Vanguard Health Care Fund

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SlowMovingInvestor
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Vanguard Health Care Fund

Post by SlowMovingInvestor » Mon Jan 13, 2020 9:13 pm

I have a holding of Vanguard Health Care (VHGAX) with significant embedded gains. This fund has performed well and is low cost , but isn't very tax efficient.

I'm wondering whether to sell of chunks and buy a health care index like Vanguard's VHT or Fidelity's FHLC. Any comments/thoughts ?
Last edited by SlowMovingInvestor on Tue Jan 14, 2020 10:42 pm, edited 3 times in total.

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willthrill81
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Re: Vanguard Health Care Fund

Post by willthrill81 » Mon Jan 13, 2020 9:42 pm

Don't let the tail (i.e. taxes) wag the dog (i.e. your investment strategy). If the fund still meets your investment objectives, then I'd suggest that you keep it. If it doesn't, then you can consider slowly shifting it to other funds.

When do you plan on retiring? Could you wait until then to begin selling it, potentially paying 0% LTCG?
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Re: Vanguard Health Care Fund

Post by Grt2bOutdoors » Mon Jan 13, 2020 9:50 pm

willthrill81 wrote:
Mon Jan 13, 2020 9:42 pm
Don't let the tail (i.e. taxes) wag the dog (i.e. your investment strategy). If the fund still meets your investment objectives, then I'd suggest that you keep it. If it doesn't, then you can consider slowly shifting it to other funds.

When do you plan on retiring? Could you wait until then to begin selling it, potentially paying 0% LTCG?
Agree. +1
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Vegomatic
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Re: Vanguard Health Care Fund

Post by Vegomatic » Mon Jan 13, 2020 10:00 pm

Below is the tax analysis page from M* for VHGAX (VG Healthcare, Admiral Class, note correct symbol).

http://performance.morningstar.com/fund ... on?t=vghax
  1. You can enter tickers for VHT and VHLC and see the difference in pre and post tax returns.
  2. Over last 3 - 5 years, the two ETFs have performed much better than the VGHAX, as you indicated.
  3. At the very least, you can take the distributions you received from VHGAX, and invest (if you can afford to do so) in the healthcare ETFs.
  4. Over last 3 - 5 years, it looks like the M* Tax Cost of the VHGAX is about 170 bps more than the two ETFs.
  5. You could work out - on paper - what the tax cost (in bps) would be were you to sell the VHGAX and pay the (ugh!) tax.
  6. Then see how may years it would take for you to recover this extra cost by owning the more efficient ETFs.
  7. Then think and see if 'it' (selling fund, paying tax now, and buying ETF that will be more efficient in future) seems 'worth it'.

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sperry8
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Re: Vanguard Health Care Fund

Post by sperry8 » Mon Jan 13, 2020 11:54 pm

SlowMovingInvestor wrote:
Mon Jan 13, 2020 9:13 pm
I have a holding of Vanguard Heath Care (VHCAX) with significant embedded gains. This fund has performed well and is low cost , but isn't very tax efficient.

I'm wondering whether to sell of chunks and buy a health care index like Vanguard's VHT or Fidelity's FHLC. Any comments/thoughts ?
Actually, it hasn't performed well. It has gone up if that's what you mean. But it has underperformed VHT over the past few years and even longer once taxes are included. VHCAX is not your fathers healthcare fund. The majority of its outperformance happened years ago. Note it basically ties the benchmark before taxes and loses after
Last edited by sperry8 on Tue Jan 14, 2020 11:32 am, edited 1 time in total.
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gd
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Re: Vanguard Health Care Fund

Post by gd » Tue Jan 14, 2020 8:16 am

sperry8 wrote:
Mon Jan 13, 2020 11:54 pm
VHCAX is not your fathers healthcare fund. The majority of its outperformance happened years ago. Not it basically ties the benchmark before taxes and loses after
Yup. Had it since the early 90s but it was about the first on my list for capital gains harvesting and cash extraction 5 years ago, after years of startling CGs. Replaced it with VHT and VTI for a bit more sector diversification, successfully so far.

Elysium
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Re: Vanguard Health Care Fund

Post by Elysium » Tue Jan 14, 2020 10:31 pm

Surprised no one pointed this out. The difference between VHT and VGHAX is foreign equities. The index fund holds nothing in Foreign equities while the active fund has 30% allocated to them. This alone could make the performance results vastly different during short time periods.

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whodidntante
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Re: Vanguard Health Care Fund

Post by whodidntante » Wed Jan 15, 2020 12:00 am

In a nice, gut-wrenching drawdown, look for that fund to hand you an offensively large capital gains distribution the same year it pukes. The reason is they'll run out of losers to sell to offset the winners, and the fund manager will be unable to meet redemptions without realizing capital gains. This according to some dummy named whodidntante who owned actively managed equity funds in taxable leading into Hurricane Lehman. :happy :oops:

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SlowMovingInvestor
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Re: Vanguard Health Care Fund

Post by SlowMovingInvestor » Wed Jan 15, 2020 8:19 am

Vegomatic wrote:
Mon Jan 13, 2020 10:00 pm
Below is the tax analysis page from M* for VHGAX (VG Healthcare, Admiral Class, note correct symbol).

http://performance.morningstar.com/fund ... on?t=vghax
  1. You can enter tickers for VHT and VHLC and see the difference in pre and post tax returns.
  2. Over last 3 - 5 years, the two ETFs have performed much better than the VGHAX, as you indicated.
  3. At the very least, you can take the distributions you received from VHGAX, and invest (if you can afford to do so) in the healthcare ETFs.
    [*]Over last 3 - 5 years, it looks like the M* Tax Cost of the VHGAX is about 170 bps more than the two ETFs.
  4. You could work out - on paper - what the tax cost (in bps) would be were you to sell the VHGAX and pay the (ugh!) tax.
  5. Then see how may years it would take for you to recover this extra cost by owning the more efficient ETFs.
  6. Then think and see if 'it' (selling fund, paying tax now, and buying ETF that will be more efficient in future) seems 'worth it'.
Thanks to everyone for all the useful comments (and for correcting the ticker).

What does 'tax cost 170bps more' mean exactly ? 1.7% of NAV extra in taxes or 1.7% of NAV extra in income to be taxed at my regular rate (fed + state) ?

drzzzzz
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Re: Vanguard Health Care Fund

Post by drzzzzz » Wed Jan 15, 2020 10:44 pm

Similar situation, have held the fund for a long time and have large embedded gains. I hate how much capital gains are being generated each year and decided to harvest the fund by donating it to a donor advised fund and gifting shares to nieces and nephews in lower tax brackets. Will buy the ETF instead if I want to tilt toward healthcare or buy a similar fund in a tax deferred or Roth account in the future.

gd
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Re: Vanguard Health Care Fund

Post by gd » Thu Jan 16, 2020 9:08 am

Elysium wrote:
Tue Jan 14, 2020 10:31 pm
Surprised no one pointed this out. The difference between VHT and VGHAX is foreign equities. The index fund holds nothing in Foreign equities while the active fund has 30% allocated to them. This alone could make the performance results vastly different during short time periods.
I'm not seeing it comparing VGHCX and VHT in PortfolioVisualizer. Multi-year trends, which might/might not be offset by the cg problem.

Elysium
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Re: Vanguard Health Care Fund

Post by Elysium » Thu Jan 16, 2020 10:43 am

gd wrote:
Thu Jan 16, 2020 9:08 am
Elysium wrote:
Tue Jan 14, 2020 10:31 pm
Surprised no one pointed this out. The difference between VHT and VGHAX is foreign equities. The index fund holds nothing in Foreign equities while the active fund has 30% allocated to them. This alone could make the performance results vastly different during short time periods.
I'm not seeing it comparing VGHCX and VHT in PortfolioVisualizer. Multi-year trends, which might/might not be offset by the cg problem.
What do you not see? That the active fund holds 30% in foreign equities while the index fund holds nothing in them? You can see that on M* and on Vanguard. I wouldn't use PV for checking that. That said, it is only a possibility that the reason index performed better is explained by foreign vs domestic equities, although the active fund is more diversified in that sense, since it has exposure to health care companies around the world while the index is US only.

mtmingus
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Re: Vanguard Health Care Fund

Post by mtmingus » Thu Jan 16, 2020 10:58 am

Most of my Vanguard funds are tax inefficient in my taxable account:

Dividend Growth
Wellesley Income
Wellington
Global Min Volatility

No complain!

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SlowMovingInvestor
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Re: Vanguard Health Care Fund

Post by SlowMovingInvestor » Thu Jan 16, 2020 11:02 am

mtmingus wrote:
Thu Jan 16, 2020 10:58 am
Most of my Vanguard funds are tax inefficient in my taxable account:
..
Wellesley Income
Wellington
...
IIRC, Wellesley and Wellington are mostly tax inefficient because of their bond holdings. VGHAX is a growth fund, so tax inefficiency is not really an inherent feature of the fund.

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