Vanguard Tax-Managed Small Cap Fund Tax Distributions
| Vanguard Funds: Distributions |
|---|
 |
| Fund Distributions |
| Data Sources |
| Favorable tax factors
|
Unfavorable tax factors
|
|---|---|
|
Historical gains distributions : None |
Stock Migration: High |
The Vanguard Tax-Managed Small Cap Fund is a very suitable candidate for placement in taxable accounts. The fund is specifically designed for taxable accounts (the fund is not eligible in IRA accounts.) The fund tracks the S&P 600 index of US small company stocks and is one of three passively managed Vanguard small cap funds. The fund is a suitable option for filling a small cap blend allocation in a portfolio as the Figure 1. chart of the Schultheis's "Coffeehouse" portfolio illustrates.
|
|
The following tables provide long term data on the fund's history of both dividend and capital gains distributions. The first table also provides the historical distribution of qualified dividends.
The second table provides a database of the fund's accounting figures: the annual level of realized and distributed gains; its level of unrealized gains and loss carryforwards; as well as the annual in-kind redemption gains the fund has realized. These figures highlight the level of a fund's tax liabilities.
Because both manager turnover of securities inside the portfolio and investor turnover of fund shares can affect the level of gains realization, a third table provides historical turnover ratios.
Contents |
Distributions
The following table provides a view of the fund's historical distributions expressed in terms of yields. We can see that the fund has not distributed a capital gain since its inception in 1999. The fund has distributed 100% qualified dividends, which under the current tax regime, are taxed at lower capital gains tax rates.
| Year | Dividend [1] | Short-term Capital Gains [2] | Long-term Capital Gains [2] | Qualifying Dividends[3] | (FY) Annual Return [4] |
| 2012 | 1.59% | 0.00% | 0.00% | 100.00% | 16.03% |
| 2011 | 0.88% | 0.00% | 0.00% | 100.00% | 1.22% |
| 2010 | 0.98% | 0.00% | 0.00% | 100.00% | 25.99% |
| 2009 | 0.79% | 0.00% | 0.00% | 100.00% | 25.59% |
| 2008 | 1.16% | 0.00% | 0.00% | 100.00% | -20.82% |
| 2007 | 0.86% | 0.00% | 0.00% | 100.00% | 0.51% |
| 2006 | 0.78% | 0.00% | 0.00% | 100.00% | 14.51% |
| 2005 | 0.92% | 0.00% | 0.00% | 100.00% | 7.74% |
| 2004 | 0.96% | 0.00% | 0.00% | 100.00% | 22.84% |
| 2003 | 0.77% | 0.00% | 0.00% | n/a | 38.51% |
| 2002 | 0.68% | 0.00% | 0.00% | n/a | -14.44% |
| 2001 | 0.63% | 0.00% | 0.00% | n/a | 5.44% |
| 2000 | 0.64% | 0.00% | 0.00% | n/a | 13.44% |
| 1999 | 0.70% | 0.00% | 0.00% | n/a | 26.28% |
Accounting statistics
The accounting figures and associated ratios (tables 3 and 4) can help one visualize some of the major determinants of a fund’s tendency to distribute taxable gains. These determining features include:
Turnover: The rate at which a fund manager sells securities within the fund has a major effect on potential gains realization. Single digit annual fund turnover percentages result in a low rate of realized gains. Similarly, fund shareholders' sales flows have major effects on a fund’s distribution tendencies. Net flows into the fund have the following effects:
- Constant inflows allow a fund manager to purchase a wide range of price lots for shares. The manager can select high basis shares when forced to sell a stock (this may realize a loss). The manager can also select low basis shares when redeeming a stock in-kind (a non-taxable transaction that can remove an unrealized gain out of the portfolio.) This redemption technique is primarily employed with institutional creation and redemption of ETF shares. [5] Net inflows mean that shareholders are not forcing the manager to liquidate assets (and realize gains or losses) in order to meet redemptions. Large outflows can force such liquidation.
- A large and growing net asset base serves to diffuse any realized capital gains across a large base of shareholders and reduces the per share gain distribution. Large outflows have the opposite effect; any gains realized are spread across a smaller asset base and result in higher per share distributed gains. [6]
The level of unrealized gains and carryover realized losses in a fund: Index funds defer gains realization and often accumulate significant unrealized appreciation, which if distributed, would be taxed; thus the unrealized gain/loss figure shows the potential gain (or loss) that would be realized if the portfolio was to be entirely liquidated. Any loss carryovers a fund possesses can be used to offset future realized gains (carryovers have an eight year expiration period).
|
(view Google Spreadsheet in browser or download as xls, ods, or pdf) |
|
Net sales/redemptions: This statistic reveals whether investors are net buyers or sellers of the fund. Realized gain/loss: A realized capital gain/loss is an increase (or decrease) in the value of a security that is "real" because the security has been sold by the portfolio manager. The capital gains/losses are "realized" by the fund, and any distributions to the shareholder as a result of realized gains (adjusted for any realized losses) are taxable during the tax year in which the security was sold. Realized losses can be used to offset realized gains in an attempt to reduce taxable gains. If realized losses are higher than realized gains, a fund can "carry forward" these excess losses to offset future gains. In-kind redemption gains are included as gains in this statistic. As these gains are not taxable, they must be deducted from the realized/gain tally to reflect the net gain/loss for the year. (see tax attributes for the net gain computation). Distributed gains: A net realized gain will be distributed to shareholders as a capital gains distribution. Unrealized gain/loss: An unrealized capital gain/loss (also called a "paper profit or loss") is an increase (or decrease) in the value of a security that isn't "real" because the security hasn't been sold. When a portfolio manager sells a security, however, the capital gains/losses become "realized" by the fund, and any realized gains (net of any losses) are taxable during the tax year in which the security was sold. Funds with low turnover rates, such as index funds, tend to have more unrealized gains than actively managed funds and are less likely to pass taxable gains on to investors. A fund's unrealized appreciation or depreciation figures are valuable because they can give an idea of whether a fund would need to distribute any gains if all of its securities were sold. Such information may help you determine your potential exposure to taxable distributions. This statistic is volatile, and will increase or decrease depending on market returns. Loss carryforward: Realized losses can be “carried forward”, over a set span of years, to offset any future net realized gains. In-kind redemptions: Instead of selling securities, a portfolio manager may elect to distribute securities in-kind to redeeming shareholders. Unlike a sale, an in-kind transfer is not taxable. This technique is frequently used in the ETF creation/redemption process. For institutional redemptions, a portfolio manager can select low-basis securities to transfer (removing the embedded tax liability) from the portfolio. |
Turnover
Reference article: Average net assets
|
(view Google Spreadsheet in browser or download as xls, ods, or pdf) |
|
Average net assets: Average net assets are derived from NSAR reports from the EDGAR database. Redemptions: The dollar amount of fund shares sold by shareholders. Sales: The dollar amount of fund shares bought by shareholders. Turnover: The rate at which the fund manager sells securities within the portfolio. The reciprocal of this number reflects the average holding period of the portfolio. Low turnover often results in low capital gains realization. R/ANA: The redemptions/average net assets (R/ANA) ratio reflects how fund shareholders are turning over their holdings in the fund. It is analogous to the investment manager's turnover ratio. R/S: The redemption/sales ratio (R/S) illustrates whether investors are net buyers or sellers of the fund. A ratio of less than 1 means that investors are net purchasers of the fund. A ratio more than one means investors are net sellers of the fund. The R/ANA and R/S ratios, viewed together, can signal market timing activity within a fund. For example a fund showing an R/ANA ratio of 400% and an R/S ratio of 1 (equal buys and sells) is likely being market timed by fund shareholders. |
Tax rates
Mutual fund distributions will be taxed according to the tax laws governing the investment over the holding period of the investment, which are subject to change. The actual tax imposed will depend upon each individual's tax rate and the timing of purchases and sales. The federal tax rates applicable to mutual fund distributions and investor sales of securities for the period 2013 onward are outlined below. Keep in mind that investment income may also be subject to state and local taxation.
- Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates up to 39.6%. Mutual fund short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
- Long-term capital gains distributions are made from realized gains on securities held for more than one year. Long-term gains are taxed at 0% for taxpayers in the 10% and 15% tax brackets, at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets, and at 20% in the 39,6% tax bracket. They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
- Qualified dividends are the ordinary dividends [7] that are subject to the same tax rate that applies to long-term capital gains. They should be shown in box 1b of the Form 1099-DIV you receive.
- When you sell at a loss you will either offset capital gains which would have otherwise been taxed at your capital gains rate or you will offset income (up to $3,000 maximum per year) which would have otherwise been taxed at your marginal income tax rate, or both. If you offset capital gains that would have otherwise not been taxed at all (because your capital gains tax rate is 0%) then this part of the tax loss harvest may be an outright loss.
- The Affordable Care Act imposes a Medicare surcharge of 3.8% on all net investment income (NII) once the taxpayer's adjusted gross income exceeds $200,000 (single) or $250,000 (married); while this tax is not part of the income tax, it has the same effect on investors as a higher tax rate. The NII tax begins to apply to individuals falling in the 33% tax bracket. Thus the top effective marginal tax rate is 23.8% on qualified dividends and long-term gains, 43.4% on ordinary investment income.
| Taxable income up to this level | Tax rate | |||
|---|---|---|---|---|
| Single | Married filing joint | Head of Household | Ordinary income | Long-term gains and qualified dividends |
| $8,925 | $17,850 | $12,750 | 10% | 0% |
| $36,250 | $72,500 | $48,600 | 15% | 0% |
| $87,850 | $146,400 | $125,450 | 25% | 15% |
| $183,250 | $223,050 | $203,150 | 28% | 15% |
| $398,350 | $398,350 | $398,350 | 33% | 15% |
| $400,000 | $450,000 | $425,000 | 35% | 15% |
| above | above | above | 39.6% | 20% |
In addition, there is a 3.8% Medicare tax rate on investment income in excess of an adjusted gross income of $200,000 ($250,000 for married filing jointly), and 0.9% on salary and self-employment income in excess of this level.
| Taxable income up to this level | Tax rate | |||
|---|---|---|---|---|
| Single | Married filing joint | Head of Household | Ordinary income | Long-term gains and qualified dividends |
| $8,700 | $17,400 | $12,400 | 10% | 0% |
| $35,350 | $70,700 | $47,350 | 15% | 0% |
| $85,650 | $142,700 | $122,300 | 25% | 15% |
| $178,650 | $217,450 | $198,050 | 28% | 15% |
| $388,350 | $388,350 | $388,350 | 33% | 15% |
| above | above | above | 35% | 15% |
In addition, there is a 3.8% Medicare tax rate on investment income in excess of an adjusted gross income of $200,000 ($250,000 for married filing jointly), and 0.9% on salary and self-employment income in excess of this level.
Tax analysis
As a tax-managed fund, the Vanguard Tax-Managed Small Cap fund has not distributed a capital gain since inception and has provided 100% qualified dividend distributions since the establishment of this tax preference.
The annual fund accounting figures show that the fund has provided moderately high turnover rates over the 1994-2010 period. Turnover can be attributed to the fact that stock migration out of a small cap index (in this instance, the S&P 600 index) can come in the following dimensions:
- An individual company becomes relatively smaller and migrates to a micro cap index;
- An individual company becomes relatively larger and migrates to a mid cap index.
- An individual company is bought out or merged with a second company.
The fund has realized losses in a plurality of fiscal years, which has produced loss carryover reserves. Due to the fund's turnover and tendency for gains realization that utilizes the reserve, these loss reserves have tended to be modest during extended bull market years, placing the fund in peril of distributing a taxable gain. The fund has utilized in-kind redemption to avoid making distributed gains (see table 3 above).
The fund has recorded net shareholder redemption in FY 2009 and 2010. Shareholder redemption has recently ranged from 10% to 29%, suggesting average shareholder holding periods ranging between 3 to 10 years.
The following table presents the federal tax cost on the fund's historical distributions (see second tab, table 6.) under two scenarios: the tax rate regime in (2010-2012) and the current tax regime (with dividends and long term capital gains taxed at 0%, 15%, and 20%, depending on marginal tax rates, and an additional 3.8% ACA Net Investment Income tax assessed at higher tax brackets). Keep in mind that distributions can also be subject to state and local taxation, with marginal rates ranging from 0% to 12% (an average 5% state tax rate will add an approximate 0.05% to the annual tax cost of holding the fund.) The average is based on the results from 2004-2012, the period comprising the qualified dividend tax regime.
The table does not include the capital gains cost associated with selling the fund at a gain. [8]
|
(view Google Spreadsheet in browser or download as xls, ods, or pdf) See also
References
External links
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
