Index fund vs ETF for taxable account

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eltron
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Index fund vs ETF for taxable account

Post by eltron » Wed Nov 21, 2018 9:13 am

I have retirement accounts at both Vanguard and Fidelity.

I'm hoping to open a taxable account in the near future. I've always been of the mindset that index funds from Vanguard, specifically VTSAX/VTIAX were the most tax efficient funds I could place in a taxable account.

I've recently read however that ETF's from Vanguard, Fidelity, Schwab, etc. are more efficient in the fact they don't distribute capital gains at all, whereas VTSAX, albeit very rarely, does.

What say you? If opening a taxable account, which would you go for VTSAX or an ETF equivalent?

22twain
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Re: Index fund vs ETF for taxable account

Post by 22twain » Wed Nov 21, 2018 9:19 am

As far as I know, with Vanguard funds, there's no difference tax-wise between the ETF and the mutual fund versions, because they're "simply" different share classes of the same fund. This is specific to Vanguard, because they have a patent on the mechanism.
My investing princiPLEs do not include absolutely preserving princiPAL.

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jakehefty17
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Re: Index fund vs ETF for taxable account

Post by jakehefty17 » Wed Nov 21, 2018 9:34 am

At Vanguard it shouldn't make a difference. Should you decide to go elsewhere, ETF's should be more tax advantageous.

I decided to open my taxable account at Schwab for commission-free index ETFs with competitive expense ratios. I also enjoy their no-fee ATM, interest-earning checking account. You need to pick a brokerage based on what you want/need/are looking for.

If mutual funds are easier for you to manage and make you comfortable, Vanguard may be the choice for you. They have a patent on their ETF/Mutual fund relationship to make their funds as tax efficient as possible.

I'd say you can't go wrong with Vanguard, Fidelity or Schwab for a taxable account. All are good options for indexing.
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gclancer
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Re: Index fund vs ETF for taxable account

Post by gclancer » Wed Nov 21, 2018 9:40 am

Mutual Funds in retirement accounts (makes it easier to keep every last dollar invested) and ETFs in taxable. You may want to turn off auto reinvestment of capital gains/dividends on all accounts to prevent the possibility of wash sales in the amount of reinvested dividends in the event you end up tax loss harvesting in taxable in the future.

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jhfenton
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Re: Index fund vs ETF for taxable account

Post by jhfenton » Wed Nov 21, 2018 9:41 am

eltron wrote:
Wed Nov 21, 2018 9:13 am
What say you? If opening a taxable account, which would you go for VTSAX or an ETF equivalent?
In a taxable account, VTIAX, VTI, ITOT, SCHB, SPTM are all basically equivalent total market fund choices. The Vanguard funds are at 4 bp, the others are at 3 bp.

As jakehefty17 said, VTIAX is a share class of the same fund as VTI, so it can share the ETF wrapper's tax advantages. Until Vanguard's patent expires, no one else can use that structure. But the other companies all have perfectly good ETFs at rock-bottom prices.

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grabiner
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Re: Index fund vs ETF for taxable account

Post by grabiner » Wed Nov 21, 2018 6:59 pm

eltron wrote:
Wed Nov 21, 2018 9:13 am
I'm hoping to open a taxable account in the near future. I've always been of the mindset that index funds from Vanguard, specifically VTSAX/VTIAX were the most tax efficient funds I could place in a taxable account.

I've recently read however that ETF's from Vanguard, Fidelity, Schwab, etc. are more efficient in the fact they don't distribute capital gains at all, whereas VTSAX, albeit very rarely, does.
ETFs can still distribute capital gains, although the creation-redemption process makes this less likely. Only three of Vanguard's stock ETFs have ever distributed a capital gain, and only REIT Index distributed gains other than just after getting started.

Vanguard's ETFs are a share class of the index funds, so both will distribute the same capital gains, and both benefit from the ETF's capital gain reduction. Neither Total Stock Market nor Total International has distributed a capital gain since the ETF class was added.

If you don't use Vanguard's index funds, then you should use ETFs. Fidelity's index funds do distribute capital gains, while the equivalent ETFs which you can buy in a Fidelity brokerage are unlikely to.
Wiki David Grabiner

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