Exchanging VT total world stock for VTI & VXUS

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fsh71
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Exchanging VT total world stock for VTI & VXUS

Post by fsh71 » Mon Oct 15, 2018 12:06 pm

I've currently got the bulk of my taxable money in VT. This holding represents approx 2/3rds of my taxable allocation and ~1/4 of my overall portfolio. As I've learned more, I realize that I may want the flexibility to selectively sell US or International when I'm in retirement. If I'm going to make this swap to VTI & VXUS, I think now is a good time as I have a modest capital loss if selling all shares of VT.

When I make this trade, I want to ensure there is no impact to my allocation, so I plan to buy VTI & VXUS in the same proportion that VT holds US and foreign stock.

To my questions -- am I correct in assuming that if I buy VTI & VXUS in the same proportions as VT (a float-adjusted market-cap weighted fund), I can leave them alone with no re-balancing and I'll accomplish the same hands-off result across both funds as I currently have owning VT (this is the reason I originally purchased VT, to avoid dealing with re-balancing in taxable).

Are there any other considerations I need to be aware of?

Thanks

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triceratop
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Re: Exchanging VT total world stock for VTI & VXUS

Post by triceratop » Mon Oct 15, 2018 12:10 pm

fsh71 wrote:
Mon Oct 15, 2018 12:06 pm
Are there any other considerations I need to be aware?
Why do you believe the following?
As I've learned more, I realize that I may want the flexibility to selectively sell US or International when I'm in retirement.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

alex_686
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Re: Exchanging VT total world stock for VTI & VXUS

Post by alex_686 » Mon Oct 15, 2018 12:12 pm

Short term yes, long term no. The ratios between the 2 are not fixed and do change. Well, maybe drift would be a better word.

fsh71
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Re: Exchanging VT total world stock for VTI & VXUS

Post by fsh71 » Mon Oct 15, 2018 12:20 pm

triceratop wrote:
Mon Oct 15, 2018 12:10 pm
fsh71 wrote:
Mon Oct 15, 2018 12:06 pm
Are there any other considerations I need to be aware?
Why do you believe the following?
As I've learned more, I realize that I may want the flexibility to selectively sell US or International when I'm in retirement.
In retirement I will be making periodic withdrawals from my investments, and if I own separate US & foreign ETFs, I can sell more of the over-performer / less of the under-performer, which will keep my overall allocation in check. I could likely do the same by selling some in tax-advantaged accounts where I hold 3 funds, but I guess I just can't predict exactly what my disbursements will look like 25+ years from now, so all things being equal, why not have the flexibility.

That said, I really don't want to have to rebalance in taxable if I can avoid it, so maybe the loss of flexibility is worth the hand-off self-balancing single fund.

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jhfenton
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Re: Exchanging VT total world stock for VTI & VXUS

Post by jhfenton » Mon Oct 15, 2018 12:25 pm

triceratop wrote:
Mon Oct 15, 2018 12:10 pm
Why do you believe the following?
As I've learned more, I realize that I may want the flexibility to selectively sell US or International when I'm in retirement.
I'm not the OP, but I believe this year provides a good example. If I were in retirement, would I prefer to sell US or sell ex-US this year? Would VT allow me to sell US without selling ex-US?

lassevirensghost
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Re: Exchanging VT total world stock for VTI & VXUS

Post by lassevirensghost » Mon Oct 15, 2018 12:29 pm

jhfenton wrote:
Mon Oct 15, 2018 12:25 pm


I'm not the OP, but I believe this year provides a good example. If I were in retirement, would I prefer to sell US or sell ex-US this year? Would VT allow me to sell US without selling ex-US?
But if OP has modest losses, does it really matter even this year? There's no selling and incurring a gain to be taxed here.
70% Total World Stock / 30% Total US Bond

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triceratop
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Re: Exchanging VT total world stock for VTI & VXUS

Post by triceratop » Mon Oct 15, 2018 2:05 pm

jhfenton wrote:
Mon Oct 15, 2018 12:25 pm
triceratop wrote:
Mon Oct 15, 2018 12:10 pm
Why do you believe the following?
As I've learned more, I realize that I may want the flexibility to selectively sell US or International when I'm in retirement.
I'm not the OP, but I believe this year provides a good example. If I were in retirement, would I prefer to sell US or sell ex-US this year? Would VT allow me to sell US without selling ex-US?
If you want to maintain your asset allocation, you would prefer to sell VT, since that is consistent with your asset allocation (ignoring retirement plans which may have only the equivalent of one of VTI or VXUS, since OP did not mention them). If you don't want to maintain your asset allocation, well, that's maybe fine too, but it's a different discussion. ;)

I agree if you hold both of VTI and VXUS each in taxable/tax-advantaged there could be a benefit and it would be reasonable to do that.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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galeno
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Re: Exchanging VT total world stock for VTI & VXUS

Post by galeno » Mon Oct 15, 2018 2:18 pm

I think you're making a mistake.

When you hold VT you never have to worry if you have the correct USA/non-USA/EM ratio. You always do. Big advantage.

You're asking if you should trade a big advantage for the possibility of some small advantages. I don't think so.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

inbox788
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Re: Exchanging VT total world stock for VTI & VXUS

Post by inbox788 » Mon Oct 15, 2018 2:30 pm

IMO, the biggest reason to split VT is to reduced the expense ratio. You can adjust the drift over long periods if you choose, but I think it will take a decade for that effect to exceed the few basis points in fees. There's also foreign tax, but that's another small factor. Enjoy simplicity or enjoy a free dinner once in a while.

viewtopic.php?t=237427

MnD
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Re: Exchanging VT total world stock for VTI & VXUS

Post by MnD » Mon Oct 15, 2018 2:40 pm

fsh71 wrote:
Mon Oct 15, 2018 12:06 pm
To my questions -- am I correct in assuming that if I buy VTI & VXUS in the same proportions as VT (a float-adjusted market-cap weighted fund), I can leave them alone with no re-balancing and I'll accomplish the same hands-off result across both funds as I currently have owning VT (this is the reason I originally purchased VT, to avoid dealing with re-balancing in taxable).
That is largely correct. As VTI or VXUS outperform or under-perform each other, the ratio of the US/ex-US will move the same way the proportion of US/ex-US varies in VT. So you shouldn't have to make any "adjustments" or re-balancing to maintain a global cap ratio, even though you have two funds. There will be minuscule divergences due various things like to differences in expense rations or differences in other expenses or income such as trading costs, portfolio lending income, taxation of fund dividends internally etc.

The biggest impact on potentially moving the ratios away from global market cap would be if you put funds in or take funds out in that don't match the current market cap split between US and ex-US.

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Re: Exchanging VT total world stock for VTI & VXUS

Post by alex_686 » Mon Oct 15, 2018 2:49 pm

MnD wrote:
Mon Oct 15, 2018 2:40 pm
There will be minuscule divergences due various things like to differences in expense rations or differences in other expenses or income such as trading costs, portfolio lending income, taxation of fund dividends internally etc.
Plus any changes in the capital structure. IPOs, dividends, stock buy backs, stock options to employees, etc. These have a larger affect than what Mnd lists. I would strike dividend taxation - it should be the same between the 2.

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triceratop
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Re: Exchanging VT total world stock for VTI & VXUS

Post by triceratop » Mon Oct 15, 2018 2:49 pm

inbox788 wrote:
Mon Oct 15, 2018 2:30 pm
IMO, the biggest reason to split VT is to reduced the expense ratio. You can adjust the drift over long periods if you choose, but I think it will take a decade for that effect to exceed the few basis points in fees. There's also foreign tax, but that's another small factor. Enjoy simplicity or enjoy a free dinner once in a while.

viewtopic.php?t=237427
Regarding the thread you link to: given 2017 evidence either (1) The posts by Tyler Aspect appear to be confirmed, or else (2) we do not fully understand the law and its applicability, or (3) Vanguard is breaking US law.

Right? I'm curious if alex_686 can chime in here on the regulatory/tax question since I recall he worked on the mutual fund side of things at one point.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

alex_686
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Re: Exchanging VT total world stock for VTI & VXUS

Post by alex_686 » Mon Oct 15, 2018 2:56 pm

triceratop wrote:
Mon Oct 15, 2018 2:49 pm
Regarding the thread you link to: given 2017 evidence either (1) The posts by Tyler Aspect appear to be confirmed, or else (2) we do not fully understand the law and its applicability, or (3) Vanguard is breaking US law.

Right? I'm curious if alex_686 can chime in here on the regulatory/tax question since I recall he worked on the mutual fund side of things at one point.
I can't say. I did do some work with foreign tax credits, but not on this issue. Our funds where either very heavy or very light on foreign income, so it never crossed my desk.

On a different, but related note, foreign MSCI ETFs have been outperforming their underlying index. Apparently, MSCI takes a conservative stance on foreign withholding but fund companies have been very successfully in reclaiming those withheld taxes.

jalbert
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Re: Exchanging VT total world stock for VTI & VXUS

Post by jalbert » Mon Oct 15, 2018 4:33 pm

Let’s first look at it without considering that market indices are float-adjusted.

If you hold the stocks held by VT and VXUS at market cap weight, you do not have to rebalance to maintain market cap weight as the stocks change in value over time. This is true whether held as individual stocks, in a single fund, or broken up into two or three funds.

VT tracks an index that is not identical to the union of the sets of stocks in the indices tracked by VTI and VXUS, but the principle is the same.

Because major market indices are float-adjusted, the market weights can change as the free float of the stocks change. This can require adjusting the portfolio to meet the new weights. This is true whether the stocks are held in a single fund, multiple funds, or individual stocks. If held in a single fund like VT, the portfolio managers will do 100% of this work for you. At the other extreme, holding individual stocks would mean you execute 100% of the changes needed to adjust for float.

With say VTI and VXUS you likely would see a very gradual drift due to float changes if you did not address them, and it would be unlikely to have much impact. A small change to allocation ratio of stocks and bonds has a much larger impact on portfolio performance and risk than a small change in US:non-US equity ratio.

I would not favor realizing a gain by selling VT just to split it up into two (or three) funds. You might as well wait and see if you get a chance to do it while harvesting a loss after a market sell off or bear market. All you risk by doing that is having VT continue to rise and missing the chance. That is not exactly what I would call a bad problem to have. You can make new contributions and reinvest dividends in your preferred taxable portfolio until and unless you can unwind VT in a tax-favorable manner.

Ideally, you probably want to fill taxable space with non-US equities for the foreign tax credit, and only hold US equities in taxable space if you have taxable space left over after that. This is the main reason to separate US and non-US equities into separate funds in a taxable account. I think VT has also had a lower percentage of qualified dividends.

I think either the higher tax efficiency of IXUS or lower ER of holding a combination of VEA and VWO may be preferable to holding VXUS.
Last edited by jalbert on Tue Oct 16, 2018 1:02 pm, edited 1 time in total.
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lostdog
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Re: Exchanging VT total world stock for VTI & VXUS

Post by lostdog » Mon Oct 15, 2018 5:04 pm

galeno wrote:
Mon Oct 15, 2018 2:18 pm
I think you're making a mistake.

When you hold VT you never have to worry if you have the correct USA/non-USA/EM ratio. You always do. Big advantage.

You're asking if you should trade a big advantage for the possibility of some small advantages. I don't think so.
+1

I'l go even further in saying I don't count international equities as a separate asset allocation. So when you see another US vs international thread, are you going to be able to stay the course?

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