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Question to owners of the Vanguard Midcap Index fund/ETF

Bogleheads Forum Index -> Investing - Help with Personal Investments

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hisairness

Joined: 24 Mar 2007
Posts: 22

Posted: Tue Nov 03, 2009 8:56 pm Post subject: Question to owners of the Vanguard Midcap Index fund/ETF

To those who own the Vanguard Midcap Index Fund (VIMSX) or ETF (VO), do you have it in a taxable or tax-deffered account?

joe8d

Joined: 20 Feb 2007
Posts: 1000
Location: Buffalo,NY

Posted: Tue Nov 03, 2009 9:04 pm Post subject:

Taxable. _________________ All the Best, Joe

EmergDoc

Joined: 02 Mar 2007
Posts: 4938
Location: Home sweet home

Posted: Wed Nov 04, 2009 6:08 am Post subject: Re: Question to owners of the Vanguard Midcap Index fund/ETF

hisairness wrote:

To those who own the Vanguard Midcap Index Fund (VIMSX) or ETF (VO), do you have it in a taxable or tax-deffered account?

I'm noticing a trend. Why not list all your funds and we'll rank them in order from most tax-inefficient to least tax-efficient. Or you could visit the wiki:

http://www.bogleheads.org/wiki...._Placement
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hisairness

Joined: 24 Mar 2007
Posts: 22

Posted: Wed Nov 04, 2009 11:20 am Post subject: Re: Question to owners of the Vanguard Midcap Index fund/ETF

EmergDoc wrote:

I'm noticing a trend. Why not list all your funds and we'll rank them in order from most tax-inefficient to least tax-efficient.

Sure.

Taxable:
Vanguard Tax Managed Growth & Income (VTGIX) [7.5%]
Vanguard Tax Managed Small Cap (VTMSX) [7.5%]
Vanguard FTSE All World ex-US (VEU) [6%]
Bridgeway Ultra Small Co. Market (BRSIX) [5%]
Vanguard Tax-Exempt Mass. Munis (VMATX) [5%]

Roth IRA
Vanguard Large Value ETF (VTV) [5%]*
Vanguard Midcap Index ETF (VO) [5%]*
Vanguard Midcap Value ETF (VOE) [5%]*
Vanguard Small Cap ETF (VBR) [5%]
iShares Intl. Value (EFV) [6%]*
Vanguard Intl. Small Cap ex-US (VSS) [6%]*
Wisdomtree Small Cap Intl. (DLS) [6%]*
Vanguard Emerging Markets ETF (VWO) [6%]*
Vanguard REIT Index ETF (VNQ) [10%]*
Vanguard Total Bond Market (VBMFX) [7.5%]
Vanguard Infl. Prot. Sec. Fund (VIPSX) [7.5%]

Target Allocations are in []. The '*'s next to the percentages mean they aren't fully funded yet. The two tax-managed funds are over their target percentages but I don't want to sell them.

Both accounts held at TD Ameritrade. I have ~ $5500 in my Taxable account for cash, so I could make VO a full position. I initially looked at the 10 yr. returns with and without taxing distributions and saw quite a noticeable difference with VO (and BRSIX for that matter).

My goal was to grow the $5500 to $20,000 using Investors Business Daily's methods to repay the "loan" I made from my bank account, but I'm finding that difficult as some of the stocks I picked using Investors Business Daily (IBD) didn't perform as well as my index/ETFs did this year.

grabiner

Joined: 20 Feb 2007
Posts: 2798
Location: Columbia, MD

Posted: Wed Nov 04, 2009 9:13 pm Post subject: Re: Question to owners of the Vanguard Midcap Index fund/ETF

hisairness wrote:

EmergDoc wrote:

I'm noticing a trend. Why not list all your funds and we'll rank them in order from most tax-inefficient to least tax-efficient.

Here are some recommendations based onPrinciples of Tax-Efficient Fund Placement on the Bogleheads Wiki.

Replace the municipal bond fund with a corporate fund such as Total Bond Market in tax-deferred; you pay an effective tax cost by holding munis. You can compensate by dropping the small-cap ETF in your taxable account and adding more to Tax-Managed Small-Cap.

Get Bridgeway Ultra-Small Company Market out of the taxable account; it has distributed capital gains every year, and they are getting larger. (And according to M*, it still has a net capital gain.)

My next choice for the taxable account would be Mid-Cap Index, followed by Emerging Markets Index; the foreign tax credit is useful. After that, I would add the international small-cap ETF; I don't know how tax-efficient it will be, but Vanguard's latest estimate is a 1% distribution, which would be very good for an ETF in its first year in a tax-inefficient asset class, and would suggest that it may never distribute another gain.

If you can do it without paying capital-gains tax, you might also replace VEU in taxable with Tax-Managed International or its ETF class VEA; you hold emerging markets separately anyway, and Tax-Managed International has lower expenses and 100% qualified dividends.

Quote:

I initially looked at the 10 yr. returns with and without taxing distributions and saw quite a noticeable difference with VO (and BRSIX for that matter).

The 10-year data is not reliable for VO (Mid-Cap ETF); the fund changed indexes during that time, and the ETF class reduces capital gains.

(edited to make minor correction of fund order)
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David Grabiner

hisairness

Joined: 24 Mar 2007
Posts: 22

Posted: Thu Nov 12, 2009 4:55 pm Post subject: Re: Question to owners of the Vanguard Midcap Index fund/ETF

grabiner wrote:

Replace the municipal bond fund with a corporate fund such as Total Bond Market in tax-deferred; you pay an effective tax cost by holding munis.

Thanks David for getting back to me on this. Can you please explain why I pay an effective tax cost by holding munis? It's not clear to me.

grabiner

Joined: 20 Feb 2007
Posts: 2798
Location: Columbia, MD

Posted: Thu Nov 12, 2009 9:20 pm Post subject: Re: Question to owners of the Vanguard Midcap Index fund/ETF

hisairness wrote:

grabiner wrote:

Replace the municipal bond fund with a corporate fund such as Total Bond Market in tax-deferred; you pay an effective tax cost by holding munis.

Thanks David for getting back to me on this. Can you please explain why I pay an effective tax cost by holding munis? It's not clear to me.

If a corporate bond yields 5% and you hold it in a taxable account in a 25% tax bracket, your tax cost is 1.25%. If you avoid the taxes by holding a municipal bond of comparable risk yielding 4% instead, you do a bit better, but you have still lost 1% in returns by holding bonds in your taxable account. The 1% is an effective tax cost; it is not a cost paid in taxes, but a cost paid in order to avoid the taxes.

This effective tax cost is the reason that it is better to hold a tax-efficient stock fund in a taxable account and a corporate bond fund in an IRA, rather than a municipal bond fund in a taxable account and a stock fund in an IRA.
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David Grabiner

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