Bogleheads

[Robert T]

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Here’s a quick update on the five-year tax-efficiency of various value funds to end December 2007 (See table below).

A few observations over the last five years:

1. Tax-efficiency of the value funds (particularly the iShares S&P 400 and S&P 600 Value, and DFA TM Mktwide Value) have not been wildly different from the tax-efficiency of Vanguard TSM.

2. Tax-efficiency of the value ETFs have been better than the DFA TM Targeted Value fund, and similar to the DFA TM Market-wide Value fund. The DFA TM Targeted Value fund had the highest after-tax return (consistent with its highest combined small and value loadings - although I would expect the load-adjusted after-tax returns to be much closer to the other ETFs).

3. I also compared the difference between the 5-yr index return and the 5-yr after-tax return for the iShares S&P 600 value, iShares S&P 400 value and Vangard TSM. The percentage differences were 0.52, 0.58, 0.58 respectively. So implementation has cost between 0.5 to 0.6% of returns for these three funds.

4. Will this relative tax-efficiency of value funds continue – time will tell.

[RaleighStClaire]

Thanks Robert.

For the after-tax numbers what marginal tax rate is assumed here?

[Kenster1]

Thanks for the info.

I would like to throw in one more comparison...

10-YR Returns as of 12/31/07:

Midcap (S&P400) SPDR ETF -- (data per AMEX)
Before-tax: 10.96%
After-tax: 10.40%

Vanguard Total Stock Market -- (data per Vanguard)
Before-tax: 6.25%
After-tax: 5.81%

Vanguard S&P 500 -- (data per Vanguard)
Before-tax: 5.83%
After-tax: 5.41%

=====

Some requirements of the S&P 400 Midcap index:

Financial Viability. Companies should have four consecutive
quarters of positive as-reported earnings, where as-reported
earnings are defined as GAAP Net Income excluding
discontinued operations and extraordinary items.

Public Float. There must be public fl oat of at least 50%.

Adequate Liquidity and Reasonable Price. The ratio of
annual dollar value traded to market capitalization for the
company should be 0.30 or greater. Very low stock prices
can affect a stock’s liquidity.

Sector Representation. Companies’ industry classifications
contribute to the maintenance of a sector balance that is in
line with the sector composition of the universe of eligible
companies within the defi ned market cap range.

Company Type. Constituents must be operating companies.
Closed-end funds, holding companies, partnerships,
investment vehicles and royalty trusts are not eligible. Real
Estate Investment Trusts (REITs) and business development
companies (BDCs) are eligible for inclusion.
_________________
SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

[Robert T]

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RaleighStClaire,

[alec]

Here are the 5 yr after tax returns for Vanguard Mid-Cap Index Fund Investor Shares

Before - 17.24%
After - 17.02%

A quick check of M* for VIMSX, MDY, and IJH, indicates that over last 3 + 5 years, VIMSX has been more tax efficient than the ETFs. VIMSX + IJH haven't been around for 10 years.

- Alec

[stratton]

[Random Walker]

Do the benefits of value tilt outweigh the potential costs in a taxable account? I am very interested in value tilt, but after TIPs and REITs I have no additional room in tax deferred accounts. I would really like to have a small value tilt. Instead I am using tax managed small cap in taxable account. Thanks.

Dave

[stratton]

[daniel]

[SmallHi]

Nice work Robert! Very helpful to update these studies from time to time.

By the way, I think in general the use of Mid Cap Value ETFs (in leu of the Marketwide Value or Large Value DFA funds) gives you the necessary size tilt to equalize Russell/S&P/MSCI/DFA allocations.

sh