Relative tax efficiency of total international funds

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aaja
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Relative tax efficiency of total international funds

Post by aaja » Fri Jul 06, 2018 12:03 pm

Hello there. I use the 3 fund portfolio and currently have my international funds (Vtiax - total international stock) placed in my taxable account based on the information at https://www.bogleheads.org/wiki/Tax-eff ... _placement. It is safe to assume I have space and availability for international funds both in taxable and tax advantaged.

In one of the recent posts I found this spreadsheet viewtopic.php?t=242137. I entered my tax numbers to compare and it looks like VXUS (Vanguard total international etf) has a tax efficiency of 0.56 as compared to VTI(Vanguard total stock etf) at 0.33.

Few questions here.
1. Can I assume the Vanguard index versions of the etfs have the same tax afficiency?
2. Lower tax efficiency number is better right?
3. Does this mean in my case it is more efficient to keep Vtiax in the tax advantaged accounts relative to Vanguard total stock.

Also in the spreadsheet IXUS has a tax efficiency of 0.37.

1. Would this mean that if I do have to place my international funds in the taxable account at a later stage, IXUS is a better choice than VTIAX?
2. Is IXUS a good replacement for Vtiax. It looks like they don't have the same number of stocks and don't follow the same benchmark.

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Re: Relative tax efficiency of total international funds

Post by triceratop » Fri Jul 06, 2018 12:14 pm

1. Yes, modulo changes in tax efficiency due to differences in expense ratio.
2. Yes, unless you're feeling generous towards the IRS.
3. It means it would have been more efficient in 2017. What that means for the future is unclear.

1. Yes, I use IXUS over VXUS in taxable.
2. IXUS is an excellent total international fund. Who is to say which index is truly better, taxes aside? Here's a nice experiment -- use a Morningstar growth chart to see how closely they track.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Relative tax efficiency of total international funds

Post by aaja » Sat Jul 07, 2018 12:03 pm

Thanks @tricerarop. Any tips or pointers on how to best optimize the placement given the numbers will vary from year to year.

From what I gather based on current data from your spreadsheet, the best option for me seems to be

1. If between VXUS and VTI, place VXUS in roth (is 401k a good place for it?) and VTI in taxable.
2. If no space in tax deferred accounts put IXUS in taxable instead of VXUS.

Does this make sense or am I not interpreting the data correctly?

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Re: Relative tax efficiency of total international funds

Post by triceratop » Sat Jul 07, 2018 12:11 pm

1 & 2 is probably what I would do, but do consider any possible changes you foresee in your tax rates due to changes in personal situation in the coming years.

I try to avoid giving universal advice on this, and just provide the data. Personally I expect my tax situation to change a great deal in the coming years.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

CrazyCatLady
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Re: Relative tax efficiency of total international funds

Post by CrazyCatLady » Sat Jul 07, 2018 2:22 pm

triceratop wrote:
Sat Jul 07, 2018 12:11 pm
1 & 2 is probably what I would do, but do consider any possible changes you foresee in your tax rates due to changes in personal situation in the coming years.

I try to avoid giving universal advice on this, and just provide the data. Personally I expect my tax situation to change a great deal in the coming years.
I have a similar question. I plan to open a taxable account at Vanguard in December/January once my student loans are paid off and I had planned on buying total international to get the FTC. However, I plugged my numbers (24% federal, 5% state) into the spreadsheet and if I did it right (which is always a question with me and spreadsheets :?) it looks like VXUS (though I would buy the MF not the ETF) is not very tax efficient - 0.61 and significantly worse than VTI (which is currently in my 401(k) and ROTH) - 0.42. Interestingly, it looks like FTIPX would be one of the most tax efficient - 0.39. The next best international option is IXUS at 0.46.

I know the numbers change every year so nothing is guaranteed (however, I don't expect my tax bracket to change much for at least the next 10 years though I may occasionally dip into the 32% bracket if we have a good year and I get a larger than usual bonus), but I am trying to figure out the best way to set up my taxable account and avoid a lot of changes in the future. My plan is it invest approx $24-$30k each year in taxable for the next 10-12 years (after 10 years it should be approximately 15-20% of my portfolio) and then reevaluate. Thus my questions are:

1. Should I set up a taxable account at Fidelity instead of (or in addition to) Vanguard so I can purchase FTIPX? I have no experience with Fidelity (my ROTH IRA is at Vanguard) but I assume it is pretty easy to set up an account online? Or would it be better to open a taxable account at Vanguard and buy IXUS or a different international fund?

2. Should I instead open the taxable account at Vanguard and purchase VTI and make a corresponding rebalance in my Roth IRA and 401(k), using the excess to purchase VXUS in my Roth and Dev Markets in my 401(K) ? I'm thinking this is the easiest option, but I don't know if it is the smartest.

3. My current allocation (99% in 401(k), 1% in ROTH IRA) is all Vanguard Funds: Total Bond - 25%, Total Stock - 46%, S/C Growth - 5%, Dev Markets (Int'l) - 24%. My 401(k) does not offer total international (or emerging markets), so if I don't purchase VXUS (or FTIPX) in taxable, I could just add emerging markets (maybe VEIEX) in my ROTH IRA and keep the developed markets in my 401(k). The emerging markets is not going to make a big difference in my allocation overall since I have just under $10k in my ROTH currently (though will be investing the max every year from here out).

Hope that makes sense and thanks in advance for any thoughts you may have! :beer

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Re: Relative tax efficiency of total international funds

Post by triceratop » Sat Jul 07, 2018 2:28 pm

CrazyCatLady wrote:
Sat Jul 07, 2018 2:22 pm
triceratop wrote:
Sat Jul 07, 2018 12:11 pm
1 & 2 is probably what I would do, but do consider any possible changes you foresee in your tax rates due to changes in personal situation in the coming years.

I try to avoid giving universal advice on this, and just provide the data. Personally I expect my tax situation to change a great deal in the coming years.
I have a similar question. I plan to open a taxable account at Vanguard in December/January once my student loans are paid off and I had planned on buying total international to get the FTC. However, I plugged my numbers (24% federal, 5% state) into the spreadsheet and if I did it right (which is always a question with me and spreadsheets :?) it looks like VXUS (though I would buy the MF not the ETF) is not very tax efficient - 0.61 and significantly worse than VTI (which is currently in my 401(k) and ROTH) - 0.42. Interestingly, it looks like FTIPX would be one of the most tax efficient - 0.39. The next best international option is IXUS at 0.46.

I know the numbers change every year so nothing is guaranteed (however, I don't expect my tax bracket to change much for at least the next 10 years though I may occasionally dip into the 32% bracket if we have a good year and I get a larger than usual bonus), but I am trying to figure out the best way to set up my taxable account and avoid a lot of changes in the future. My plan is it invest approx $24-$30k each year in taxable for the next 10-12 years (after 10 years it should be approximately 15-20% of my portfolio) and then reevaluate. Thus my questions are:

1. Should I set up a taxable account at Fidelity instead of (or in addition to) Vanguard so I can purchase FTIPX? I have no experience with Fidelity (my ROTH IRA is at Vanguard) but I assume it is pretty easy to set up an account online? Or would it be better to open a taxable account at Vanguard and buy IXUS or a different international fund?

2. Should I instead open the taxable account at Vanguard and purchase VTI and make a corresponding rebalance in my Roth IRA and 401(k), using the excess to purchase VXUS in my Roth and Dev Markets in my 401(K) ? I'm thinking this is the easiest option, but I don't know if it is the smartest.

3. My current allocation (99% in 401(k), 1% in ROTH IRA) is all Vanguard Funds: Total Bond - 25%, Total Stock - 46%, S/C Growth - 5%, Dev Markets (Int'l) - 24%. My 401(k) does not offer total international (or emerging markets), so if I don't purchase VXUS (or FTIPX) in taxable, I could just add emerging markets (maybe VEIEX) in my ROTH IRA and keep the developed markets in my 401(k). The emerging markets is not going to make a big difference in my allocation overall since I have just under $10k in my ROTH currently (though will be investing the max every year from here out).

Hope that makes sense and thanks in advance for any thoughts you may have! :beer
I expect FTIPX to be less tax efficient than either VXUS or IXUS in the future. In the past FTIPX has been more tax efficient than it should be on a forward-looking basis because ballooning assets as a newly-started fund has resulted in fund income being distributed among a broader pool of assets than assets that generated the income. FTIPX is a traditional index mutual fund and will probably distribute capital gains yearly.

I don't know if you've heard but starting in August you will be able to buy IXUS (as well as basically any ETF you will ever care about as an investor) at Vanguard commission-free. That should simplify your concerns a great deal.

I don't see a question in (3).
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Relative tax efficiency of total international funds

Post by CrazyCatLady » Sat Jul 07, 2018 2:41 pm

triceratop wrote:
Sat Jul 07, 2018 2:28 pm
CrazyCatLady wrote:
Sat Jul 07, 2018 2:22 pm
triceratop wrote:
Sat Jul 07, 2018 12:11 pm
1 & 2 is probably what I would do, but do consider any possible changes you foresee in your tax rates due to changes in personal situation in the coming years.

I try to avoid giving universal advice on this, and just provide the data. Personally I expect my tax situation to change a great deal in the coming years.
I have a similar question. I plan to open a taxable account at Vanguard in December/January once my student loans are paid off and I had planned on buying total international to get the FTC. However, I plugged my numbers (24% federal, 5% state) into the spreadsheet and if I did it right (which is always a question with me and spreadsheets :?) it looks like VXUS (though I would buy the MF not the ETF) is not very tax efficient - 0.61 and significantly worse than VTI (which is currently in my 401(k) and ROTH) - 0.42. Interestingly, it looks like FTIPX would be one of the most tax efficient - 0.39. The next best international option is IXUS at 0.46.

I know the numbers change every year so nothing is guaranteed (however, I don't expect my tax bracket to change much for at least the next 10 years though I may occasionally dip into the 32% bracket if we have a good year and I get a larger than usual bonus), but I am trying to figure out the best way to set up my taxable account and avoid a lot of changes in the future. My plan is it invest approx $24-$30k each year in taxable for the next 10-12 years (after 10 years it should be approximately 15-20% of my portfolio) and then reevaluate. Thus my questions are:

1. Should I set up a taxable account at Fidelity instead of (or in addition to) Vanguard so I can purchase FTIPX? I have no experience with Fidelity (my ROTH IRA is at Vanguard) but I assume it is pretty easy to set up an account online? Or would it be better to open a taxable account at Vanguard and buy IXUS or a different international fund?

2. Should I instead open the taxable account at Vanguard and purchase VTI and make a corresponding rebalance in my Roth IRA and 401(k), using the excess to purchase VXUS in my Roth and Dev Markets in my 401(K) ? I'm thinking this is the easiest option, but I don't know if it is the smartest.

3. My current allocation (99% in 401(k), 1% in ROTH IRA) is all Vanguard Funds: Total Bond - 25%, Total Stock - 46%, S/C Growth - 5%, Dev Markets (Int'l) - 24%. My 401(k) does not offer total international (or emerging markets), so if I don't purchase VXUS (or FTIPX) in taxable, I could just add emerging markets (maybe VEIEX) in my ROTH IRA and keep the developed markets in my 401(k). The emerging markets is not going to make a big difference in my allocation overall since I have just under $10k in my ROTH currently (though will be investing the max every year from here out).

Hope that makes sense and thanks in advance for any thoughts you may have! :beer
I expect FTIPX to be less tax efficient than either VXUS or IXUS in the future. In the past FTIPX has been more tax efficient than it should be on a forward-looking basis because ballooning assets as a newly-started fund has resulted in fund income being distributed among a broader pool of assets than assets that generated the income. FTIPX is a traditional index mutual fund and will probably distribute capital gains yearly.

I don't know if you've heard but starting in August you will be able to buy IXUS (as well as basically any ETF you will ever care about as an investor) at Vanguard commission-free. That should simplify your concerns a great deal.

I don't see a question in (3).
I guess I forgot to ask the question in 3 :) Basically I was asking if it made sense to bother with VEIEX since it would be such a small portion of my portfolio (probably never more than 5%).

I did not hear that we would be able to buy ETFs commission free, and you are right that does make the analysis much easier! :) I will plan on buyig international in my taxable account, but will buy IXUS rather than VXUS.

Thanks so much for your response! :D

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Re: Relative tax efficiency of total international funds

Post by triceratop » Sat Jul 07, 2018 2:51 pm

I would hold an appropriate amount of EM to meet my asset allocation regardless of whether it amounted to less than 5% of my portfolio. I don't understand how people settled on 5% as a magic number below which an allocation does not affect your portfolio. Don't view it as an allocation less than 5% is my opinion -- view it as one component of meeting an overall allocation of X% to total international.
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Re: Relative tax efficiency of total international funds

Post by aaja » Tue Jul 17, 2018 12:20 pm

I have a couple of related followup questions. If a new thread is better I can do that.

1. I TLH'ed VTIAX (Vang total intl) a couple of weeks ago and purchased VFWAX (FTSE All-World ex-US) as a partner. I now need to purchase some more international and wanted to confirm that FTIPX (Fidelity total intl) is a valid partner (for wash sale purposes) as well since it follows a different index. I searched and could not find a definitive answer hence poking here for some guidance.

2. I was deciding between ROTH or 401k for my new international purchase and was not sure of the optimal choice here. My current dilemma is
a. Since historically international has been outperformed by the US stock it is better to place it in 401k in comparison since it will not grow as much. I know past performance does not guarantee future returns but just going on current data

but

b. I have already paid some tax on dividends for the international funds and placing them in 401k means I will be taxed again when I withdraw. Hence placing them in Roth is better as I will not be paying any tax on the withdrawal.
Am I overanalysing here ?

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Re: Relative tax efficiency of total international funds

Post by grabiner » Wed Jul 18, 2018 9:02 pm

aaja wrote:
Tue Jul 17, 2018 12:20 pm
2. I was deciding between ROTH or 401k for my new international purchase and was not sure of the optimal choice here. My current dilemma is
a. Since historically international has been outperformed by the US stock it is better to place it in 401k in comparison since it will not grow as much. I know past performance does not guarantee future returns but just going on current data

but

b. I have already paid some tax on dividends for the international funds and placing them in 401k means I will be taxed again when I withdraw. Hence placing them in Roth is better as I will not be paying any tax on the withdrawal.
Am I overanalysing here ?
It doesn't matter, or rather it should be determined by the options in the accounts. If you retire in a 25% tax bracket, $4000 in a 401(k) and $3000 in a Roth IRA will have the same value if you invest them the same way, so it doesn't matter which one is US and which one is foreign unless one foreign fund is better than the other.

The dividend tax on an international fund is a loss, but it's a loss regardless of where you put it. If the fund loses 0.2% per year to foreign tax, and you hold it for 20 years, you will have 4% less than the tax-free return, regardless of which account you hold it in. It is no worse to pay double tax than to pay tax on something that would not be taxed.
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Re: Relative tax efficiency of total international funds

Post by aaja » Mon Jul 23, 2018 1:24 am

Thank you for the response.

Found an older post at viewtopic.php?t=2427470 with a similar discussion. Seems like it agrees that there is no real consensus.

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Re: Relative tax efficiency of total international funds

Post by aaja » Fri Aug 10, 2018 1:23 pm

triceratop wrote:
Sat Jul 07, 2018 2:28 pm
I expect FTIPX to be less tax efficient than either VXUS or IXUS in the future. In the past FTIPX has been more tax efficient than it should be on a forward-looking basis because ballooning assets as a newly-started fund has resulted in fund income being distributed among a broader pool of assets than assets that generated the income. FTIPX is a traditional index mutual fund and will probably distribute capital gains yearly.
@triceratop, now with the lower ER for FTIPX (0.06), are you still of the opinion that IXUS is a better choice in a taxable account or do you think it is a close call now? Just curious as to how much the change in ER impacts the overall efficiency for the fund.

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Re: Relative tax efficiency of total international funds

Post by triceratop » Fri Aug 10, 2018 1:28 pm

aaja wrote:
Fri Aug 10, 2018 1:23 pm
triceratop wrote:
Sat Jul 07, 2018 2:28 pm
I expect FTIPX to be less tax efficient than either VXUS or IXUS in the future. In the past FTIPX has been more tax efficient than it should be on a forward-looking basis because ballooning assets as a newly-started fund has resulted in fund income being distributed among a broader pool of assets than assets that generated the income. FTIPX is a traditional index mutual fund and will probably distribute capital gains yearly.
@triceratop, now with the lower ER for FTIPX (0.06), are you still of the opinion that IXUS is a better choice in a taxable account or do you think it is a close call now? Just curious as to how much the change in ER impacts the overall efficiency for the fund.
My analysis wasn't really based on the cost of FTIPX so I guess it hasn't changed? Anyway, isn't the proper comparison now with FZILX (ER 0.00%)? I still wouldn't use it in an international account, but that is just me.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

aaja
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Re: Relative tax efficiency of total international funds

Post by aaja » Fri Aug 10, 2018 1:50 pm

triceratop wrote:
Fri Aug 10, 2018 1:28 pm
aaja wrote:
Fri Aug 10, 2018 1:23 pm

@triceratop, now with the lower ER for FTIPX (0.06), are you still of the opinion that IXUS is a better choice in a taxable account or do you think it is a close call now? Just curious as to how much the change in ER impacts the overall efficiency for the fund.
My analysis wasn't really based on the cost of FTIPX so I guess it hasn't changed? Anyway, isn't the proper comparison now with FZILX (ER 0.00%)? I still wouldn't use it in an international account, but that is just me.
I guess FZILX can be added to the argument but I left it out due to lack of history. I was generally using the Total Cost (expense + tax) column from your spreadsheet to assess the funds hence the thought. I was not sure how much the tax efficiency varies from year to year and whether it is within this ER range normally.

Appreciate the response.

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