Costs for Switching Funds in Taxable - Mid Cap Growth (RPMGX) vs Schwab Total Market (SWTSX)

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Topic Author
lowcost
Posts: 3
Joined: Sun Feb 10, 2019 2:08 pm

Costs for Switching Funds in Taxable - Mid Cap Growth (RPMGX) vs Schwab Total Market (SWTSX)

Post by lowcost » Sun Feb 10, 2019 2:27 pm

Hi,

I am a long time lurker and enjoy reading and learning from all of the posts on the forum.

I am trying to determine whether selling my T Rowe Price Mid Cap Growth (RPMGX - ER 0.76%) and switching to Schwab's Total Market (SWTSX- ER 0.03%) makes financial sense. I am concerned over the Mid Cap Growth's High Capital Gains/distributions every year and its impact on my taxes. I have owned the Mid Cap Growth (RPMGX) for at least 15 years and it has performed very well. This fund is in a taxable brokerage account.

The Mid Cap Growth (RPMGX) has a high Tax Efficiency of 2.66% for 2018.
The Schwab Total Market (SWTSX) has a tax efficiency of 0.98% for 2018.

I found the Bogleheads Wiki page for, "Paying a tax cost to switch funds". I tried populating the spreadsheet to calculate the numbers, but I am not sure if I am putting the correct values into the the spreadsheet. I am not sure what to enter for the distributions and tax on the distributions. I am 49 years old and plan to maintain the investments until retirement (at least 10-15 years)

The wiki page is at: https://www.bogleheads.org/wiki/Paying_ ... rnal_links

In the T Rowe Price Mid Cap Growth, I have $55K and a cost basis of $37K.

I know past performance is no guarantee of future returns. Here's the 1, 3, 5, 10, and 15 year returns for each fund:
Fund, 1 year, 3 year, 5 year, 10 year, 15 year
RPMGX, 9.95, 18.86, 11.53, 17.18, 11.31
SWTSX, 6.91, 16.11, 10.26, 14.50, 8.41

My instinct tells me the Schwab Total Market with a ER of .03% would be better. However, based upon the values I am entering, the calculations show I would be better off holding on the T Rowe Price Mid Cap Growth. In the past the Mid Cap Growth beat the Total Market over the 1, 3, 5, 10, and 15 years. It seems the calculations are driven by the expected return of each fund and not as affected by the expense ration or tax efficiency of each fund.

I am in the 24% fed tax bracket, live in California, and will be subject to 15% capital gains tax rate.

Can anyone help with crunching the numbers or let me know if switching funds make sense?

Thanks for the help.

typical.investor
Posts: 1176
Joined: Mon Jun 11, 2018 3:17 am

Re: Costs for Switching Funds in Taxable - Mid Cap Growth (RPMGX) vs Schwab Total Market (SWTSX)

Post by typical.investor » Sun Feb 10, 2019 9:06 pm

lowcost wrote:
Sun Feb 10, 2019 2:27 pm

I know past performance is no guarantee of future returns. Here's the 1, 3, 5, 10, and 15 year returns for each fund:
Fund, 1 year, 3 year, 5 year, 10 year, 15 year
RPMGX, 9.95, 18.86, 11.53, 17.18, 11.31
SWTSX, 6.91, 16.11, 10.26, 14.50, 8.41

My instinct tells me the Schwab Total Market with a ER of .03% would be better. However, based upon the values I am entering, the calculations show I would be better off holding on the T Rowe Price Mid Cap Growth. In the past the Mid Cap Growth beat the Total Market over the 1, 3, 5, 10, and 15 years. It seems the calculations are driven by the expected return of each fund and not as affected by the expense ration or tax efficiency of each fund.
Welcome and nice first post.

I think you should hold SCHB (Schwab US broad market) in taxable. SWTSX will issues capital gains too. On average it's been about 0.1% tax cost yearly (versus SCHB).

I tried to find RPMGX's exact distributions to run the numbers but didn't see them on their site. In any case, your point about expected returns is valid so let's look at it.

Understand that growth stocks have been on a tear in recent years. That doesn't mean they have higher expected returns going forward though. With high valuations, future returns may necessarily be more muted. Who knows though for how long they can continue to outperform though, so I am not suggesting market timing based on valuation.

If you look at SCHG (large-midcap) growth ETF, you'll see it's outperformed RPMGX and SWTSX in its 9 year life. So I think the RPMGX had a nice universe to select from since growth has been doing well.

So not only does SCHB have a lower ER than RPMGX, and lower tax costs (since it doesn't issue any yearly capital gains and you only face that when selling), but actually it has higher expected returns from a valuation standpoint. Of course, we can't know the timing - next 5 years, 10 years, 15 years, longer?

At a minimum, I would redirect any distributions from RPMGX into SCHB and have a look at the tax consequences of selling the RPMGX shares which now have capital gains.

https://www.portfoliovisualizer.com/bac ... ion4_3=100

Topic Author
lowcost
Posts: 3
Joined: Sun Feb 10, 2019 2:08 pm

Re: Costs for Switching Funds in Taxable - Mid Cap Growth (RPMGX) vs Schwab Total Market (SWTSX)

Post by lowcost » Mon Feb 11, 2019 1:11 am

Thanks for the response. I found the T Rowe Price Distributions at: https://www.troweprice.com/personal-inv ... tions.html

For 2018, RPMGX shows It shows the following:
- Income Dividends $0.12 per share
- Short Term Gains $0.83 per share
- Long Term Gains $8.31 per share

I was concerned about the long term gains being $8.31 per share .

I used portfolio visualizer too and it showed the Mid Cap Growth (RPMGX) beating the total market for every time span I could identify (1 year, 3, 5, 10, 15, etc). Today, I switched the fund to not reinvest the distributions and capital gains.

Thanks for the tip on SCHG. It performed better than RPMGX from 2011. Seeing the SCHG - SCHB - SCHG comparison highlighted a selected time window can make a fund look better/worse than others. SCHB, SCHG, SCHM, SCHA, and the other ETFs do not have enough of history to do a longer time comparison.

I think the best move would be to sell the RPMGX and reinvest according to my asset allocation which includes large, midcap, and small caps (mix of total market) and international (SCHF, SCHE) in my taxable account (bonds and REITS are in my tax advantage accounts). It seems this would provide more diversification and better tax efficiency.

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