutual fund has one billion shares outstanding and owns stocks worth $20B, you can buy one share for $20 whether the fund's basis in those shares is $10B (with $10B unrealized gain) or $20B (with no unrealized gain). If you hold the fund in an IRA, you don't care. If you hold it in a taxable account, the fund with the large unrealized gain has a larger potential tax bill, and thus lower potential after-tax returns, although it usually won't matter if the fund is an ETF or low-turnover index.