tax explanation on active vs passive funds in a taxable brokerage account

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Sokam
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tax explanation on active vs passive funds in a taxable brokerage account

Post by Sokam »

Can someone please explain why and how passive funds are better than active mutual funds in a taxable brokerage account? Ive tried looking everywhere and cant find the exact reasons. Everything just says passive is better the end. A example would be great! Thank you!
mjs06861
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by mjs06861 »

Active management involves a lot more selling and buying (switching one security for another). Anytime this happens they are required to distribute any capital gains for the assets they have sold to the holders of the mutual funds. These gains are taxable, the taxes are paid by the people who have invested in the fund.
MotoTrojan
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by MotoTrojan »

mjs06861 wrote: Sun Mar 24, 2019 7:58 pm Active management involves a lot more selling and buying (switching one security for another). Anytime this happens they are required to distribute any capital gains for the assets they have sold to the holders of the mutual funds. These gains are taxable, the taxes are paid by the people who have invested in the fund.
This. While active is generally worse, some passive funds can be problematic too. Turnover is a good metric to use. Niche indexes such as small-cap, value/growth, etc will have more companies coming in and out and thus worse tax-efficiency. This is why Total US, Total Int, and Total World are best in taxable.
senex
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by senex »

Sokam wrote: Sun Mar 24, 2019 7:48 pm Can someone please explain why and how passive funds are better than active mutual funds in a taxable brokerage account? Ive tried looking everywhere and cant find the exact reasons. Everything just says passive is better the end. A example would be great! Thank you!
What mjs & Moto said. It is a rule of thumb based on the general principle that active funds have higher turnover. It is not universally true (you can find low turnover active funds and high turnover passive).

You asked for an example:

Consider a magical land where every stock pays a 2% dividend. Fund A and Fund B own identical stocks at identical cost basis. Fund A has 50% turnover -- i.e they sell half their holdings during the year and buy different stocks. Fund B has 5% turnover. In this magical land assume all the stocks sold by each fund were sold for 8% above cost basis.

You hold $1000 of each fund.

At tax time, your 1099-DIV for Fund A will show $20 of dividends and $40 of capital gains distributions (your share of an 8% gain recognized on 50% of the portfolio, i.e. $1000 x 50% x 8%).

Your 1099-DIV for Fund B will show $20 of dividends and $4 of capital gain distributions ($1000 x 5% x 8%).
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Sokam
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by Sokam »

senex wrote: Sun Mar 24, 2019 8:09 pm
Sokam wrote: Sun Mar 24, 2019 7:48 pm Can someone please explain why and how passive funds are better than active mutual funds in a taxable brokerage account? Ive tried looking everywhere and cant find the exact reasons. Everything just says passive is better the end. A example would be great! Thank you!
What mjs & Moto said. It is a rule of thumb based on the general principle that active funds have higher turnover. It is not universally true (you can find low turnover active funds and high turnover passive).

You asked for an example:

Consider a magical land where every stock pays a 2% dividend. Fund A and Fund B own identical stocks at identical cost basis. Fund A has 50% turnover -- i.e they sell half their holdings during the year and buy different stocks. Fund B has 5% turnover. In this magical land assume all the stocks sold by each fund were sold for 8% above cost basis.

You hold $1000 of each fund.

At tax time, your 1099-DIV for Fund A will show $20 of dividends and $40 of capital gains distributions (your share of an 8% gain recognized on 50% of the portfolio, i.e. $1000 x 50% x 8%).

Your 1099-DIV for Fund B will show $20 of dividends and $4 of capital gain distributions ($1000 x 5% x 8%).
So after 10 years of doing this if I withdraw all of both funds will I have to pay I have to pay less taxes on fund A because I was paying yearly and then pay more on fund B because I didn't pay taxes already?

Can you explain how withdrawing both funds work? Thank you that helps allot!
krow36
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by krow36 »

This article by John Bogle in the peer reviewed Financial Analysts Journal concludes that the cost difference between average actively managed funds and passive index funds is over 2%.
http://johncbogle.com/wordpress/wp-cont ... b-2014.pdf
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Sokam
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by Sokam »

krow36 wrote: Sun Mar 24, 2019 8:33 pm This article by John Bogle in the peer reviewed Financial Analysts Journal concludes that the cost difference between average actively managed funds and passive index funds is over 2%.
http://johncbogle.com/wordpress/wp-cont ... b-2014.pdf
I know index funds are the better choice as they beat 90% of active funds and dont have loads or high expenses but im trying to figure out how both funds are taxed in a taxable account.
venkman
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by venkman »

Sokam wrote: Sun Mar 24, 2019 8:30 pm So after 10 years of doing this if I withdraw all of both funds will I have to pay I have to pay less taxes on fund A because I was paying yearly and then pay more on fund B because I didn't pay taxes already?
Yes. Assuming you reinvest all the CG distributions, your cost basis will increase. 10 years down the road (assuming both funds have the same performance and Fund A continues with higher CG distributions), Fund B will have a lower cost basis, and you would owe more in taxes when selling it.

The advantage of Fund B is that less money needs to be taken out to cover taxes along the way, so more money can stay in the account to compound. (Or if you just covered the taxes with separate money, that's money you could have invested into the fund instead.) The growth of that extra money will cause Fund B to have a slightly higher total return, after all taxes are accounted for.
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grabiner
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by grabiner »

venkman wrote: Sun Mar 24, 2019 9:10 pm
Sokam wrote: Sun Mar 24, 2019 8:30 pm So after 10 years of doing this if I withdraw all of both funds will I have to pay I have to pay less taxes on fund A because I was paying yearly and then pay more on fund B because I didn't pay taxes already?
Yes. Assuming you reinvest all the CG distributions, your cost basis will increase. 10 years down the road (assuming both funds have the same performance and Fund A continues with higher CG distributions), Fund B will have a lower cost basis, and you would owe more in taxes when selling it.

The advantage of Fund B is that less money needs to be taken out to cover taxes along the way, so more money can stay in the account to compound. (Or if you just covered the taxes with separate money, that's money you could have invested into the fund instead.) The growth of that extra money will cause Fund B to have a slightly higher total return, after all taxes are accounted for.
A further advantage of low turnover is that high-turnover Fund A may sell some stocks which it has held for less than one year; the capital gain on these shares will be taxed at the higher short-term rate. Almost all of the capital gains on Fund B will be long-term (taxes on shares you have held for more than one year). Thus you may pay more dollars of tax on Fund A than on Fund B, in addition to paying them earlier.
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sixty40
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by sixty40 »

Real life example based on 2018 1099-div, assume based on $100,000 for each fund.

Dodge and Cox Stock Fund distributions: $1708 total dividends, $8000 LT capital gains.

VG Total Stock Mkt fund distribution: $1970 total dividends, $0 capital gains.

This example is just based on how much more in taxes you will pay with active funds compared to passive. All my active funds have much more distributions than my index funds.
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Sokam
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by Sokam »

sixty40 wrote: Sun Mar 24, 2019 11:32 pm Real life example based on 2018 1099-div, assume based on $100,000 for each fund.

Dodge and Cox Stock Fund distributions: $1708 total dividends, $8000 LT capital gains.

VG Total Stock Mkt fund distribution: $1970 total dividends, $0 capital gains.

This example is just based on how much more in taxes you will pay with active funds compared to passive. All my active funds have much more distributions than my index funds.
So since you paid 8000 LT capital gains on Dodge and Cox so you not need to pay that 8000 again? How does the math work out for that?
nolesrule
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by nolesrule »

Sokam wrote: Sun Mar 24, 2019 11:46 pm
sixty40 wrote: Sun Mar 24, 2019 11:32 pm Real life example based on 2018 1099-div, assume based on $100,000 for each fund.

Dodge and Cox Stock Fund distributions: $1708 total dividends, $8000 LT capital gains.

VG Total Stock Mkt fund distribution: $1970 total dividends, $0 capital gains.

This example is just based on how much more in taxes you will pay with active funds compared to passive. All my active funds have much more distributions than my index funds.
So since you paid 8000 LT capital gains on Dodge and Cox so you not need to pay that 8000 again? How does the math work out for that?
The math is the same if you remain in the same Capital Gains tax bracket. If you are in a lower bracket when you sell, you would have paid less (and possibly zero) in taxes. If you are in a higher bracket when you sell, you will pay more in taxes.

Of course, if you are reinvesting the capital gains distribution, the money has to come from somewhere to pay the taxes now. Surprise, you are paying an extra $1200 in taxes this year.
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Sokam
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by Sokam »

nolesrule wrote: Mon Mar 25, 2019 6:44 am
Sokam wrote: Sun Mar 24, 2019 11:46 pm
sixty40 wrote: Sun Mar 24, 2019 11:32 pm Real life example based on 2018 1099-div, assume based on $100,000 for each fund.

Dodge and Cox Stock Fund distributions: $1708 total dividends, $8000 LT capital gains.

VG Total Stock Mkt fund distribution: $1970 total dividends, $0 capital gains.

This example is just based on how much more in taxes you will pay with active funds compared to passive. All my active funds have much more distributions than my index funds.
So since you paid 8000 LT capital gains on Dodge and Cox so you not need to pay that 8000 again? How does the math work out for that?
The math is the same if you remain in the same Capital Gains tax bracket. If you are in a lower bracket when you sell, you would have paid less (and possibly zero) in taxes. If you are in a higher bracket when you sell, you will pay more in taxes.

Of course, if you are reinvesting the capital gains distribution, the money has to come from somewhere to pay the taxes now. Surprise, you are paying an extra $1200 in taxes this year.
So if both of those 100,000 funds grew to 200,000 you would pay the same to withdraw them even tho you are paying yearly for the active and not as much for the passive?
nolesrule
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by nolesrule »

Sokam wrote: Mon Mar 25, 2019 8:25 am
nolesrule wrote: Mon Mar 25, 2019 6:44 am
Sokam wrote: Sun Mar 24, 2019 11:46 pm
sixty40 wrote: Sun Mar 24, 2019 11:32 pm Real life example based on 2018 1099-div, assume based on $100,000 for each fund.

Dodge and Cox Stock Fund distributions: $1708 total dividends, $8000 LT capital gains.

VG Total Stock Mkt fund distribution: $1970 total dividends, $0 capital gains.

This example is just based on how much more in taxes you will pay with active funds compared to passive. All my active funds have much more distributions than my index funds.
So since you paid 8000 LT capital gains on Dodge and Cox so you not need to pay that 8000 again? How does the math work out for that?
The math is the same if you remain in the same Capital Gains tax bracket. If you are in a lower bracket when you sell, you would have paid less (and possibly zero) in taxes. If you are in a higher bracket when you sell, you will pay more in taxes.

Of course, if you are reinvesting the capital gains distribution, the money has to come from somewhere to pay the taxes now. Surprise, you are paying an extra $1200 in taxes this year.
So if both of those 100,000 funds grew to 200,000 you would pay the same to withdraw them even tho you are paying yearly for the active and not as much for the passive?

If you have a Capital Gains distribution, you'll pay taxes on the $8000 now instead of the future. But you will have to reinvest the distribution in order to keep that money invested and grow. If you are in the same tax bracket now vs. in the future, the total taxes paid works out to be the same when you add them together. However it means paying taxes on that $8000 now ($1200 in 15% CG bracket), which has to come from somewhere.

If you are in the 0 percent CG bracket in the future, you would have been better off not getting the CG distribution now, because that would be $1200 (or more) in taxes you paid now that would have been completely avoided in the future.


This has nothing to do with active or passive funds. The math is the same. You need to look at distributions of dividends and capital gains distributions to determine tax efficiency.

Taxes on $8000 would be $1200 in the 15% CG bracket.
sixty40
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by sixty40 »

Sokam wrote: Sun Mar 24, 2019 11:46 pm
sixty40 wrote: Sun Mar 24, 2019 11:32 pm Real life example based on 2018 1099-div, assume based on $100,000 for each fund.

Dodge and Cox Stock Fund distributions: $1708 total dividends, $8000 LT capital gains.

VG Total Stock Mkt fund distribution: $1970 total dividends, $0 capital gains.

This example is just based on how much more in taxes you will pay with active funds compared to passive. All my active funds have much more distributions than my index funds.
So since you paid 8000 LT capital gains on Dodge and Cox so you not need to pay that 8000 again? How does the math work out for that?
No you do not need to pay it again. If you reinvest div & cap gain distributions, in this example, the $1708 and $8000 will be added to your cost basis. If for example your cost basis for the $100k market value in DODGX (dodge & cox stock fd) was $50k, then $50000+1708+8000= $59,708 would be your new cost basis. If you did not reinvest your dividends and cap gains distr and just took them as cash, then your cost basis stays at $50k (you did not buy any shares). Same thing happens to all(or most all) stock funds, stocks/equities, etc. Whether you take the distributions as cash, or you reinvest it in the same fund, or you reinvest it in another fund, all distributions are taxed at the time they are given.

Reinvesting distributions is the same as taking the distributions as cash and then taking that cash to buy more shares of the same fund. Reinvesting just takes away a couple steps.
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Sokam
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by Sokam »

sixty40 wrote: Mon Mar 25, 2019 10:01 am
Sokam wrote: Sun Mar 24, 2019 11:46 pm
sixty40 wrote: Sun Mar 24, 2019 11:32 pm Real life example based on 2018 1099-div, assume based on $100,000 for each fund.

Dodge and Cox Stock Fund distributions: $1708 total dividends, $8000 LT capital gains.

VG Total Stock Mkt fund distribution: $1970 total dividends, $0 capital gains.

This example is just based on how much more in taxes you will pay with active funds compared to passive. All my active funds have much more distributions than my index funds.
So since you paid 8000 LT capital gains on Dodge and Cox so you not need to pay that 8000 again? How does the math work out for that?
No you do not need to pay it again. If you reinvest div & cap gain distributions, in this example, the $1708 and $8000 will be added to your cost basis. If for example your cost basis for the $100k market value in DODGX (dodge & cox stock fd) was $50k, then $50000+1708+8000= $59,708 would be your new cost basis. If you did not reinvest your dividends and cap gains distr and just took them as cash, then your cost basis stays at $50k (you did not buy any shares). Same thing happens to all(or most all) stock funds, stocks/equities, etc. Whether you take the distributions as cash, or you reinvest it in the same fund, or you reinvest it in another fund, all distributions are taxed at the time they are given.

Reinvesting distributions is the same as taking the distributions as cash and then taking that cash to buy more shares of the same fund. Reinvesting just takes away a couple steps.
Great last question!

If turn over is high (100+) in a fund. Do you need to pay short term capital gains on the distributions for that fund for the year even if you have had the fund for many years? Can someone please explain how that works to me?
sixty40
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by sixty40 »

Sokam wrote: Mon Mar 25, 2019 10:26 am
sixty40 wrote: Mon Mar 25, 2019 10:01 am
Sokam wrote: Sun Mar 24, 2019 11:46 pm
sixty40 wrote: Sun Mar 24, 2019 11:32 pm Real life example based on 2018 1099-div, assume based on $100,000 for each fund.

Dodge and Cox Stock Fund distributions: $1708 total dividends, $8000 LT capital gains.

VG Total Stock Mkt fund distribution: $1970 total dividends, $0 capital gains.

This example is just based on how much more in taxes you will pay with active funds compared to passive. All my active funds have much more distributions than my index funds.
So since you paid 8000 LT capital gains on Dodge and Cox so you not need to pay that 8000 again? How does the math work out for that?
No you do not need to pay it again. If you reinvest div & cap gain distributions, in this example, the $1708 and $8000 will be added to your cost basis. If for example your cost basis for the $100k market value in DODGX (dodge & cox stock fd) was $50k, then $50000+1708+8000= $59,708 would be your new cost basis. If you did not reinvest your dividends and cap gains distr and just took them as cash, then your cost basis stays at $50k (you did not buy any shares). Same thing happens to all(or most all) stock funds, stocks/equities, etc. Whether you take the distributions as cash, or you reinvest it in the same fund, or you reinvest it in another fund, all distributions are taxed at the time they are given.

Reinvesting distributions is the same as taking the distributions as cash and then taking that cash to buy more shares of the same fund. Reinvesting just takes away a couple steps.
Great last question!

If turn over is high (100+) in a fund. Do you need to pay short term capital gains on the distributions for that fund for the year even if you have had the fund for many years? Can someone please explain how that works to me?
It does not matter how long you have had the fund, you are just an investor. If I had the fund for only one year and you had the fund for 20 yrs, we pay the same exact per share capital gain distributions as indicated in the 1099-DIV, you do not get a "personal" 1099-DIV just because you owned it longer than me. In fact if you buy into the fund just before the ex-dividend date, you will get hit with the same per share cap gains distribution as anyone else who have owned the fund much longer. You as the investor do not dictate to the fund whether they sell LT or ST cap gain positions, you just go along for the ride. The fund will determine what gets sold, and I assume they do it in the best interest of the investor as far as cap gains are concerned.
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by grabiner »

Sokam wrote: Mon Mar 25, 2019 10:26 am If turn over is high (100+) in a fund. Do you need to pay short term capital gains on the distributions for that fund for the year even if you have had the fund for many years? Can someone please explain how that works to me?
What matters for your taxes as a fundholder is what the fund does. If the fund bought a stock, and sold the stock within one year, the capital gain on that stock is short-term, and all fundholders must pay tax on that gain at the short-term rate. Conversely, if the fund distributed a gain from selling a stock that it held for more than a year, all fundholders pay tax at the long-term rate, even if they bought the fund a month ago.

Your own holding period determines whether any gains or losses are short-term or long-term when you sell the fund shares.
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Sokam
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by Sokam »

sixty40 wrote: Mon Mar 25, 2019 11:37 am
Sokam wrote: Mon Mar 25, 2019 10:26 am
sixty40 wrote: Mon Mar 25, 2019 10:01 am
Sokam wrote: Sun Mar 24, 2019 11:46 pm
sixty40 wrote: Sun Mar 24, 2019 11:32 pm Real life example based on 2018 1099-div, assume based on $100,000 for each fund.

Dodge and Cox Stock Fund distributions: $1708 total dividends, $8000 LT capital gains.

VG Total Stock Mkt fund distribution: $1970 total dividends, $0 capital gains.

This example is just based on how much more in taxes you will pay with active funds compared to passive. All my active funds have much more distributions than my index funds.
So since you paid 8000 LT capital gains on Dodge and Cox so you not need to pay that 8000 again? How does the math work out for that?
No you do not need to pay it again. If you reinvest div & cap gain distributions, in this example, the $1708 and $8000 will be added to your cost basis. If for example your cost basis for the $100k market value in DODGX (dodge & cox stock fd) was $50k, then $50000+1708+8000= $59,708 would be your new cost basis. If you did not reinvest your dividends and cap gains distr and just took them as cash, then your cost basis stays at $50k (you did not buy any shares). Same thing happens to all(or most all) stock funds, stocks/equities, etc. Whether you take the distributions as cash, or you reinvest it in the same fund, or you reinvest it in another fund, all distributions are taxed at the time they are given.

Reinvesting distributions is the same as taking the distributions as cash and then taking that cash to buy more shares of the same fund. Reinvesting just takes away a couple steps.
Great last question!

If turn over is high (100+) in a fund. Do you need to pay short term capital gains on the distributions for that fund for the year even if you have had the fund for many years? Can someone please explain how that works to me?
It does not matter how long you have had the fund, you are just an investor. If I had the fund for only one year and you had the fund for 20 yrs, we pay the same exact per share capital gain distributions as indicated in the 1099-DIV, you do not get a "personal" 1099-DIV just because you owned it longer than me. In fact if you buy into the fund just before the ex-dividend date, you will get hit with the same per share cap gains distribution as anyone else who have owned the fund much longer. You as the investor do not dictate to the fund whether they sell LT or ST cap gain positions, you just go along for the ride. The fund will determine what gets sold, and I assume they do it in the best interest of the investor as far as cap gains are concerned.
How are vanguard index funds better in a taxable brokerage account than other brokerages like Fidelity and swab? Can someone please please why and how?
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by grabiner »

Sokam wrote: Mon Mar 25, 2019 11:47 pm How are vanguard index funds better in a taxable brokerage account than other brokerages like Fidelity and swab? Can someone please please why and how?
Even index funds must sell stocks, because stocks leave the index. The creation-redemption process allows ETFs to avoid most capital gains when they must sell. Vanguard's ETFs are a share class of the mtuual fund, so they both get the benefit; very few of Vanguard's stock ETFs have distributed capital gains. If you don't use Vanguard in your taxable account, you need to use non-Vanguard ETFs rather than mutual funds to get this tax benefit.
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Sokam
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by Sokam »

grabiner wrote: Mon Mar 25, 2019 11:59 pm
Sokam wrote: Mon Mar 25, 2019 11:47 pm How are vanguard index funds better in a taxable brokerage account than other brokerages like Fidelity and swab? Can someone please please why and how?
Even index funds must sell stocks, because stocks leave the index. The creation-redemption process allows ETFs to avoid most capital gains when they must sell. Vanguard's ETFs are a share class of the mtuual fund, so they both get the benefit; very few of Vanguard's stock ETFs have distributed capital gains. If you don't use Vanguard in your taxable account, you need to use non-Vanguard ETFs rather than mutual funds to get this tax benefit.
So any vanguard mutual funds doesn't have distributed capital gains? Is that long term or short term? How and why is that? Examples help me understand the best! Thank you
krow36
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by krow36 »

This table for Dec 2018 distributions gives you each Vanguard fund’s QDI % (qualified dividend income, taxed at cap gain rates), Net Income (Ordinary dividends (qualified and non-qualified dividend income)), short-term cap gain distributions (taxed at income tax rates) and long-term cap gain distributions (taxed at cap gain rates). https://advisors.vanguard.com/iwe/pdf/FA891511.pdf
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Re: tax explanation on active vs passive funds in a taxable brokerage account

Post by grabiner »

Sokam wrote: Tue Mar 26, 2019 12:04 am
grabiner wrote: Mon Mar 25, 2019 11:59 pm
Sokam wrote: Mon Mar 25, 2019 11:47 pm How are vanguard index funds better in a taxable brokerage account than other brokerages like Fidelity and swab? Can someone please please why and how?
Even index funds must sell stocks, because stocks leave the index. The creation-redemption process allows ETFs to avoid most capital gains when they must sell. Vanguard's ETFs are a share class of the mtuual fund, so they both get the benefit; very few of Vanguard's stock ETFs have distributed capital gains. If you don't use Vanguard in your taxable account, you need to use non-Vanguard ETFs rather than mutual funds to get this tax benefit.
So any vanguard mutual funds doesn't have distributed capital gains? Is that long term or short term? How and why is that? Examples help me understand the best! Thank you
Traditional mutual funds are bought directly from the fund company, and sold to it. Shares are created or redeemed in response to purchases and sales; if investors buy $19M of a fund and sell $20M in one day at a sale price of $10 per share, the fund must sell $1M of investments and use those to redeem 100,000 shares.

ETF shares are bought and sold from other investors on the stock market. Shares of ETFs are created or redeemed by institutional investors in blocks; an investor can ask the fund to convert 100,000 shares to the underlying stock, or can give the underlying stock to the fund and ask it to convert to 100,000 shares. This process keeps the fund price in line with the price of the stock.

The redemption process allows ETFs to reduce capital gains. If an ETF has purchased shares at multiple prices, it can give away the shares it purchased at the lowest price. For example, if the ETF has purchased 100 shares of a stock each for $20, $30, and $40, and the stock is now worth $34, it has a $1400 capital gain. If the ETF gives away 100 shares in a redemption, it can give away the shares worth $20, so that it now has a $100 capital loss; if it sells the stock, it can use that loss to offset other gains.

Vanguard's index funds have ETFs as a share class. For example, you can buy Vanguard Total International Index as the Admiral share class VTIAX, or the Institutional share class VTSNX ($5M minimum, so you will see this only in a 401(k) plan), or the ETF share class VXUS. The share classes are identical except for the expenses; if the fund distributes a dividend or capital gain, all three share classes must distribute the same gain (with the dividend reduced by expenses). This fund has not distributed a capital gain since the ETF class was created.

In fact, very few of Vanguard's stock index funds have distributed capital gains since the ETF class was created, and none have distributed a gain since 2010. Vanguard REIT Index distributed capital gains in 2004-2008. Vanguard Consumer Staples Index and FTSE All-World Ex-US Small-Cap distribute gains just after starting, in 2004 and 2009-2010 respectively. (The redemption process is less effective at eliminating gains on new funds, because there will be a smaller range of prices. In particular, FTSE All-World Ex-US Small-Cap started near the 2009 market bottom, so that most of its stock had huge gains in the first year; it still held the distributed gain to less than 1% of the share price.)

Vanguard's non-index funds are no more tax-efficient than any other non-index funds with similar turnover.
Wiki David Grabiner
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