VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

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SpaceCowboy
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VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by SpaceCowboy »

I've been looking to do some TLH on VSS (FTSE Small Cap ex-US). However, I haven't executed the trade because of both the bid ask spread and the discount to NAV. Currently the bid ask spread is about 15bps and the discount to NAV is 1%. Any ideas on both why the spread is so wide and the NAV discount?
Also learned from Vanguard that conversion only works from mutual funds to ETF and not ETF to mutual fund.
What's the best way to deal with this kind of trading issue in implementing TLH? Also a lesson for me that with Vanguard unless the ETFs are highly liquid, you're better off sticking with Admiral mutual fund shares.
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Re: VSS Spreads and TLH

Post by HueyLD »

rrppve wrote:Also a lesson for me that with Vanguard unless the ETFs are highly liquid, you're better off sticking with Admiral mutual fund shares.
Yes indeed.
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VSS Wide Bid/Ask Spread

Post by Valdeselad »

[Thread merged into here, see below. --admin LadyGeek]

There is a $0.55 spread this afternoon on VSS - certainly the highest I've seen in quite some time. How do others approach ETF purchasing when the spread widens like this -- do you wait for more of a liquid market or just try to make a market yourself 8-) Depending on the next trade to execute the new price could be considerably different...
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Re: VSS Spreads and TLH

Post by swl »

Spread is always about that much according to ETF.com. NAV discount isn't really meaningful because you're comparing NAV and price calculated at different times (you probably don't have a realtime NAV, especially of an international ETF).
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Re: VSS Wide Bid/Ask Spread

Post by sreynard »

I don't buy an ETF with even an occasional wide bid/ask spread. Too thinly traded for me. So I guess my response would be to never buy VSS.

[Edit] Oops! Small cap, should have looked it up. . . .
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Re: VSS Spreads and TLH

Post by SpaceCowboy »

I estimate the discount to NAV using the prior day's close and the intra-day change in the ETF. It is a discount currently, which is consistent with data from various providers.
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Re: VSS Spreads and TLH

Post by livesoft »

I never worry about NAV.

I showed a TLH between SCZ and VSS in this post with graphs: viewtopic.php?p=742901#p742901

Right now spread is largish because prices are changing quickly.

So I suggest you try not to trade close in time. Instead either buy replacement shares first, then let old and new shares go up in price, then sell old shares.

Or if prices are dropping, sell first, then wait for the replacement shares to drop enough to cover any perceived spread.

Or do something else.
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Re: VSS Wide Bid/Ask Spread

Post by livesoft »

You gotta figure something out for yourself.

See also today's other thread about VSS spreads where I responded: viewtopic.php?p=2793155#p2793155
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Re: VSS Spreads and TLH

Post by jhfenton »

livesoft wrote:I never worry about NAV.
I know. It's one of your persistent blind spots, despite the fact that the changeable premiums and discounts are quite significant in VSS, VWO, VNQI, and (sometimes) VEA, and if you pay attention you can eke out a few bps of extra return.

I bought some more VWO at $29.57 today in taxable and am selling a roughly equivalent amount of VEMAX in my wife's IRA. The net effect will be swapping some short-term munis for intermediate treasuries--which I eventually wanted to do anyway--and buying EM at more than a 2% discount. Some of that will be because I lucked into VWO climbing back to close at $29.89, but the NAV was in the $30.36-range all day, so I was always going to end up with a substantial discount to NAV and VEMAX, even with Vanguard's fair value adjustment.
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Re: VSS Spreads and TLH

Post by jhfenton »

To answer the OP's original question, the discount on VSS today is quite extraordinary. The discount was wide on Friday and widened substantially today.

I would absolutely not sell it on a day like today, even to TLH, unless my replacement security was selling at an equivalent discount to NAV.

Edited: VNQI (ex-US Real Estate) is at a crazy discount too. And VWO (Emerging Markets) is fairly substantial. VEA (Developed Markets) is at a discount, but not an unusual one.
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Re: VSS Spreads and TLH

Post by swl »

rrppve wrote:I estimate the discount to NAV using the prior day's close and the intra-day change in the ETF. It is a discount currently, which is consistent with data from various providers.
Even yesterday's closing NAV isn't correct, depending on the provider, since it's either using cash closing prices which are mishmashed from midnight through noon-ish that day (and you're using the US closing price for the ETF) or its using an estimated value from those, in which cases your estimate has two levels of indirection.
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Re: VSS Spreads and TLH

Post by livesoft »

With the Chinese holiday all this week, I would avoid doing anything with funds that have a significant amount of Chinese equities.
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Re: VSS Spreads and TLH

Post by swl »

jhfenton wrote:
livesoft wrote:I never worry about NAV.
I know. It's one of your persistent blind spots, despite the fact that the changeable premiums and discounts are quite significant in VSS, VWO, VNQI, and (sometimes) VEA, and if you pay attention you can eke out a few bps of extra return.

I bought some more VWO at $29.57 today in taxable and am selling a roughly equivalent amount of VEMAX in my wife's IRA. The net effect will be swapping some short-term munis for intermediate treasuries--which I eventually wanted to do anyway--and buying EM at more than a 2% discount. Some of that will be because I lucked into VWO climbing back to close at $29.89, but the NAV was in the $30.36-range all day, so I was always going to end up with a substantial discount to NAV and VEMAX, even with Vanguard's fair value adjustment.
You're seeing an incorrect NAV. You can't compare closing NAV vs closing price from public sources for international ETFs. The bulk of the seeming discount comes from lack of (or improper) accounting for the different cash close times.
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Re: VSS Spreads and TLH

Post by dunscap »

jhfenton wrote:To answer the OP's original question, the discount on VSS today is quite extraordinary. The discount was wide on Friday and widened substantially today.

I would absolutely not sell it on a day like today, even to TLH, unless my replacement security was selling at an equivalent discount to NAV.

Edited: VNQI (ex-US Real Estate) is at a crazy discount too. And VWO (Emerging Markets) is fairly substantial. VEA (Developed Markets) is at a discount, but not an unusual one.
So if/when VSS opens tomorrow at par, but 3% down versus today's close, you'll feel better about having waited? Especially on a volatile day like today and a small-cap international ETF like VSS, the discount probably means something.
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Re: VSS Spreads and TLH

Post by jhfenton »

dunscap wrote:
jhfenton wrote:To answer the OP's original question, the discount on VSS today is quite extraordinary. The discount was wide on Friday and widened substantially today.

I would absolutely not sell it on a day like today, even to TLH, unless my replacement security was selling at an equivalent discount to NAV.

Edited: VNQI (ex-US Real Estate) is at a crazy discount too. And VWO (Emerging Markets) is fairly substantial. VEA (Developed Markets) is at a discount, but not an unusual one.
So if/when VSS opens tomorrow at par, but 3% down versus today's close, you'll feel better about having waited? Especially on a volatile day like today and a small-cap international ETF like VSS, the discount probably means something.
If my goal were to TLH into an equivalent position, then yes, I'd rather swap funds when my origin fund is not at a substantially greater discount than my destination fund, especially when the discount on the origin fund is transient. I essentially never sell anything outright, so I'm usually concerned with not losing anything on a swap between similar holdings and in that case, discounts can matter.

I own mostly Admiral Shares--except for all of my VSS and some VWO in taxable--but I track a virtual portfolio with the equivalent holdings in the ETFs. At NAV, the two portfolios have the same value. So I see exactly how the premiums and discounts shift on VWO and VNQI in particular, and I watch VSS out of curiosity, even though there are no Admiral Shares and I don't own any of the Investor Shares.

And what I see tonight is that even with fair value adjustments, Vanguard reports that VSS closed at a 0.77% discount to VFSVX, VWO closed at a 0.67% discount to VEMAX, and VNQI closed at a 0.69% discount to VGRLX.

These are not funds that consistently trade at discounts. They are funds that regularly bounce between discounts and premiums. Most of the time it doesn't matter. But occasionally it does. This was a good day for me to shift some of my taxable bond (limited-term munis) allocation to tax-deferred (intermediate treasuries) and at the same time swap some VEMAX for VWO at a discount. If I had bought VWO at the close and sold VEMAX, I would have received 0.67% more of a share in the fund than I sold. (As it was I lucked into a 1.7% gain. Unlike livesoft, I don't know how to luck into timing buys and sells all the time, but today I did well.)

It also mattered last October when I wanted to convert my all ETF portfolio from TD Ameritrade into Admiral Shares at Vanguard. I was able to pick favorable days and make the swaps near the close on days when the ETFs were at substantial premiums. I was patient with VNQI and eventually sold it on a day when it was at a greater than 60 bp premium, allowing me to cover the 25 bp purchase fee AND 25 bp redemption fee on VGRLX (assuming they don't eventually drop the redemption fee).

So, no, it usually don't matter. Except when it does.
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Re: VSS Spreads and TLH

Post by livesoft »

livesoft wrote:With the Chinese holiday all this week, I would avoid doing anything with funds that have a significant amount of Chinese equities.
VSS is reported to have about 18% in emerging markets, but less than 4% in China.
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by LadyGeek »

I merged Valdeselad's thread into here. I also retitled the thread to help with the acronyms.
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Re: VSS Spreads and TLH

Post by dunscap »

jhfenton wrote:
dunscap wrote:So if/when VSS opens tomorrow at par, but 3% down versus today's close, you'll feel better about having waited? Especially on a volatile day like today and a small-cap international ETF like VSS, the discount probably means something.
If my goal were to TLH into an equivalent position, then yes, I'd rather swap funds when my origin fund is not at a substantially greater discount than my destination fund, especially when the discount on the origin fund is transient. I essentially never sell anything outright, so I'm usually concerned with not losing anything on a swap between similar holdings and in that case, discounts can matter.
I suppose this makes sense, especially for funds that track very closely. Even extremely correlated funds though can track significantly differently over a TLH timeframe. This is a little less true with "nearly" identical indices, if we don't care about running afoul of the undefined IRS "substantially identical" rule, which I suppose there's no reason to be afraid of.

As fun as trading is this is really something that makes me happier to use mutual funds. Put in an exchange order and get NAV for NAV at the end of the day.

Re: tracking error, although this runs a little bit off the original topic, I TLH'd extended Vanguard Extended Market for Mid Cap; the correlation is near perfect from looking at history, but after a couple volatile days of differences in performance close to 0.5%, I did an X-ray and saw that, in fact, Small Cap is a closer match. Actually, 20% Mid Cap and 80% Small Cap is a nearly perfect match for Extended Market. So I rebalanced into this, which is already delving into minutiae; yet there is still a day-to-day difference from Extended Market. When LinkedIn tanked, I got to congratulate myself for lucking out and dodging a bullet; it's #2 in VEXAX and not a Mid or Small cap component. Although I still held more of it in total market accounts.

Anyway, there will be tracking error, hopefully it should be as likely to go for as against me and I'll just live with it, and the tracking error is bound to be tiny relative to the tax savings. But I guess if you have to exchange ETF for like ETF then it could pay to take note of particularly unfortunate relative discounts.

Clearly though if two extremely correlated ETFs are trading at wildly different discounts the arbitrageurs are not doing their jobs that they are supposed to be so good at.
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by stlutz »

As fun as trading is this is really something that makes me happier to use mutual funds. Put in an exchange order and get NAV for NAV at the end of the day.
Which fund would you TLH into if you were moving out of the mutual fund version of VSS?
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by baw703916 »

You might be better sticking to Admiral shares, except for FTSE small-cap there aren't any.

Why don't you try putting a bid in the spread and wait 15 minutes to see if anybody bites? That works for me more often than not.
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by dunscap »

stlutz wrote:
As fun as trading is this is really something that makes me happier to use mutual funds. Put in an exchange order and get NAV for NAV at the end of the day.
Which fund would you TLH into if you were moving out of the mutual fund version of VSS?
Within Vanguard, VFSVX ↔ VINEX (Vanguard International Explorer Fund).

Edit: There's a teeny bit of closet indexing going on in Wellington's otherwise stellar VINEX fund, it's #14 holding is VSS! But at only 2 bps in ER over VFSVX (21 over VSS) you certainly are not overpaying for the active share here. Performance versus the benchmark for 1, 3, and 10 years is very good, and versus VSS is excellent for 1, 3, 5, and 10 years (10 years versus VSS's benchmark).

I don't hold international small cap separate from Total International, but VINEX with its Wellington advisor and 0.4% ER is oh-so-tempting to for a bit of tilt. If there is anywhere that active management should be able to outperform, even by 21 bps, it should be international small cap.
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Re: VSS Spreads and TLH

Post by jhfenton »

dunscap wrote:As fun as trading is this is really something that makes me happier to use mutual funds. Put in an exchange order and get NAV for NAV at the end of the day.
I agree. That is why I chose, where possible, to switch all of my ETFs to Admiral Shares. The only Vanguard ETFs I have now are VSS (no Admiral Shares), VWO (a <$10K position in taxable), and VGIT (Intermediate Govt Index ETF) (a <$10K position in tax-deferred). I will eventually swap VGIT for VSIGX (Intermediate Govt Index Admiral Shares) once my position reaches $10K. Since VWO is in taxable, I'll probably be stuck in it, which is no big deal.

When I TLH'd VSS last fall, I just swapped in some extra VTMGX (Vanguard FTSE Developed Markets Admiral Shares) in tax-deferred. In the short-run VEA/VTMGX is a pretty good match for VSS. I ended up replacing VSS with VWO in taxable, as I decided that I liked VWO better in taxable going forward.
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by Doc »

You might want to review this recent thread: Foreign ETF Trading - Best Practice
viewtopic.php?f=10&t=182982

We were addressing Foreign large cap developed there but the closing time and stale NAV issues are relevant to this paring also.
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by Doc »

The indicative value for ETF's are available on a 15 minute time basis. You don't need to look at yesterday's closing values.

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Source: http://finance.yahoo.com/echarts?s=VSS+ ... king":true}
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by Doc »

In addition to the Chinese market being closed the Yen is going ape. VSS is 16% Japan.
The yen, though, was in the limelight for the second day, gaining around 6 percent since the start of February against the dollar. The rise has undermined plans by the Bank of Japan, which wants to generate inflation through negative interest rates and a weaker currency.
http://www.cnbc.com/2016/02/08/dollar-c ... emand.html
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Re: VSS Spreads and TLH

Post by Ungoliant »

jhfenton wrote:
dunscap wrote:As fun as trading is this is really something that makes me happier to use mutual funds. Put in an exchange order and get NAV for NAV at the end of the day.
I agree. That is why I chose, where possible, to switch all of my ETFs to Admiral Shares.
I also agree with this and it's why I've used some opportune moments during this recent market downturn to move my entire position in VSS into the fund version, VFSVX. I know it's not admiral shares so the ER is a little higher (for now, hopefully admiral shares will come someday soon), but it's still worth it to me for the simplicity it creates in my portfolio.

Everything else I own is in funds, but I originally felt compelled to use VSS back in the days when the fund had excessive purchase and redemption fees and the ER difference was much greater than it is today. But those fees are now gone and VFSVX's ER is actually less today than VSS's was when I first started investing in it, so I have no qualms about holding it anymore. And now that I've had the ETF experience for a few years, I've decided it's just not for me:
  • I have no interest in intra-day trading, in fact it's a burden since I'm usually working during market hours.
  • Large bid/ask spreads in VSS have the effect of narrowing the real cost difference and complicate trading when compared to funds.
  • Premiums/discounts seem to have an uncanny knack of working against me. Maybe this would even out in the long run, but VSS has historically traded at a non-so-insignificant premium, making periodic investments more expensive, but then seems to inevitably be trading at a steep discount whenever I'm looking to TLH in a down market.
  • Speaking of TLH, it's a pain to do efficiently between ETFs & funds due to sweep account delays.
  • Needing a separate brokerage account in general just unnecessarily complicates things, 1099s in brokerage come later, etc.
  • Frankly, I don't particularly trust ETFs, especially ones with less liquidity like VSS, to behave as well in a crisis. I know some will insist that they're as good or better than admiral shares because deviations from NAV will naturally get arbitraged away by the market, but if I'm not getting any particular value out of the ETF class anyway, then that's just another layer of abstraction from the underlying holdings that I'd sleep better at night not having to worry about.
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Re: VSS Spreads and TLH

Post by jhfenton »

Ungoliant wrote:
jhfenton wrote:
dunscap wrote:As fun as trading is this is really something that makes me happier to use mutual funds. Put in an exchange order and get NAV for NAV at the end of the day.
I agree. That is why I chose, where possible, to switch all of my ETFs to Admiral Shares.
I also agree with this and it's why I've used some opportune moments during this recent market downturn to move my entire position in VSS into the fund version, VFSVX. I know it's not admiral shares so the ER is a little higher (for now, hopefully admiral shares will come someday soon), but it's still worth it to me for the simplicity it creates in my portfolio.

Everything else I own is in funds, but I originally felt compelled to use VSS back in the days when the fund had excessive purchase and redemption fees and the ER difference was much greater than it is today. But those fees are now gone and VFSVX's ER is actually less today than VSS's was when I first started investing in it, so I have no qualms about holding it anymore. And now that I've had the ETF experience for a few years, I've decided it's just not for me:
  • I have no interest in intra-day trading, in fact it's a burden since I'm usually working during market hours.
  • Large bid/ask spreads in VSS have the effect of narrowing the real cost difference and complicate trading when compared to funds.
  • Premiums/discounts seem to have an uncanny knack of working against me. Maybe this would even out in the long run, but VSS has historically traded at a non-so-insignificant premium, making periodic investments more expensive, but then seems to inevitably be trading at a steep discount whenever I'm looking to TLH in a down market.
  • Speaking of TLH, it's a pain to do efficiently between ETFs & funds due to sweep account delays.
  • Needing a separate brokerage account in general just unnecessarily complicates things, 1099s in brokerage come later, etc.
  • Frankly, I don't particularly trust ETFs, especially ones with less liquidity like VSS, to behave as well in a crisis. I know some will insist that they're as good or better than admiral shares because deviations from NAV will naturally get arbitraged away by the market, but if I'm not getting any particular value out of the ETF class anyway, then that's just another layer of abstraction from the underlying holdings that I'd sleep better at night not having to worry about.
I've debated a few times, swapping my VSS for VFSVX, but I can't swallow the extra $100-200 in expenses. I'm not going to lose anywhere near that in spreads on a buy and hold position to which I add $4K or $5K each year in $400-500 chunks. Other than selling my taxable VSS last fall, I don't think I've ever sold any VSS. It just sits there.

I did decide to eat the 25 bp purchase fee on VGRLX and converted my VNQI on a high-premium day. I figure that they'll eventually drop the 25 bp redemption fee, and if not, I can always exercise my conversion right to turn it back into VNQI before I sell it.
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by grabiner »

rrppve wrote:I've been looking to do some TLH on VSS (FTSE Small Cap ex-US). However, I haven't executed the trade because of both the bid ask spread and the discount to NAV. Currently the bid ask spread is about 15bps and the discount to NAV is 1%. Any ideas on both why the spread is so wide and the NAV discount?
I wouldn't worry about the discount. For ETFs which trade when foreign markets are closed, the discount is relative to an estimated price which may be way off; the market price is a better estimate of the correct value. You can see this effect because many different foreign ETFs will trade at a discount to NAV on the same day.

Vanguard says that the average spread is 0.16%, so any TLH of the fund should be expected to cost you that much on the round-trip. Subtract the 0.16% from any benefit of the TLH. And don't harvest even when the benefit exceeds the spread by a small amount, as you'll have to pay the spread a second time if the market drops further; if you wait and the market drops, you can avoid paying the second spread.

I normally TLH this fund only when I have about a 10% loss. However, I don't get as much benefit from TLH as most investors, because I have a huge carryover from 2008-2009 (and many additional small losses since 2009, including more from 2016), so it will be years before I get any tax savings. A loss of 5% might be worth it if you don't have large carryover losses.
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by Doc »

jhfenton wrote: I've debated a few times, swapping my VSS for VFSVX, but I can't swallow the extra $100-200 in expenses. I'm not going to lose anywhere near that in spreads on a buy and hold position to which I add $4K or $5K each year in $400-500 chunks
The original post was about tax loss harvesting. If you are going into and out of a position in a 30 day period you have both the bid/ask and the premium/discount going both ways which can be significant. See David Grabiner's post for estimates.

One partial solution is to trade early in the day New York time when at least the European exchanges are still open. Another thing to consider is not to trade on a day that the Asian markets have been very volatile prior to their close.
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Re: VSS Spreads and TLH [FTSE Small Cap ex-US and Tax Loss Harvesting]

Post by Doc »

This thread has been very helpful. I was planning to TLH a Foreign Small Cap position tomorrow and use VSS as a temporary replacement. After this thread I am going to use a Foreign Large Cap ETF instead because of the lower spreads.

Thanks all.
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