Tax Efficient Boglehead Wiki Page Question

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BogleAlltheWay
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Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Thu Jun 15, 2017 10:52 am

Hi all ,

I have been reading the Bogleheads Tax Efficiency page.
Table 2: explains the tax cost of selling. It lists Tax-efficient stock, high returns, Tax-efficient stock, Medium returns, Tax-efficient stock, low returns, Tax-inefficient stock, high returns, Tax-inefficient stock, Medium returns, Tax-inefficient stock, low returns.

Say a US large cap index fund, a US small cap index fund , and a Total International Stock index fund (All Tax-efficient stock)all have the similar annual tax cost. In this case, is there any benefit of choosing one over the other for the taxable account?

How do I tell which funds are considered inefficient or efficient? I know REIT is inefficient due to the example and active management generally is.

For background: I am planning to start selling parts of these funds every year in about 5 years.

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Re: Tax Efficient Boglehead Wiki Page Question

Post by livesoft » Thu Jun 15, 2017 10:55 am

Here is a thread and discussion that helps answer your questions:
viewtopic.php?t=208818

One can figure out which of those funds was the most tax efficient last year and the year before. With that information, one can expect something similar to be the case for the current year and maybe future years. However, an expectation is not a guarantee. And that's just for the normal distributions.

As for you realizing capital gains (or losses), well, no one can predict the future, especially 5 years hence.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by triceratop » Thu Jun 15, 2017 11:11 am

You asked a similar question in this thread: viewtopic.php?f=1&t=220173

The tax efficiency numbers, once calculated, are precisely what you would have paid and generally should take precedence over general rules of thumb, which by necessity will never be fully accurate in all situations.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by alex_686 » Thu Jun 15, 2017 11:19 am

The simple answer to pick one, any fund. Maybe the fund that you expect to preform the least well but from the list given I would assume approximately similar returns. So darts at a board.

The more complex answer would be to dig into the annual reports of each of the funds. Funds have to disclose their unrealized gain and their realized carry over losses. That might give you a better idea of future taxable distributions.

Given the choice between the 2, I would go with darts at the board. I doubt the extra research would be worth it.

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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Thu Jun 15, 2017 11:21 am

livesoft wrote:Here is a thread and discussion that helps answer your questions:
viewtopic.php?t=208818

One can figure out which of those funds was the most tax efficient last year and the year before. With that information, one can expect something similar to be the case for the current year and maybe future years. However, an expectation is not a guarantee. And that's just for the normal distributions.

As for you realizing capital gains (or losses), well, no one can predict the future, especially 5 years hence.
I have been pointed to that thread and I have calculated my expected taxes back a few years.

The page says that "If all else is equal (and it often isn't, because you may have different options in your 401(k) and your Roth IRA), it is slightly better to have the fund with the highest expected return in your Roth"

All else being equal, does this mean I should put the fund with the lowest expected return in taxable?

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Re: Tax Efficient Boglehead Wiki Page Question

Post by triceratop » Thu Jun 15, 2017 11:23 am

BogleAlltheWay wrote:
livesoft wrote:Here is a thread and discussion that helps answer your questions:
viewtopic.php?t=208818

One can figure out which of those funds was the most tax efficient last year and the year before. With that information, one can expect something similar to be the case for the current year and maybe future years. However, an expectation is not a guarantee. And that's just for the normal distributions.

As for you realizing capital gains (or losses), well, no one can predict the future, especially 5 years hence.
I have been pointed to that thread and I have calculated my expected taxes back a few years.

The page says that "If all else is equal (and it often isn't, because you may have different options in your 401(k) and your Roth IRA), it is slightly better to have the fund with the highest expected return in your Roth"

All else being equal, does this mean I should put the fund with the lowest expected return in taxable?
Yes, but that is just to make the point that you pay taxes on gains. It's not intended to be a statement reflective of a real situation you are likely to face.

All else is never equal, as the calculations should show you.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by livesoft » Thu Jun 15, 2017 11:50 am

The answer is put some of everything but taxable bonds in your taxable account. Then you have choices when you start selling of what to sell for the least tax consequences.
Last edited by livesoft on Thu Jun 15, 2017 11:55 am, edited 1 time in total.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Thu Jun 15, 2017 11:51 am

triceratop wrote:
BogleAlltheWay wrote:
livesoft wrote:Here is a thread and discussion that helps answer your questions:
viewtopic.php?t=208818

One can figure out which of those funds was the most tax efficient last year and the year before. With that information, one can expect something similar to be the case for the current year and maybe future years. However, an expectation is not a guarantee. And that's just for the normal distributions.

As for you realizing capital gains (or losses), well, no one can predict the future, especially 5 years hence.
I have been pointed to that thread and I have calculated my expected taxes back a few years.

The page says that "If all else is equal (and it often isn't, because you may have different options in your 401(k) and your Roth IRA), it is slightly better to have the fund with the highest expected return in your Roth"

All else being equal, does this mean I should put the fund with the lowest expected return in taxable?
Yes, but that is just to make the point that you pay taxes on gains. It's not intended to be a statement reflective of a real situation you are likely to face.

All else is never equal, as the calculations should show you.
They were not exactly equal, but some were only a few basis points off.
As you ,@livesoft and @alex_686 have mentioned, the fund type does not matter and it is just a guess of which one will perform the best.
For example, there is debate on here about a small cap premium. If you agree with the small cap premium, would it make sense to put that fund in tax advantaged and pay an extra few basis points in annual taxes by putting a different fund in taxable?

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Re: Tax Efficient Boglehead Wiki Page Question

Post by livesoft » Thu Jun 15, 2017 11:58 am

BogleAlltheWay wrote:For example, there is debate on here about a small cap premium. If you agree with the small cap premium, would it make sense to put that fund in tax advantaged and pay an extra few basis points in annual taxes by putting a different fund in taxable?
Who knows?

Maybe a small-cap fund will allow more tax-loss harvesting opportunities and thus reduce your taxes if it is held in taxable?

I have the following ticker symbols today in my taxable account with shares purchased between 2009 and 2016: VLCAX, VV, VTI, VBR, VEU, and VEA. Get some. :)
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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Thu Jun 15, 2017 12:03 pm

livesoft wrote:The answer is put some of everything but taxable bonds in your taxable account. Then you have choices when you start selling of what to sell for the least tax consequences.
Excellent point. If the annual tax cost differences are minimal, buy them all. I didn't think of that. About how many basis point annual tax cost difference should be my threshold for this strategy?

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Re: Tax Efficient Boglehead Wiki Page Question

Post by triceratop » Thu Jun 15, 2017 12:18 pm

BogleAlltheWay wrote:
livesoft wrote:The answer is put some of everything but taxable bonds in your taxable account. Then you have choices when you start selling of what to sell for the least tax consequences.
Excellent point. If the annual tax cost differences are minimal, buy them all. I didn't think of that. About how many basis point annual tax cost difference should be my threshold for this strategy?
There is not more than a handful of people who do these kinds of analysis. You can be a bold, daring innovator in this space.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Thu Jun 15, 2017 1:03 pm

triceratop wrote:
BogleAlltheWay wrote:
livesoft wrote:The answer is put some of everything but taxable bonds in your taxable account. Then you have choices when you start selling of what to sell for the least tax consequences.
Excellent point. If the annual tax cost differences are minimal, buy them all. I didn't think of that. About how many basis point annual tax cost difference should be my threshold for this strategy?
There is not more than a handful of people who do these kinds of analysis. You can be a bold, daring innovator in this space.
Thanks all for the replies!
That is interesting. Thinking about it now, there are so many variables to consider. The most important factor, performance, is the least predictable.

livesoft wrote: I have the following ticker symbols today in my taxable account with shares purchased between 2009 and 2016: VLCAX, VV, VTI, VBR, VEU, and VEA. Get some. :)
That is alot of variety! I see you like your value. :)

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Re: Tax Efficient Boglehead Wiki Page Question

Post by livesoft » Thu Jun 15, 2017 1:10 pm

BogleAlltheWay wrote:That is alot of variety! I see you like your value. :)
There was only one fund in that list with "value" in its name. You get a list like that if you do any tax-loss harvesting over the past 8 years.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Thu Jun 15, 2017 1:21 pm

livesoft wrote:
BogleAlltheWay wrote:That is alot of variety! I see you like your value. :)
There was only one fund in that list with "value" in its name. You get a list like that if you do any tax-loss harvesting over the past 8 years.
You are right. I thought VV was value.

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Re: Tax Efficient Boglehead Wiki Page Question

Post by grabiner » Thu Jun 15, 2017 7:46 pm

BogleAlltheWay wrote:Hi all ,

I have been reading the Bogleheads Tax Efficiency page.
Table 2: explains the tax cost of selling. It lists Tax-efficient stock, high returns, Tax-efficient stock, Medium returns, Tax-efficient stock, low returns, Tax-inefficient stock, high returns, Tax-inefficient stock, Medium returns, Tax-inefficient stock, low returns.

Say a US large cap index fund, a US small cap index fund , and a Total International Stock index fund (All Tax-efficient stock)all have the similar annual tax cost. In this case, is there any benefit of choosing one over the other for the taxable account?
The international fund would probably be slightly more tax-efficient. Since it has a higher dividend yield (taxed at a lower rate which gives it the same tax cost), it will have a slightly lower capital gain if all three grow at the same rate.

The high, medium, and low returns in the chart should be thought of as descriptions of what the market does, not on your choice of stock funds. If the stock market grows by 5%, all stock funds will probably earn about that much, and your capital gain on selling the stock will be approximately the gain for the 5% line.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Thu Jun 15, 2017 8:36 pm

grabiner wrote:
BogleAlltheWay wrote:Hi all ,

I have been reading the Bogleheads Tax Efficiency page.
Table 2: explains the tax cost of selling. It lists Tax-efficient stock, high returns, Tax-efficient stock, Medium returns, Tax-efficient stock, low returns, Tax-inefficient stock, high returns, Tax-inefficient stock, Medium returns, Tax-inefficient stock, low returns.

Say a US large cap index fund, a US small cap index fund , and a Total International Stock index fund (All Tax-efficient stock)all have the similar annual tax cost. In this case, is there any benefit of choosing one over the other for the taxable account?
The international fund would probably be slightly more tax-efficient. Since it has a higher dividend yield (taxed at a lower rate which gives it the same tax cost), it will have a slightly lower capital gain if all three grow at the same rate.

The high, medium, and low returns in the chart should be thought of as descriptions of what the market does, not on your choice of stock funds. If the stock market grows by 5%, all stock funds will probably earn about that much, and your capital gain on selling the stock will be approximately the gain for the 5% line.
Thanks for the reply. I think I understand this.
The following funds have the same annual tax cost:
Tax-managed large-cap as having 1.5% dividends with all qualified and no capital gains
Tax-managed small-cap as having 1.0% dividends with all qualified and 0.50% long term capital gains.

If both funds grow 10% in one year, I would be paying capital gains on 8.5% for the Tax-managed large-cap and 9% for the tax-managed small-cap?

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Re: Tax Efficient Boglehead Wiki Page Question

Post by grabiner » Thu Jun 15, 2017 8:48 pm

BogleAlltheWay wrote:
grabiner wrote:
BogleAlltheWay wrote:Hi all ,

I have been reading the Bogleheads Tax Efficiency page.
Table 2: explains the tax cost of selling. It lists Tax-efficient stock, high returns, Tax-efficient stock, Medium returns, Tax-efficient stock, low returns, Tax-inefficient stock, high returns, Tax-inefficient stock, Medium returns, Tax-inefficient stock, low returns.

Say a US large cap index fund, a US small cap index fund , and a Total International Stock index fund (All Tax-efficient stock)all have the similar annual tax cost. In this case, is there any benefit of choosing one over the other for the taxable account?
The international fund would probably be slightly more tax-efficient. Since it has a higher dividend yield (taxed at a lower rate which gives it the same tax cost), it will have a slightly lower capital gain if all three grow at the same rate.

The high, medium, and low returns in the chart should be thought of as descriptions of what the market does, not on your choice of stock funds. If the stock market grows by 5%, all stock funds will probably earn about that much, and your capital gain on selling the stock will be approximately the gain for the 5% line.
Thanks for the reply. I think I understand this.
The following funds have the same annual tax cost:
Tax-managed large-cap as having 1.5% dividends with all qualified and no capital gains
Tax-managed small-cap as having 1.0% dividends with all qualified and 0.50% long term capital gains.

If both funds grow 10% in one year, I would be paying capital gains on 8.5% for the Tax-managed large-cap and 9% for the tax-managed small-cap?
No, both funds would have an 8.5% capital gain, and would be equally tax-efficient. Since both funds distributed 1.5% of their value, the share price increased by 1.5% less than the percentage return.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Thu Jun 15, 2017 9:12 pm

grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:
BogleAlltheWay wrote:Hi all ,

I have been reading the Bogleheads Tax Efficiency page.
Table 2: explains the tax cost of selling. It lists Tax-efficient stock, high returns, Tax-efficient stock, Medium returns, Tax-efficient stock, low returns, Tax-inefficient stock, high returns, Tax-inefficient stock, Medium returns, Tax-inefficient stock, low returns.

Say a US large cap index fund, a US small cap index fund , and a Total International Stock index fund (All Tax-efficient stock)all have the similar annual tax cost. In this case, is there any benefit of choosing one over the other for the taxable account?
The international fund would probably be slightly more tax-efficient. Since it has a higher dividend yield (taxed at a lower rate which gives it the same tax cost), it will have a slightly lower capital gain if all three grow at the same rate.

The high, medium, and low returns in the chart should be thought of as descriptions of what the market does, not on your choice of stock funds. If the stock market grows by 5%, all stock funds will probably earn about that much, and your capital gain on selling the stock will be approximately the gain for the 5% line.
Thanks for the reply. I think I understand this.
The following funds have the same annual tax cost:
Tax-managed large-cap as having 1.5% dividends with all qualified and no capital gains
Tax-managed small-cap as having 1.0% dividends with all qualified and 0.50% long term capital gains.

If both funds grow 10% in one year, I would be paying capital gains on 8.5% for the Tax-managed large-cap and 9% for the tax-managed small-cap?
No, both funds would have an 8.5% capital gain, and would be equally tax-efficient. Since both funds distributed 1.5% of their value, the share price increased by 1.5% less than the percentage return.
I guess I don't understand. May you provide an example?

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Re: Tax Efficient Boglehead Wiki Page Question

Post by grabiner » Fri Jun 16, 2017 9:24 pm

BogleAlltheWay wrote:
grabiner wrote:
Thanks for the reply. I think I understand this.
The following funds have the same annual tax cost:
Tax-managed large-cap as having 1.5% dividends with all qualified and no capital gains
Tax-managed small-cap as having 1.0% dividends with all qualified and 0.50% long term capital gains.

If both funds grow 10% in one year, I would be paying capital gains on 8.5% for the Tax-managed large-cap and 9% for the tax-managed small-cap?
No, both funds would have an 8.5% capital gain, and would be equally tax-efficient. Since both funds distributed 1.5% of their value, the share price increased by 1.5% less than the percentage return.
I guess I don't understand. May you provide an example?[/quote]

Suppose large-cap and small-cap stocks would both earn 10% in a tax-free account, and both funds are at a share price of $40 at the beginning of the year.

The tax-managed large-cap fund distributes a $0.60 dividend, and its share price rises to $43.40 for a 10% pre-tax return; you pay $0.09 tax on the $0.60 dividend.

The tax-managed small-cap fund distributes a $0.40 dividend and a $0.20 capital gain. Its share price also rises to $43.40 for a 10% pre-tax return, and you pay $0.06 tax on the $0.40 dividend, and $0.03 tax on the $0.20 capital gain.

Both funds have an unrealized gain of $3.40; if you sell the funds now (after one year and at least one more day), you will pay $0.51 tax on the $3.40, so they are equally tax-efficient.

I am not sure how realistic the example above is. When I created the table in the wiki page, I assumed that Tax-Managed Small-Cap could not keep on avoiding capital gains forever; index changes would force it to realize gains. But the fund has now been around for eighteen years, with an 11% annual return, and it still has a small realized loss and only 33% unrealized gains. Thus, it now appears that it will be just as tax-efficient as the ETFs, and I should revise the wiki page accordingly.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Sat Jun 17, 2017 1:41 pm

grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:
Thanks for the reply. I think I understand this.
The following funds have the same annual tax cost:
Tax-managed large-cap as having 1.5% dividends with all qualified and no capital gains
Tax-managed small-cap as having 1.0% dividends with all qualified and 0.50% long term capital gains.

If both funds grow 10% in one year, I would be paying capital gains on 8.5% for the Tax-managed large-cap and 9% for the tax-managed small-cap?
No, both funds would have an 8.5% capital gain, and would be equally tax-efficient. Since both funds distributed 1.5% of their value, the share price increased by 1.5% less than the percentage return.
I guess I don't understand. May you provide an example?
Suppose large-cap and small-cap stocks would both earn 10% in a tax-free account, and both funds are at a share price of $40 at the beginning of the year.

The tax-managed large-cap fund distributes a $0.60 dividend, and its share price rises to $43.40 for a 10% pre-tax return; you pay $0.09 tax on the $0.60 dividend.

The tax-managed small-cap fund distributes a $0.40 dividend and a $0.20 capital gain. Its share price also rises to $43.40 for a 10% pre-tax return, and you pay $0.06 tax on the $0.40 dividend, and $0.03 tax on the $0.20 capital gain.

Both funds have an unrealized gain of $3.40; if you sell the funds now (after one year and at least one more day), you will pay $0.51 tax on the $3.40, so they are equally tax-efficient.

I am not sure how realistic the example above is. When I created the table in the wiki page, I assumed that Tax-Managed Small-Cap could not keep on avoiding capital gains forever; index changes would force it to realize gains. But the fund has now been around for eighteen years, with an 11% annual return, and it still has a small realized loss and only 33% unrealized gains. Thus, it now appears that it will be just as tax-efficient as the ETFs, and I should revise the wiki page accordingly.[/quote]

Thanks I understand with the example. What do you mean when you say the Tax-Managed Small-Cap will be as tax efficient as the ETFs? It is more tax efficient than the small cap ETF, even before you remove the capital gains tax.

How can you tell that the from the realized loss(–1.8%) and 33% unrealized gains that a fund is unlikely to distribute capital gains in the future?
I was looking at: https://www.bogleheads.org/wiki/Vanguar ... tributions and I see the Loss Carry forward jumped in 2015 with only a -1.85% loss.

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Re: Tax Efficient Boglehead Wiki Page Question

Post by grabiner » Sat Jun 17, 2017 2:47 pm

BogleAlltheWay wrote:
grabiner wrote:I am not sure how realistic the example above is. When I created the table in the wiki page, I assumed that Tax-Managed Small-Cap could not keep on avoiding capital gains forever; index changes would force it to realize gains. But the fund has now been around for eighteen years, with an 11% annual return, and it still has a small realized loss and only 33% unrealized gains. Thus, it now appears that it will be just as tax-efficient as the ETFs, and I should revise the wiki page accordingly.
Thanks I understand with the example. What do you mean when you say the Tax-Managed Small-Cap will be as tax efficient as the ETFs? It is more tax efficient than the small cap ETF, even before you remove the capital gains tax.
What I intended is that it would be just as good at avoiding capital gains as the ETFs.

If it distributed 0.5% in capital gains per year, it would be less tax-efficient than the ETFs. At the current yield of 1.31%, all qualified, the tax cost is 0.20% in a 25% bracket, 0.31% in the top bracket. Add 0.5% long-term gains and those numbers become 0.27% and 0.43%. For comparison, an ETF with equal yield but only 80% qualified dividends would have a tax cost of 0.22% in the 25% bracket, 0.36% in the top bracket.
How can you tell that the from the realized loss(–1.8%) and 33% unrealized gains that a fund is unlikely to distribute capital gains in the future?
The realized loss means that there will be no capital-gains distribution this year, and that there is some breathing room if index changes force gains. The potential capital gains exposure indicates the possibility for future gains.

But the real reason I no longer expect this fund to distribute capital gains is that it has been able to avoid distributing any for its 18-year history, including long periods of growth. I don't think it had a huge realized loss in 2003 (when it was still above its 1999 starting price), but it grew by two and a half times through 2007 without distributing a gain. Similarly, I don't think it had a huge realized loss in 2009 (when it was still above the 2003 bottom), but it has grown by four times in the last eight years without distributing a gain.

Similarly, I expected small-cap ETFs to distribute capital gains, but Vanguard and other providers have been able to avoid this as well, except when the ETFs get started and thus cannot benefit as much from redeeming shares bought at different prices. Vanguard Small-Cap Value Index, which should be one of the least tax-efficient ETFs, has a realized loss of 4.6% and has not distributed a capital gain since the 2004 inception of the ETF class.
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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Sun Jun 18, 2017 2:43 am

grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:I am not sure how realistic the example above is. When I created the table in the wiki page, I assumed that Tax-Managed Small-Cap could not keep on avoiding capital gains forever; index changes would force it to realize gains. But the fund has now been around for eighteen years, with an 11% annual return, and it still has a small realized loss and only 33% unrealized gains. Thus, it now appears that it will be just as tax-efficient as the ETFs, and I should revise the wiki page accordingly.
Thanks I understand with the example. What do you mean when you say the Tax-Managed Small-Cap will be as tax efficient as the ETFs? It is more tax efficient than the small cap ETF, even before you remove the capital gains tax.
What I intended is that it would be just as good at avoiding capital gains as the ETFs.

If it distributed 0.5% in capital gains per year, it would be less tax-efficient than the ETFs. At the current yield of 1.31%, all qualified, the tax cost is 0.20% in a 25% bracket, 0.31% in the top bracket. Add 0.5% long-term gains and those numbers become 0.27% and 0.43%. For comparison, an ETF with equal yield but only 80% qualified dividends would have a tax cost of 0.22% in the 25% bracket, 0.36% in the top bracket.
How can you tell that the from the realized loss(–1.8%) and 33% unrealized gains that a fund is unlikely to distribute capital gains in the future?
The realized loss means that there will be no capital-gains distribution this year, and that there is some breathing room if index changes force gains. The potential capital gains exposure indicates the possibility for future gains.

But the real reason I no longer expect this fund to distribute capital gains is that it has been able to avoid distributing any for its 18-year history, including long periods of growth. I don't think it had a huge realized loss in 2003 (when it was still above its 1999 starting price), but it grew by two and a half times through 2007 without distributing a gain. Similarly, I don't think it had a huge realized loss in 2009 (when it was still above the 2003 bottom), but it has grown by four times in the last eight years without distributing a gain.

Similarly, I expected small-cap ETFs to distribute capital gains, but Vanguard and other providers have been able to avoid this as well, except when the ETFs get started and thus cannot benefit as much from redeeming shares bought at different prices. Vanguard Small-Cap Value Index, which should be one of the least tax-efficient ETFs, has a realized loss of 4.6% and has not distributed a capital gain since the 2004 inception of the ETF class.
I have always read how ETFs are more tax efficient than index mutual funds but now I understand why. (ETFs are better at avoiding capital gains). So even though the tax-managed small-cap fund does not have the benefit of an ETF class, it doesn't matter for tax purposes.

Does this also mean that Vanguard FTSE Emerging Markets ETF ( VWO) and Vanguard FTSE All-Wld ex-US Small Cap ETF (VSS), which both haven't had long term capital gains in years, are not at risk for capital gains?

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Re: Tax Efficient Boglehead Wiki Page Question

Post by grabiner » Sun Jun 18, 2017 9:47 am

BogleAlltheWay wrote:
grabiner wrote:I have always read how ETFs are more tax efficient than index mutual funds but now I understand why. (ETFs are better at avoiding capital gains). So even though the tax-managed small-cap fund does not have the benefit of an ETF class, it doesn't matter for tax purposes.

Does this also mean that Vanguard FTSE Emerging Markets ETF ( VWO) and Vanguard FTSE All-Wld ex-US Small Cap ETF (VSS), which both haven't had long term capital gains in years, are not at risk for capital gains?
This is correct. VSS is one of the few Vanguard stock ETFs which has distributed capital gains, but that is unlikely to happen again. The ETF started in 2009, near the bottom of the bear market, and doubled in value in its first year. As a result of the boom, it had few shares with losses to sell in order to meet index changes; the ability to give away low-basis shares in redemptions reduced the capital gain but could not eliminate it. The fund distributed capital gains in 2009 and 2010, but none since then, and currently has 4% realized losses and only 5% realized gains despite its eight years of growth.

VWO tracks a total-market index, which is inherently low-turnover, but the ETF structure protects against capital gain distributions when countries leave the index.

Both of these funds should be somewhat less tax-efficient than other international funds, because they have only about 50% qualified dividends. This is a small effect; 50% rather than 80% qualified dividends on a fund with a 3% yield is 0.90% more in non-qualified dividends, which is an extra tax cost of 0.09% in the 25% bracket, and 0.18% in the top bracket. The emerging and small-cap indexes also have slightly lower dividend yields, which reduces this difference. Five-year tax costs from Vanguard:

VEU (large-cap): 0.71%
VSS (small-cap): 0.78%
VEA (developed): 0.64%
VWO (emerging): 0.70%

Edited to add: I believe these do not include the foreign tax credit, which is why they are higher than for US funds. If a fund has a 2.8% yield, 0.20% foreign tax credit, and the dividends are 70% qualified, the tax cost in the top bracket would be 20% tax on 2.40% qualified dividends, 39.6% tax on 0.60% non-qualified dividends, reduced by 0.20% foreign tax credit, which is 0.52%.
Last edited by grabiner on Sun Jun 18, 2017 1:56 pm, edited 1 time in total.
David Grabiner

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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Sun Jun 18, 2017 11:59 am

grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:I have always read how ETFs are more tax efficient than index mutual funds but now I understand why. (ETFs are better at avoiding capital gains). So even though the tax-managed small-cap fund does not have the benefit of an ETF class, it doesn't matter for tax purposes.

Does this also mean that Vanguard FTSE Emerging Markets ETF ( VWO) and Vanguard FTSE All-Wld ex-US Small Cap ETF (VSS), which both haven't had long term capital gains in years, are not at risk for capital gains?
This is correct. VSS is one of the few Vanguard stock ETFs which has distributed capital gains, but that is unlikely to happen again. The ETF started in 2009, near the bottom of the bear market, and doubled in value in its first year. As a result of the boom, it had few shares with losses to sell in order to meet index changes; the ability to give away low-basis shares in redemptions reduced the capital gain but could not eliminate it. The fund distributed capital gains in 2009 and 2010, but none since then, and currently has 4% realized losses and only 5% realized gains despite its eight years of growth.

VWO tracks a total-market index, which is inherently low-turnover, but the ETF structure protects against capital gain distributions when countries leave the index.

Both of these funds should be somewhat less tax-efficient than other international funds, because they have only about 50% qualified dividends. This is a small effect; 50% rather than 80% qualified dividends on a fund with a 3% yield is 0.90% more in non-qualified dividends, which is an extra tax cost of 0.09% in the 25% bracket, and 0.18% in the top bracket. The emerging and small-cap indexes also have slightly lower dividend yields, which reduces this difference. Five-year tax costs from Vanguard:

VEU (large-cap): 0.71%
VSS (small-cap): 0.78%
VEA (developed): 0.64%
VWO (emerging): 0.70%
I calculated what my tax ratio should of been for various funds a few years back.However, my tax cost numbers are slightly lower than yours. Since I pay NYS and NYC tax, they should be higher. I used a sheet provided by a Boglehead member viewtopic.php?t=208818and added in the numbers for previous years. What information does you tax cost numbers use? I am hoping it is different information otherwise I screwed up. lol For example, in my calculations VEU has been more tax efficient than VEA .

Since the ETFs helps with the capital gains, can Vanguard run into a tax problem if everyone buys the mutual fund version? From what I have read Vanguard said it doesn't matter and others have said there would be an issue if everyone purchased the mutual fund.

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Re: Tax Efficient Boglehead Wiki Page Question

Post by grabiner » Sun Jun 18, 2017 2:03 pm

BogleAlltheWay wrote:
grabiner wrote:[ive-year tax costs from Vanguard:

VEU (large-cap): 0.71%
VSS (small-cap): 0.78%
VEA (developed): 0.64%
VWO (emerging): 0.70%
I calculated what my tax ratio should of been for various funds a few years back.However, my tax cost numbers are slightly lower than yours. Since I pay NYS and NYC tax, they should be higher. I used a sheet provided by a Boglehead member viewtopic.php?t=208818and added in the numbers for previous years. What information does you tax cost numbers use? I am hoping it is different information otherwise I screwed up. lol For example, in my calculations VEU has been more tax efficient than VEA .
I used the five-year returns from Vanguard. Five year tax cost is computed as

(post-tax return+100%)/(pre-tax return+100%) - 100%.

For example, a fund which has an 8.9% post-tax return and a 10.0% pre-tax return has a 1.00% tax cost, not 1.10%. In one year, a $10,000 investment would grow to $11,000 pre-tax, and $10,890 post-tax, which is 1% less.

But I believe the Vanguard numbers do not include the foreign tax credit, which would explain your lower cost.
Since the ETFs helps with the capital gains, can Vanguard run into a tax problem if everyone buys the mutual fund version? From what I have read Vanguard said it doesn't matter and others have said there would be an issue if everyone purchased the mutual fund.
In theory, if everyone used the mutual fund, high-turnover indexes would become tax-inefficiant. Vanguard's small-cap indexes regularly distributed capital gains before the ETF classes were added.

But I wouldn't be concerned about this, because you are taking an average over a large number of people with different preferences. Everyone using Vanguard's mutual funds over its ETFs is about as likely as everyone using index funds over active funds, another unreasonable scenario which is sometimes discussed.
David Grabiner

BogleAlltheWay
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Re: Tax Efficient Boglehead Wiki Page Question

Post by BogleAlltheWay » Mon Jun 19, 2017 7:58 am

grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:[ive-year tax costs from Vanguard:

VEU (large-cap): 0.71%
VSS (small-cap): 0.78%
VEA (developed): 0.64%
VWO (emerging): 0.70%
I calculated what my tax ratio should of been for various funds a few years back.However, my tax cost numbers are slightly lower than yours. Since I pay NYS and NYC tax, they should be higher. I used a sheet provided by a Boglehead member viewtopic.php?t=208818and added in the numbers for previous years. What information does you tax cost numbers use? I am hoping it is different information otherwise I screwed up. lol For example, in my calculations VEU has been more tax efficient than VEA .
I used the five-year returns from Vanguard. Five year tax cost is computed as

(post-tax return+100%)/(pre-tax return+100%) - 100%.

For example, a fund which has an 8.9% post-tax return and a 10.0% pre-tax return has a 1.00% tax cost, not 1.10%. In one year, a $10,000 investment would grow to $11,000 pre-tax, and $10,890 post-tax, which is 1% less.

But I believe the Vanguard numbers do not include the foreign tax credit, which would explain your lower cost.
Since the ETFs helps with the capital gains, can Vanguard run into a tax problem if everyone buys the mutual fund version? From what I have read Vanguard said it doesn't matter and others have said there would be an issue if everyone purchased the mutual fund.
In theory, if everyone used the mutual fund, high-turnover indexes would become tax-inefficiant. Vanguard's small-cap indexes regularly distributed capital gains before the ETF classes were added.

But I wouldn't be concerned about this, because you are taking an average over a large number of people with different preferences. Everyone using Vanguard's mutual funds over its ETFs is about as likely as everyone using index funds over active funds, another unreasonable scenario which is sometimes discussed.

That makes sense. The Vanguard returns use the highest federal tax bracket so my tax cost will be different. I didn't realize not to just add the numbers to get the tax cost. The numbers also include the gains.

I have seen those conversations. As someone with somewhat limited knowledge on subject, I was worried about that eventually happening too. I am a logical guy and I figured most people would index once they looked at the data.

Thanks again for your help.

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