Vanguard ETFs Less Tax Efficient Than Other ETFs?

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Park
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Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Fri Dec 02, 2016 11:29 am

Vanguard ETFs are different than other ETFs. They're a hybrid of an ETF and a mutual fund. By purchasing a Vanguard ETF, one gets a lower cost ETF and also a company that is more investor friendly than average. But are you exposing yourself to potential tax liabilities that you wouldn't in other ETFs?

In mutual funds, cap gains distributions result from changes in the portfolio and/or net selling by mutual fund owners. In ETFs, cap gains distributions result from changes in the portfolio only. Also, the exchange mechanism of an ETF, where authorized participants exchange ETF shares for the underlying shares from the ETF provider, allow an ETF to purge itself of shares with low cost base. The exchange mechanism can decrease the cap gains associated with changes in portfolio. Mutual funds can also use the same exchange mechanism, but have a much more limited ability to do so.

In ETFs, when an ETF owner sells, only the ETF seller is exposed to any cap gains resulting from the sale. The ETF seller trades with an ETF buyer in the market. It is possible that if there is enough selling, authorized participants may exchange ETF shares for underlying stocks with the ETF provider. But that exchange doesn't result in cap gains, and may have a beneficial effect for the remaining ETF owners, as discussed later.

If selling is overall greater than buying in a mutual fund, the fund has to sell underlying shares. When that happens, the resultant cap gains/losses are distributed to the remaining mutual fund owners.

Let's assume that redemptions exceed purchases by the mutual fund owners of a Vanguard hybrid ETF/MF. Vanguard has to sell underlying shares of the fund to meet the redemptions of the departing mutual fund owners. Assume that the underlying shares have gone up in price. This will result in cap gains distributions for both the mutual fund and ETF owners of the fund. The ETF owners will receive cap gains distributions that they wouldn't in a pure ETF structure.

Due to the ETF redemption procedure, the cost base of the underlying shares that are sold in the last paragraph may be higher than it otherwise would be in a pure mutual fund. When the fund exchanges underlying shares for ETF shares with authorized participants, it can choose to exchange underlying shares with low cost base without any tax liability doing so. So the hybrid structure can result in lower cap gains distributions for the mutual fund owners than a pure mutual fund would.

About the last paragraph, the exchange of underlying shares for ETF shares allows a fund to purge itself of underlying shares with low cost base. The more a fund purges itself of underlying shares with low cost base, the better it is for the fund owners. Assume a Vanguard ETF/mutual fund is divided 50% between the ETF and the mutual fund. The ability to purge will come from the 50% of assets that is ETF. Compare that to a pure ETF, where the ability to purge will come from 100% of the assets. In other words, the pure ETF will have a greater ability to purge itself of underlying shares with low cost base and therefore decrease any unrealized cap gains.

When it comes to meeting the redemptions of mutual fund owners, the fund can sell underlying shares with higher cost base to minimize cap gains distributions. This will minimize any cap gains distributions to both the ETF and mutual fund owners. However, this will increase any unrealized cap gains exposure for the remaining mutual fund and ETF owners. In a pure ETF, this wouldn't be an issue for the ETF owners.

Assume that redemptions exceed purchases by the mutual fund owners of a Vanguard hybrid ETF/MF. However, assume that the underlying shares have gone down in price. This will result in a cap loss, and will decrease any cap gains distributions that year. If there will be no cap gain distributions that year, the cap losses can be kept for possible future use.

However, I have read the following from morningstar. An ETF has the option to sell underlying shares, and not just exchange them with authorized participants. So it can also accumulate cap losses that can be used to offset any cap gains resulting from changes in the portfolio.

The higher the turnover of a fund, the more advantageous a pure ETF structure will be. So a pure ETF structure helps a small cap value fund more than a total stock market index fund. This may be one reason why Vanguard has a lower turnover (15%) for it's small cap value mutual fund/ETF (VBR), compared to a pure small cap value ETF, such as iShares IJS (turnover 44%).

Also, the comparative tax inefficiency of Vanguard's hybrid mutual fund/ETFs is less of an issue, as long as purchases are greater than redemption by the mutual fund owners. However, no mutual fund grows indefinitely. Eventually, all mutual funds experience declines in assets, whether temporary or permanent.

About the ability of an ETF to purge itself of underlying shares with low cost base, that depends on tax lots. If tax law is changed, so that tax lots no longer exist, then this ability to purge would disappear. If tax lots disapppeared, then low turnover strategies, such as a total stock market index approach, would be more attractive.

Please correct me, if anything that I've written is wrong.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by lack_ey » Fri Dec 02, 2016 12:06 pm

That is more or less my understanding as well but I have not looked that carefully at these things and am sometimes wrong (frequently? sorry, now I jinxed you by association).

I would love to see more discussion and confirmation here.

IIRC there was some example of a Vanguard index fund in a category that distributed a small amount of capital gains during the same period a pure ETF from a competitor did not. I'm thinking maybe it was in bonds?

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David Jay
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by David Jay » Fri Dec 02, 2016 12:15 pm

I don't believe Vanguard ETFs are a hybrid, their ETFs are a class of the underlying fund. And Vanguard has a patent on this structure, so others can't use it.

Marketing departments at other companies could reasonably be expected to detail any perceived flaws in the Vanguard structure.
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by jhfenton » Fri Dec 02, 2016 12:26 pm

I don't believe a Vanguard equity hybrid ETF/OE MF has ever distributed any capital gains. They could in theory as you point out, but I haven't seen it.

Some Vanguard Bond ETFs have made small year-end capital gain distributions in recent years. Some of the funds have to sell off bonds at the end of the fund's maturity window, and with the steady decline in interest rates over the last several years, there were often small capital gains. I haven't done an analysis to see how those distributions compare to ETFs without an open-ended sister share class.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by GreatOdinsRaven » Fri Dec 02, 2016 1:48 pm

Recently I was comparing DFA and Vanguard mutual funds with Vanguard and iShares ETFs using Morningstar's tax tool page and I came to a similar conclusion. I do think that unless Vanguard dramatically shifts new purchases and redemptions to the ETF share classes owners will face potentially high capital gains taxes. As much of a Vanguard fan as I am it is pushing me to consider purchasing iShares ETFs instead of Vanguard ETFs.

Here's a M* comparison to the potential tax burdens of three funds: Vanguard S&P 500 index mutual fund admiral shares, Vanguard S&P 500 ETF shares and iShares S&P 500 ETF shares:

*edited to include correct ticker symbol for IVV*
http://performance.morningstar.com/fund ... ture=en_US Looks like the iShares ETFs have the same performance and a lower potential capital gains exposure. Their tax cost ratio last year was higher, but lower over the past 5 years.

Is this correct? Is this potential capital gains exposure meaningful? Should it nudge investors toward iShares and away from Vanguard ETFs?
Last edited by GreatOdinsRaven on Fri Dec 02, 2016 2:38 pm, edited 1 time in total.
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by GreatOdinsRaven » Fri Dec 02, 2016 1:52 pm

David Jay wrote:I don't believe Vanguard ETFs are a hybrid, their ETFs are a class of the underlying fund. And Vanguard has a patent on this structure, so others can't use it.

Marketing departments at other companies could reasonably be expected to detail any perceived flaws in the Vanguard structure.
Others can license the technique AFAIK. But no one has chosen to do so.

I do believe that as a separate share class of Vanguard funds they are a hybrid. They aren't as tax efficient as a 100% ETF fund, but they make the mutual fund share classes much more efficient than traditional open end mutual funds. i.e. They seem to benefit the mutual fund share holder asymmetrically (at least in theory). I'm not sure how this plays out as the boomer generation retires and draws down on their mutual fund holdings.

My feeling is that there's a reason Vanguard webinars and discussions spend a lot of time focusing on ETFs. I bet they "need" large ETF inflows and trading- but this is purely speculation on my part.

If anyone is qualified to answer please speak up.
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by talzara » Fri Dec 02, 2016 2:26 pm

Vanguard is also allowed to redeem mutual funds in kind. It's not as good as an ETF's creation/redemption mechanism, but it does eliminate the realized gains from large, disruptive trades.
Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading.
Also, taxes are not the only consideration.

For example, iShares SPDRs are the largest S&P 500 ETF. However, SPDRs are actually structured as a Unit Investment Trust. UITs are not allowed to reinvest dividends, so there is a cash drag between the time the company pays dividends and the time the ETF distributes them.

The Vanguard S&P 500 ETF is an open-ended fund, so it is allowed to reinvest dividends. Distributions are later paid by selling the stock. For mutual fund shares that are set to reinvest dividends, Vanguard doesn't have to do anything because it has already reinvested the dividend.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by GreatOdinsRaven » Fri Dec 02, 2016 2:33 pm

talzara wrote:
Also, taxes are not the only consideration.

For example, iShares SPDRs are the largest S&P 500 ETF. However, SPDRs are actually structured as a Unit Investment Trust. UITs are not allowed to reinvest dividends, so there is a cash drag between the time the company pays dividends and the time the ETF distributes them.

The Vanguard S&P 500 ETF is an open-ended fund, so it is allowed to reinvest dividends. Distributions are later paid by selling the stock. For mutual fund shares that are set to reinvest dividends, Vanguard doesn't have to do anything because it has already reinvested the dividend.

Very interesting. So, how meaningful is this?

Let's say you have 1M in the Vanguard S&P 500 index ETF vs 1M in a similar iShares ETF. How much of a cash drag is there/has there been? Is this a large number or only a few dollars?
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Fri Dec 02, 2016 2:42 pm

David Jay wrote:I don't believe Vanguard ETFs are a hybrid, their ETFs are a class of the underlying fund. And Vanguard has a patent on this structure, so others can't use it.

Marketing departments at other companies could reasonably be expected to detail any perceived flaws in the Vanguard structure.
Whether Vanguard ETFs are a hybrid or a subclass, I'm not sure that it makes a lot of difference. About marketing depts at other companies, your point is well taken. However, Vanguard has a cost advantage. So if marketing depts bring up the disadvantages of Vanguard ETFs, the advantages of Vanguard ETFs will also become more prominent.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by GreatOdinsRaven » Fri Dec 02, 2016 2:52 pm

Park wrote:
David Jay wrote:I don't believe Vanguard ETFs are a hybrid, their ETFs are a class of the underlying fund. And Vanguard has a patent on this structure, so others can't use it.

Marketing departments at other companies could reasonably be expected to detail any perceived flaws in the Vanguard structure.
Whether Vanguard ETFs are a hybrid or a subclass, I'm not sure that it makes a lot of difference. About marketing depts at other companies, your point is well taken. However, Vanguard has a cost advantage. So if marketing depts bring up the disadvantages of Vanguard ETFs, the advantages of Vanguard ETFs will also become more prominent.
I'm not trolling you, because I'm a big Vanguard fan.

But... IVV (iShares S&P500 ER 0.04% is now actually cheaper than VOO, Vanguard's S&P 500 ETF ER 0.05%). These are now low cost commoditized products, so we can be granular and look at long term potential tax implications of holding one over the other.

Quite honestly, I want what's going to perform the best at the lowest potential tax cost.
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by lack_ey » Fri Dec 02, 2016 3:14 pm

GreatOdinsRaven wrote:
talzara wrote:
Also, taxes are not the only consideration.

For example, iShares SPDRs are the largest S&P 500 ETF. However, SPDRs are actually structured as a Unit Investment Trust. UITs are not allowed to reinvest dividends, so there is a cash drag between the time the company pays dividends and the time the ETF distributes them.

The Vanguard S&P 500 ETF is an open-ended fund, so it is allowed to reinvest dividends. Distributions are later paid by selling the stock. For mutual fund shares that are set to reinvest dividends, Vanguard doesn't have to do anything because it has already reinvested the dividend.

Very interesting. So, how meaningful is this?

Let's say you have 1M in the Vanguard S&P 500 index ETF vs 1M in a similar iShares ETF. How much of a cash drag is there/has there been? Is this a large number or only a few dollars?
Wait wait wait wait wait. Somebody reading this might get the wrong idea from what talzara posted (not sure if worded confusingly or didn't have the right information), so just to be clear...

State Street Global Advisor's SPDR S&P 500 ETF Trust (SPY) is the unit investment trust with the disadvantages of not being able to reinvest dividends or do securities lending, and has the largest AUM. This is the oldest and most recognizable ETF. Or I guess it's actually more an exchange-traded product (ETP) being an investment trust and not structured legally as a fund in the way many others are.

BlackRock's iShares Core S&P 500 ETF (IVV) is a regular open-ended fund, a typical ETF structurally. This used to have a higher ER than Vanguard's offering but now that's no longer the case, so it's currently larger/better traded/lower ER than Vanguard's. Not as big as SPY, though. And of course Vanguard's option is already extremely liquid. Actually in terms of performance, with ER differences that small, it is up to the exact handling of the trading, securities lending program, etc. We're talking low single digits bp differences, in any case.

For the record, most of the SPDRs lineup is open-ended funds. The famous SPDR Gold Trust (GLD) is not but actually that is preferred for that asset, particularly if you're concerned with security of the physical underlying gold they own. But a lot of the others like Financial Select Sector SPDR Fund (XLF) and SPDR S&P Dividend ETF (SDY) would be open-ended funds. Sometimes people use the SPDRs brand to mean SPY specifically, which can cause confusion.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by GreatOdinsRaven » Fri Dec 02, 2016 3:21 pm

Lack_ey,

Good point at SPY. I assumed incorrectly the person was saying it applied to both State Street and Blackrock.

As for the potential capital gains exposures of IVV and VOO-

Is the difference meaningful?

Quite honestly if no one ever sold I'd be happy to plug along buying Vanguard ETFs. But if selling by current mutual fund share class holders unlocks bigger tax consequences to me as an ETF owner than I would by buying iShares why would I want to expose myself to that?

Is this a real issue or manufactured/theoretical/insignificant?
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by ogd » Fri Dec 02, 2016 3:26 pm

Park wrote: But are you exposing yourself to potential tax liabilities that you wouldn't in other ETFs?
Hi Park,

This is all nice and well argued (and I have seen it elsewhere, I believe in a BlackRock marketing article), but in practice the presence of the MF shares seems to not make a difference, as Vanguard ETFs don't distribute capital gains, period. So why worry about it until it actually occurs?

Also, a small ETF founded at the wrong time (e.g. bottom of the recession) can distribute capital gains, lacking the cost basis diversity that mutual fund shares would have given Vanguard.
Park wrote: About the last paragraph, the exchange of underlying shares for ETF shares allows a fund to purge itself of underlying shares with low cost base. The more a fund purges itself of underlying shares with low cost base, the better it is for the fund owners. Assume a Vanguard ETF/mutual fund is divided 50% between the ETF and the mutual fund. The ability to purge will come from the 50% of assets that is ETF. Compare that to a pure ETF, where the ability to purge will come from 100% of the assets. In other words, the pure ETF will have a greater ability to purge itself of underlying shares with low cost base and therefore decrease any unrealized cap gains.
Perhaps what you're missing here is that the ability to purge also depends on the trading frequency of the two share classes. Since ETFs are the instrument of choice for traders, whereas mutual fund owners tend to be much more passive (even more so for funds part of the large-ish Target Retirement funds or Vanguard's typical managed portfolios), I think there is probably an order of magnitude difference. I don't have the numbers for VTI/VOO, but I remember Jack Bogle arguing that the trading frequency of SPY seems insane from a bogleheads perspective, something like 100x or more.
Park wrote:Vanguard ETFs are different than other ETFs. They're a hybrid of an ETF and a mutual fund. By purchasing a Vanguard ETF, one gets a lower cost ETF and also a company that is more investor friendly than average.
Let's not forget the advantages that stem from this structure, even for ETF holders. Lower expenses, without the fear I have at e.g. Schwab that they are loss leaders and unsustainable in the long term. The ability to open new / niche ETFs with small asset bases sustained by the existing mutual funds. Finally -- and very relevant from a tax perspective -- less fear that an ETF will dissolve for ongoing lack of AUM, which is something that many ETF holders have to watch out for.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Fri Dec 02, 2016 3:33 pm

talzara wrote:Vanguard is also allowed to redeem mutual funds in kind. It's not as good as an ETF's creation/redemption mechanism, but it does eliminate the realized gains from large, disruptive trades.
Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading.
Also, taxes are not the only consideration.

For example, iShares SPDRs are the largest S&P 500 ETF. However, SPDRs are actually structured as a Unit Investment Trust. UITs are not allowed to reinvest dividends, so there is a cash drag between the time the company pays dividends and the time the ETF distributes them.

The Vanguard S&P 500 ETF is an open-ended fund, so it is allowed to reinvest dividends. Distributions are later paid by selling the stock. For mutual fund shares that are set to reinvest dividends, Vanguard doesn't have to do anything because it has already reinvested the dividend.
From what I understand, it's been a longstanding property of mutual funds that they can redeem in kind. But mutual funds interact with retail investors predominately. Such redemptions in kind are unlikely to be popular with most retail investors. However, ETFs interact with authorized participants. Authorized participants are institutional investors. And those authorized particpants would not necessarily be averse to redemptions in kind, as they make profits arbitraging the difference between the NAV of the underlying shares and the market price.

Unit Investment Trusts aren't allowed to reinvest dividends, and that results in a cash drag. The UIT structure is found in older ETFs. iShares, Powershares, Vanguard etc have ETFs structured as open-ended funds that can reinvest dividends, which eliminates the cash drag.

Both Vanguard and DFA are known for comparatively low turnover of their funds. One reason for such turnover is that lower turnover means lower costs. But I wonder whether in part, the low turnover strategy is due to the fact that both use mutual fund vehicles. Such vehicles are less able to deal with high turnover in a tax efficient manner than pure ETFs are.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Fri Dec 02, 2016 4:16 pm

ogd wrote:This is all nice and well argued (and I have seen it elsewhere, I believe in a BlackRock marketing article), but in practice the presence of the MF shares seems to not make a difference, as Vanguard ETFs don't distribute capital gains, period. So why worry about it until it actually occurs?
One could envision scenarios, where there are net redemptions by Vanguard mutual fund owners. If you're saving for retirement in Vanguard mutual funds, there's a good chance you will eventually sell those funds.

Whenever there is net selling or net buying of units in a mutual fund, the fund has to buy or sell. Along with possible tax consequences, there are commissions and bid ask spreads to pay as a result. All those invested in the mutual fund share in those costs. Those who are buy and hold will end up paying the costs of those who aren't. In Vanguard's hybrid ETF/mutual fund structure, that includes Vanguard ETF owners.

In a pure ETF, the costs of buying or selling of ETF shares is paid by directly by those buying or selling. Authorized participants will also have costs, and they will pass on those costs to those who are buying or selling ETFs, along with a profit on top of those costs. But ETF owners who are buy and hold will not end up paying the costs of those who aren't. Frequent trading is not going to cost a buy and hold ETF owner, but it will cost a buy and hold mutual fund owner or Vanguard ETF owner.

You make the case that ETFs are traded much more frequently than mutual funds, so the mutual fund part of a Vanguard fund doesn't limit it's ability to purge low cost shares much. I would agree that some ETFs, such as SPY, have very high turnover. But traders focus on certain ETFs, and I'm not certain that they are Vanguard ETFs. Also, the lower the portion of a Vanguard fund that is ETF, the more the mutual fund portion limits the ability to purge low cost shares. Vanguard mutual fund owners should want as much of the Vanguard fund to be ETF as possible.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Longtermgrowth » Fri Dec 02, 2016 5:11 pm

The posts here make me wonder if iShares total stock market ETF (ITOT), even with it taking 30% of securities lending profits, wouldn't be better than Vanguard's total stock market ETF (VTI)...

Can anyone really predict what the future cost to those holding Vanguard ETFs, due to the corresponding mutual fund share class, would be?

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by ogd » Fri Dec 02, 2016 5:16 pm

Park wrote: Whenever there is net selling or net buying of units in a mutual fund, the fund has to buy or sell. Along with possible tax consequences, there are commissions and bid ask spreads to pay as a result. All those invested in the mutual fund share in those costs. Those who are buy and hold will end up paying the costs of those who aren't. In Vanguard's hybrid ETF/mutual fund structure, that includes Vanguard ETF owners.

In a pure ETF, the costs of buying or selling of ETF shares is paid by directly by those buying or selling. Authorized participants will also have costs, and they will pass on those costs to those who are buying or selling ETFs, along with a profit on top of those costs. But ETF owners who are buy and hold will not end up paying the costs of those who aren't. Frequent trading is not going to cost a buy and hold ETF owner, but it will cost a buy and hold mutual fund owner or Vanguard ETF owner.
You've now moved from the tax efficiency to a different potential problem, NAV pricing vs market pricing.

Fortunately, this too is easily verified. If the turnover by MF shareholders made a difference to buy and holders, you'd expect Vanguard's ETFs/funds to underperform pure ETFs over long periods. And if anything, it's the opposite (or "within the margin of error") if I look at precisely matched funds, with the addition that Vanguard's funds seem to be almost free vs their index, due to security lending revenue comparable to fees. Which I'm not sure you're getting from other ETF providers.

My gut feeling is that the fund managers are so much better than you are at trading, whether in liquid markets or not, that the inefficiency lost to mutual fund churn even if you hold much longer than the typical MF investor (which isn't easy) are comparable or less to the inefficiency of your one buy / one sell transaction.
Park wrote: One could envision scenarios, where there are net redemptions by Vanguard mutual fund owners. If you're saving for retirement in Vanguard mutual funds, there's a good chance you will eventually sell those funds.
It's still about trading frequency, not net redemptions. You the ETF holder too will eventually have to sell, so the question is whether the MF shareholders are buying and selling many times inbetween your transactions.
Park wrote: You make the case that ETFs are traded much more frequently than mutual funds, so the mutual fund part of a Vanguard fund doesn't limit it's ability to purge low cost shares much. I would agree that some ETFs, such as SPY, have very high turnover. But traders focus on certain ETFs, and I'm not certain that they are Vanguard ETFs. Also, the lower the portion of a Vanguard fund that is ETF, the more the mutual fund portion limits the ability to purge low cost shares. Vanguard mutual fund owners should want as much of the Vanguard fund to be ETF as possible.
Well, the avg trading volume for both VTI and VOO is a pretty healthy hundreds of millions per day. Which means tens of billions (close to the entire size of the ETF class and maybe 10% of Total Stock Market). Anyways, in practice it seems to be more than enough or you'd see at least an occasional capital distribution.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by stlutz » Fri Dec 02, 2016 5:30 pm

Where this does consistently show up as an issue with is their fixed income ETFs. For example, scroll down to the bottom of this list.

https://personal.vanguard.com/us/insigh ... ins-112016


The iShares or Schwab equivalents of these funds never have such distributions.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Fri Dec 02, 2016 6:54 pm

ogd wrote:
Park wrote: Whenever there is net selling or net buying of units in a mutual fund, the fund has to buy or sell. Along with possible tax consequences, there are commissions and bid ask spreads to pay as a result. All those invested in the mutual fund share in those costs. Those who are buy and hold will end up paying the costs of those who aren't. In Vanguard's hybrid ETF/mutual fund structure, that includes Vanguard ETF owners.

In a pure ETF, the costs of buying or selling of ETF shares is paid by directly by those buying or selling. Authorized participants will also have costs, and they will pass on those costs to those who are buying or selling ETFs, along with a profit on top of those costs. But ETF owners who are buy and hold will not end up paying the costs of those who aren't. Frequent trading is not going to cost a buy and hold ETF owner, but it will cost a buy and hold mutual fund owner or Vanguard ETF owner.
You've now moved from the tax efficiency to a different potential problem, NAV pricing vs market pricing.

Fortunately, this too is easily verified. If the turnover by MF shareholders made a difference to buy and holders, you'd expect Vanguard's ETFs/funds to underperform pure ETFs over long periods. And if anything, it's the opposite (or "within the margin of error") if I look at precisely matched funds, with the addition that Vanguard's funds seem to be almost free vs their index, due to security lending revenue comparable to fees. Which I'm not sure you're getting from other ETF providers.

My gut feeling is that the fund managers are so much better than you are at trading, whether in liquid markets or not, that the inefficiency lost to mutual fund churn even if you hold much longer than the typical MF investor (which isn't easy) are comparable or less to the inefficiency of your one buy / one sell transaction..
Park wrote: One could envision scenarios, where there are net redemptions by Vanguard mutual fund owners. If you're saving for retirement in Vanguard mutual funds, there's a good chance you will eventually sell those funds.
It's still about trading frequency, not net redemptions. You the ETF holder too will eventually have to sell, so the question is whether the MF shareholders are buying and selling many times inbetween your transactions.
Park wrote: You make the case that ETFs are traded much more frequently than mutual funds, so the mutual fund part of a Vanguard fund doesn't limit it's ability to purge low cost shares much. I would agree that some ETFs, such as SPY, have very high turnover. But traders focus on certain ETFs, and I'm not certain that they are Vanguard ETFs. Also, the lower the portion of a Vanguard fund that is ETF, the more the mutual fund portion limits the ability to purge low cost shares. Vanguard mutual fund owners should want as much of the Vanguard fund to be ETF as possible.
Well, the avg trading volume for both VTI and VOO is a pretty healthy hundreds of millions per day. Which means tens of billions (close to the entire size of the ETF class and maybe 10% of Total Stock Market). Anyways, in practice it seems to be more than enough or you'd see at least an occasional capital distribution.
Vanguard's ETF/MFs don't underperform pure ETFs. That's because Vanguard's cost advantage makes up for the subsidy paid by Vanguard ETF owners and buy and hold Vanguard mutual fund owners to Vanguard mutual fund owners who aren't buy and hold.

About your comment regarding trading frequency and net redemption, I beg to differ. The question is whether there are net redemptions by Vanguard mutual fund owners in any year while you own a Vanguard ETF. Because if there are net redemptions in any year, and those net redemptions result in capital gains, Vanguard ETF owners will get capital gains distributions that they wouldn't in a pure ETF.

As long as the mutual fund portion of Vanguard funds keep growing in units, capital gains distributions to Vanguard ETF owners are less of an issue. But if there are net redemptions among Vanguard mutual fund owners and Vanguard ETFs start paying cap gains taxes that they wouldn't in a pure ETF, Vanguard ETF may become less popular with potential and existing Vanguard ETF owners. This might decrease the % of Vanguard funds that are ETF. With a decreasing % of ETF owners, Vanguard funds may be less able to purge themselves of low cost shares.

For my needs and those of many other investors, ETFs are a better vehicle overall than open ended mutual funds. Vanguard ETFs are definitely competitive with nonVanguard ETFs. But that's because of Vanguard's cost advantage; IMO, the structure of Vanguard's ETFs is overall inferior to those of other open ended ETFs. And that cost advantage is what also keeps the number of Vanguard mutual fund units increasing, which is important for Vanguard ETF owners. I don't see that cost advantage disappearing, at least in the near future.

For total stock market index funds, whether you own a Vanguard ETF or other ETF is of lesser importance. But in higher turnover strategies, such as small cap value, it is something to consider.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by grabiner » Fri Dec 02, 2016 11:05 pm

jhfenton wrote:I don't believe a Vanguard equity hybrid ETF/OE MF has ever distributed any capital gains. They could in theory as you point out, but I haven't seen it.
It has happened, but is not common. From the wiki:

FTSE All-World Ex US Small-Cap, which was created simultaneously as a fund and an ETF, distributed small gains in its first two years (2009 and 2010), and Consumer Staples Index also distributed a gain in its first year (2004). In addition, REIT Index, which added an ETF class to an existing fund which generates a lot of gains, distributed gains in 2004, 2005, 2006, and 2008.

It is more common for stock ETFs to distribute gains when getting started, because the redemption process works better to eliminate gains when shares have been purchased at a variety of prices. In particular, since FTSE All-World Small-Cap started close to the 2009 market bottom, it had huge gains on all its shares in 2009-2010, and had to realize capital gains to meet index changes. It hasn't distributed a capital gain since then, and currently has both realized and unrealized losses.

This is also why bond ETFs are more likely to distribute capital gains. When rates fall, all bonds rise in value, and any bond sales made by a fund must be for capital gains. In contrast, in a stock bull market, some stocks will still fall.
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by motorcyclesarecool » Sun Dec 04, 2016 7:09 am

Stupid question here: wouldn't a simple solution here be to make a policy that mf holders have to convert to ETF class prior to redemption? That seems like a decent strategy for the net outflows that should accompany Boomers finally leaving the work force. Hence, why Vanguard is "upgrading" people to brokerage accounts. Any holes in that theory?
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by grok87 » Sun Dec 04, 2016 7:22 am

stlutz wrote:Where this does consistently show up as an issue with is their fixed income ETFs. For example, scroll down to the bottom of this list.

https://personal.vanguard.com/us/insigh ... ins-112016


The iShares or Schwab equivalents of these funds never have such distributions.
thanks.

wow that's quite a big cap gain distribution for the long term treasury etf (EDV), around 2% of capital.
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by FillorKill » Sun Dec 04, 2016 8:50 am

Park wrote: For my needs and those of many other investors, ETFs are a better vehicle overall than open ended mutual funds. Vanguard ETFs are definitely competitive with nonVanguard ETFs. But that's because of Vanguard's cost advantage; IMO, the structure of Vanguard's ETFs is overall inferior to those of other open ended ETFs. And that cost advantage is what also keeps the number of Vanguard mutual fund units increasing, which is important for Vanguard ETF owners. I don't see that cost advantage disappearing, at least in the near future.
IMO your analysis is incomplete at least in regard to VG equity funds. You identify the tax advantage that the ETF share class has on the dual-structure portfolio via pushing the lowest basis securities out of the portfolio eliminating potential capital gains which benefits all share class owners. However, you fail to consider that net redemptions on the MF side of the house allow the portfolio managers to liquidate the highest basis securities in the portfolio and, as opportunity allows, accrue tax losses that also benefit all share class owners. Instead you're focusing on the unlikely (and in application unwarranted) concern that redemption activity on the MF side will detrimentally impact the long term ETF share holders.

An investor that considered this to be a real concern and used this reasoning to choose EEM over VWO (while the tracked the same index) and held the position for 3 years (2010-2012) would have experienced considerably different performance that can't be explained by the higher ER of EEM alone. The significant performance difference is primarily due to the fact that EEM used tracking methodology that failed to deliver - especially in 2010. They employed a representative sampling technique while VWO employed full replication which did a better job of tracking the index. After all, an index fund that fails to effectively track the index doesn't pass round one of the selection process for me.

When selecting ETFs to fulfil your desired allocations ER, tracking methodology and tax cost all need to be considered. The idea that MF redemptions will at some point detrimentally impact VG equity ETF owners (in the dual-structure funds) is pretty low on the list of considerations, IMO YMMV.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by grabiner » Sun Dec 04, 2016 10:09 am

stlutz wrote:Where this does consistently show up as an issue with is their fixed income ETFs. For example, scroll down to the bottom of this list.

https://personal.vanguard.com/us/insigh ... ins-112016


The iShares or Schwab equivalents of these funds never have such distributions.
https://www.ishares.com/us/capital-gains-distributions shows distributions for several iShares bond ETFs, including IUSB and IAGG, equivalent to Vanguard's BND and BNDX.

https://www.csimfunds.com/public/file/P ... b_ETFs.pdf says that Schwab has none.

However, I don't expect this to continue. I believe the reason Vanguard has larger distributions than Schwab is not the result of the ETF structure, but the fact that Vanguard's funds are older, and thus bought more of their bonds at higher yields. The inception date for Schwab''s SCHZ (equivalent to BND) is 7/14/11. Intermediate-term rates went up in 2011-2013 and were relatively flat in 2013-2016, so there aren't many capital gains.

As a separate point, capital gains distributions are not a tax problem for bond investors (except for munis), as they represent money the investor was going to get taxed on anyway, and the distribution may even be taxed at a lower rate.

For example, say that a fund bought a 10-year bond at a 3% yield for $10,000 (paying $150 every six months), and five years later, the bond is worth $10,472 because yields on 5-year bonds are now 2%. If the fund sells the bond and buys a new five-year bond, it will distribute a capital gain of $472, and pay $1047 of interest over the next five years, a total taxable income of $1519. If it keeps the bond until maturity, it will distribute no capital gain, and pay $1500 of interest over the next five years.
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Geologist » Sun Dec 04, 2016 10:25 am

Park wrote:
talzara wrote:Vanguard is also allowed to redeem mutual funds in kind. It's not as good as an ETF's creation/redemption mechanism, but it does eliminate the realized gains from large, disruptive trades.
Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading.
Also, taxes are not the only consideration.
From what I understand, it's been a longstanding property of mutual funds that they can redeem in kind. But mutual funds interact with retail investors predominately. Such redemptions in kind are unlikely to be popular with most retail investors. However, ETFs interact with authorized participants. Authorized participants are institutional investors. And those authorized particpants would not necessarily be averse to redemptions in kind, as they make profits arbitraging the difference between the NAV of the underlying shares and the market price.
It doesn't matter that "mutual funds interact with retail investors predominately." It is enough if the mutual fund has a few large enough institutional investors. As a non-Vanguard example, the Dodge and Cox Stock Fund has realized well over a billion dollars in capital gains through in-kind redemptions over the past 5 or 6 years, so it must have institutional investors willing to take the appreciated shares, even though you might think of it as a classic individual investor fund.

As to Vanguard, it is obvious that Vanguard's funds do have important institutional investors, because they have large institutional mutual fund classes. I don't know if it is easy to tell how much of the capital gains reported in annual reports as realized in-kind went through the institutional class versus ETF participants, but it can be happening.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Sun Dec 04, 2016 11:37 am

FillorKill wrote: However, you fail to consider that net redemptions on the MF side of the house allow the portfolio managers to liquidate the highest basis securities in the portfolio and, as opportunity allows, accrue tax losses that also benefit all share class owners...

An investor that considered this to be a real concern and used this reasoning to choose EEM over VWO (while the tracked the same index) and held the position for 3 years (2010-2012) would have experienced considerably different performance that can't be explained by the higher ER of EEM alone. The significant performance difference is primarily due to the fact that EEM used tracking methodology that failed to deliver - especially in 2010. They employed a representative sampling technique while VWO employed full replication which did a better job of tracking the index. After all, an index fund that fails to effectively track the index doesn't pass round one of the selection process for me.

When selecting ETFs to fulfil your desired allocations ER, tracking methodology and tax cost all need to be considered. The idea that MF redemptions will at some point detrimentally impact VG equity ETF owners (in the dual-structure funds) is pretty low on the list of considerations,
Your point that net redemptions on the MF side of the house allow the portfolio managers to liquidate the highest basis securities, which can give rise to tax loss harvesting opportunities, is well taken. However, the same also applies to net redemptions by ETF owners; portfolio managers could choose to exchange highest basis securities instead of lowest base securities. But hopefully for the fund owners, the net direction of the NAV is up, and this is especially relevant to buy and hold owners. So IMO, minimizing cap gains is more important than maximizing tax loss harvest opportunities. And ETFs are better able than mutual funds to minimize cap gains.

There is certainly more to ETF choice than tax efficiency. However, i'd like to make the following comment. Tax on long term cap gains can be as high as 33% (California), and rates in some other states are not considerably lower ( http://www.forbes.com/sites/robertwood/ ... 0671a43b45 ). Much is made of high hedge fund fees, and how difficult it is for a hedge fund to overcome the cost hurdle of such fees. For ETFs in a taxable account, taxes are the equivalent of hedge fund fees.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Sun Dec 04, 2016 11:51 am

Geologist wrote:
Park wrote:
talzara wrote:Vanguard is also allowed to redeem mutual funds in kind. It's not as good as an ETF's creation/redemption mechanism, but it does eliminate the realized gains from large, disruptive trades.
Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading.
Also, taxes are not the only consideration.
From what I understand, it's been a longstanding property of mutual funds that they can redeem in kind. But mutual funds interact with retail investors predominately. Such redemptions in kind are unlikely to be popular with most retail investors. However, ETFs interact with authorized participants. Authorized participants are institutional investors. And those authorized particpants would not necessarily be averse to redemptions in kind, as they make profits arbitraging the difference between the NAV of the underlying shares and the market price.
It doesn't matter that "mutual funds interact with retail investors predominately." It is enough if the mutual fund has a few large enough institutional investors. As a non-Vanguard example, the Dodge and Cox Stock Fund has realized well over a billion dollars in capital gains through in-kind redemptions over the past 5 or 6 years, so it must have institutional investors willing to take the appreciated shares, even though you might think of it as a classic individual investor fund.

As to Vanguard, it is obvious that Vanguard's funds do have important institutional investors, because they have large institutional mutual fund classes. I don't know if it is easy to tell how much of the capital gains reported in annual reports as realized in-kind went through the institutional class versus ETF participants, but it can be happening.
It would be interesting to know how much of the cap gains reported in annual reports as realized in-kind went through mutual fund owners. It wouldn't surprise me if someone on this board had access to such information, or knew someone who did.

If you're a buy and hold investor in a mutual fund, frequent traders are not your friend: you share in the costs of their trading and any resultant taxes. However, if you're a buy and hold investor in an ETF, frequent traders might be your friend. You don't pay for the costs of their trading and their trading won't increase your taxes. It is possible that their trading might decrease your taxes. Due to Vanguard's hybrid ETF/MF structure, Vanguard ETF owners get exposure to ETF traders and MF traders, whereas in a nonVanguard ETF, they would only get exposed to ETF traders.

Vanguard mutual fund owners benefit from the hybrid structure, but I"m not convinced that Vanguard ETF owners overall do. It would probably be better for Vanguard ETF owners if Vanguard ETFs were similar to other ETFs. However, any differences would likely be small. And the cost advantage of Vanguard makes up for the structural weakness of Vanguard ETFs.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by grabiner » Sun Dec 04, 2016 12:34 pm

Park wrote:If you're a buy and hold investor in a mutual fund, frequent traders are not your friend: you share in the costs of their trading and any resultant taxes. However, if you're a buy and hold investor in an ETF, frequent traders might be your friend. You don't pay for the costs of their trading and their trading won't increase your taxes. It is possible that their trading might decrease your taxes. Due to Vanguard's hybrid ETF/MF structure, Vanguard ETF owners get exposure to ETF traders and MF traders, whereas in a nonVanguard ETF, they would only get exposed to ETF traders.

Vanguard mutual fund owners benefit from the hybrid structure, but I"m not convinced that Vanguard ETF owners overall do. It would probably be better for Vanguard ETF owners if Vanguard ETFs were similar to other ETFs. However, any differences would likely be small. And the cost advantage of Vanguard makes up for the structural weakness of Vanguard ETFs.
Vanguard deals with this shared issue. Several Vanguard mutual funds which trade in illiquid markets impose purchase and redemption fees, so that existing shareholders do not pay for the trading costs caused by purchases and redemptions. The ETF and mutual fund shareholders are both protected. (It is usually more attractive to buy the ETF class for such funds, although the same high trading costs may also cause the ETF to trade at large spreads, creating its own trading costs.)

Vanguard adjusts those fees over time to better match trading costs. For example, Emerging Markets Index used to have fees, but it is now so large that the trading costs associated with purchases and redemptions are trivial relative to the size of the fund, and thus it no longer charges them.
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by FillorKill » Sun Dec 04, 2016 12:40 pm

Park wrote:However, the same also applies to net redemptions by ETF owners; portfolio managers could choose to exchange highest basis securities instead of lowest base securities. But hopefully for the fund owners, the net direction of the NAV is up, and this is especially relevant to buy and hold owners. So IMO, minimizing cap gains is more important than maximizing tax loss harvest opportunities. And ETFs are better able than mutual funds to minimize cap gains.
But there's a fly in that ointment. ETFs generally create and redeem via in-kind transactions with APs and MF shares are generally created and extinguished via directly transacting in the marketplace. The reason that in-kind is so effective at eliminating potential gains is precisely the reason why the process will not allow for a tax loss. If the securities pushed-out are in a loss position RE the prevailing market price there is no opportunity for the fund to realize a tax loss. In-kind isn't a taxable event either way.

The opposite is true with the marketplace transactions taking place on the MF side. All of their transacting in the marketplace is taxable so the symbiosis of the two share classes working together should benefit all share class owners - low basis securities pushed-out to the APs with no tax consequence and the highest basis securities opportunistically sold out of the MF channel for losses which will offset potential future cap gains.

As you say the general trajectory of equity investing over time is up so in a binary situation I would take ongoing gain avoidance over less prevalent loss realization but when the combination of the two are available across the tax structure of the portfolio due to the dual share classes, well, in practice it seems to be beneficial to all share class holders.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Sun Dec 04, 2016 12:52 pm

FillorKill wrote:
Park wrote:However, the same also applies to net redemptions by ETF owners; portfolio managers could choose to exchange highest basis securities instead of lowest base securities. But hopefully for the fund owners, the net direction of the NAV is up, and this is especially relevant to buy and hold owners. So IMO, minimizing cap gains is more important than maximizing tax loss harvest opportunities. And ETFs are better able than mutual funds to minimize cap gains.
But there's a fly in that ointment. ETFs generally create and redeem via in-kind transactions with APs and MF shares are generally created and extinguished via directly transacting in the marketplace. The reason that in-kind is so effective at eliminating potential gains is precisely the reason why the process will not allow for a tax loss. If the securities pushed-out are in a loss position RE the prevailing market price there is no opportunity for the fund to realize a tax loss. In-kind isn't a taxable event either way.
I stand corrected. But from an earlier post in this thread:

"However, I have read the following from morningstar. An ETF has the option to sell underlying shares, and not just exchange them with authorized participants. So it can also accumulate cap losses that can be used to offset any cap gains resulting from changes in the portfolio."

So my take is that ETF providers have the same ability to tax loss harvest as mutual fund providers. But ETF providers have a greater ability to minimize cap gains than mutual fund providers.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by FillorKill » Sun Dec 04, 2016 1:13 pm

Park wrote: I stand corrected. But from an earlier post in this thread:

"However, I have read the following from morningstar. An ETF has the option to sell underlying shares, and not just exchange them with authorized participants. So it can also accumulate cap losses that can be used to offset any cap gains resulting from changes in the portfolio."

So my take is that ETF providers have the same ability to tax loss harvest as mutual fund providers. But ETF providers have a greater ability to minimize cap gains than mutual fund providers.
'generally' :happy I was mostly trying to point out that in-kind, which is the typical day-to-day process for ETFs, is a non taxable event either way which seemed to have gotten lost in the thread. ETF sponsors can and do engage in cash transactions and other portfolio management techniques but that isn't the normal course of day-to-day operations - just as VG provides in-kind redemptions to institutional MF clients that prefer that. So yes, stand alone ETFs can generate tax losses they just can't do it via in-kind.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Sun Dec 04, 2016 2:47 pm

Park wrote:If you're a buy and hold investor in a mutual fund, frequent traders are not your friend: you share in the costs of their trading and any resultant taxes. However, if you're a buy and hold investor in an ETF, frequent traders might be your friend. You don't pay for the costs of their trading and their trading won't increase your taxes. It is possible that their trading might decrease your taxes. Due to Vanguard's hybrid ETF/MF structure, Vanguard ETF owners get exposure to ETF traders and MF traders, whereas in a nonVanguard ETF, they would only get exposed to ETF traders.
Actually, ETF traders benefit everyone, except probably themselves. By trading frequently, ETF traders generate liquidity, and only they pay the price for their trading. This keeps the bid ask spread down on ETFs and their underlying shares, and decreases tracking error of fund price from NAV.

Mutual fund traders help nonVanguard ETF owners by generating liquidity also. But Vanguard mutual fund traders hurt Vanguard ETF owners and buy and hold Vanguard mutual fund owners.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Wakefield1 » Sun Dec 04, 2016 2:54 pm

So some mutual fund families tend to have more "fund swapping" market timers and frequent traders in and out as opposed to buy and hold for,say,years at a time than other families?

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Park » Sun Dec 04, 2016 3:08 pm

Wakefield1 wrote:So some mutual fund families tend to have more "fund swapping" market timers and frequent traders in and out as opposed to buy and hold for,say,years at a time than other families?
NonVanguard mutual fund traders will help both Vanguard ETF owners and Vanguard mutual fund owners.

Vanguard has a cost advantage compared to other companies providing mutual funds and ETFs. With their hybrid ETF/mutual fund structure, Vanguard mutual funds have a tax efficiency that conventional mutual funds can't replicate. All other things being equal, Vanguard mutual funds will be better than any other mutual funds. That's good for Vanguard ETF owners, as it decreases the risk of net redemptions by Vanguard mutual fund owners.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Dale_G » Sun Dec 04, 2016 11:53 pm

Maybe i missed it, but Vanguard index funds should be less tax efficient than a fund that tracks the same index - if that fund has a higher expense ratio.

The expenses of running (all or almost all) funds are taken from the dividends paid by the underlying shares owned by the funds.

Suppose we are considering two funds tracking the S&P500. Before expenses both funds track the S&P perfectly. The dividends received by both funds amount to 2% of NAV - or $20 per $1,000 of shares owned by the fund.

Fund X has an expense ratio of 0.5% - or $5 per $1,000 of the fund owned. Fund X will distribute a dividend of $15 over the course of a year.

Vanguard's Admiral and ETF S&P500 funds have an expense ratio of .05% - or 50 cents per $1,000 of the fund owned. Vanguard will distribute a dividend of $19.50 over the coarse of a year.

The Vanguard fund is "less tax efficient", but it means more money in my pocket. Sometimes tax inefficiency is good. A fund with a 2% expense ratio would not distribute any dividend, but it would have wonderful tax efficiency.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by grabiner » Mon Dec 05, 2016 12:26 am

Dale_G wrote:Maybe i missed it, but Vanguard index funds should be less tax efficient than a fund that tracks the same index - if that fund has a higher expense ratio.
Similarly, Investor shares are more tax-efficient than Admiral and ETF shares of the same fund, but this doesn't make them better; it is what you keep after taxes that matters.
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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by Suppertime » Mon Dec 05, 2016 8:00 pm

Vanguard's total stock market index fund has unrealized gains of 27.37% of NAV. (It always bugged me you buy a fund, you're potentially on the hook for unrealized gains you didn't enjoy.)

According to Morningstar ITOT has potential cap gain exposure of $10.92 on NAV of around $50, or ~22%.

For this level of difference, I'll stick with Vanguard funds. I trust them more to benefit shareholders in terms of things like stock lending profits and smart trading to avoid tracking error (or get positive tracking error).

I also recently exchanged Vanguard's actively managed treasury fund for their treasury index fund with etf counterpart due to the big difference in estimated cap gain distribution. I hope the difference in distribution is due to the ETF's tax efficiency rather than the index fund being unable to capture cap gains from rolling down the yield curve.

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Re: Vanguard ETFs Less Tax Efficient Than Other ETFs?

Post by jalbert » Tue Dec 06, 2016 2:09 am

Sometimes competitor's products are more tax efficient than Vanguard's but the ETF share class structure has not been the culprit.

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