value stocks in taxable

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bogleboyz
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value stocks in taxable

Post by bogleboyz » Sat May 06, 2017 5:29 am

what do you guys think about holding value stocks such as small value index, large value index funds in taxable account?
I would like to tilt a bit with value stocks but dont have enough space in my tax deferred accounts (401, 457,roth) as they contain bonds and REIT index fund.
or should i just stick with total market index fund in the taxable account?
I am in a high tax bracket

any advice will be appreciated
Thanks a lot

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StevieG72
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Re: value stocks in taxable

Post by StevieG72 » Sat May 06, 2017 5:46 am

If you desire value stocks as part of your AA, there is nothing wrong with putting them in your taxable account.
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backpacker
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Re: value stocks in taxable

Post by backpacker » Sat May 06, 2017 7:06 am

You can estimate the cost of holding value stocks in a taxable account directly using last year's qualified dividends. The summary page from Vanguard is here.

So for example, US total market had 92% qualified dividends and small cap value had 74%. The dividend yield for both funds is about 1.8% for both funds, so you will end up with an extra .3% of unqualified dividend yield with the small cap value fund. If your tax rate is 30%, that means you will lose an extra .09% a year to taxes. Think of it as basically doubling the ER of the fund.

Whether that's worth it depends on your estimate of the value premium going forward.

NiceUnparticularMan
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Re: value stocks in taxable

Post by NiceUnparticularMan » Sat May 06, 2017 8:07 am

Another poster has created this cool spreadsheet:

viewtopic.php?t=208818

Long story short, to me the tax drag on U.S. SCV funds like IJS was not prohibitive, so now I am planning to use that for SCV in taxable as needed. I'm also using taxable for international value (EFV), for the same reason.

Random Walker
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Re: value stocks in taxable

Post by Random Walker » Sat May 06, 2017 8:26 am

I used to be strict about only placing the tax efficient funds in taxable account. I'm about 85% taxable / 15% tax deferred. As I evolved, the asset location issue started to dominate my asset allocation decisions. Now I've switched. I don't let the tax tail wag the asset allocation dog so much. When creating a position, think about where the new position is coming from. For me I have a substantial 35% allocation to municipal bonds in taxable. Taking from a TSM equity fund to create the inefficient SV position narrows the after tax expected return benefit of the allocation change. Taking from the municipal bonds to create the relatively inefficient SV position significantly increases the after tax return of that pie slice. Overall, I'd say give priority to asset allocation over asset location. Diversifying across factors improves portfolio efficiency. There is a tradeoff with tax efficiency.
FWIW, it was my interest in tilting to SV in a overwhelmingly taxable portfolio that got me started down the DFA / advisor route with core funds, tax Managed value funds, tax advantaged funds.

Dave

KyleAAA
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Re: value stocks in taxable

Post by KyleAAA » Sat May 06, 2017 8:29 am

The smaller and more valuey of the small-cap value ETFs (like IJS and VIOV) tend to be every bit as tax efficient as the total market ETFs. In fact, IJS has been MORE tax-efficient than VTI over the past 10 and 15 year periods. Those that delve more into mid-cap territory, like Vanguard's VBR, tend to be significantly less tax-efficient because they tend to have a significantly higher dividend yield and a lower proportion of qualified dividends (perhaps because VBR holds such a large REIT component?). So doing small-value in taxable is actually a great idea so long as you actually own small and value. VBR wouldn't be the worst thing to own in taxable, but I would definitely prefer VIOV/IJS.

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backpacker
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Re: value stocks in taxable

Post by backpacker » Sat May 06, 2017 8:37 am

^ OK, this spreadsheet is amazing. That's what you need.

pkcrafter
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Re: value stocks in taxable

Post by pkcrafter » Sat May 06, 2017 9:04 am

Nice work by triceratop, but I believe he used the 15% tax bracket. M* shows tax efficiency at highest tax bracket. Here is Vanguard Small Cap Value, VISVX

http://performance.morningstar.com/fund ... ture=en_US

The fund is very tax efficient.

U.S. Value Index, VUVLX

http://performance.morningstar.com/fund ... ture=en_US

Not as efficient as small, but reasonable
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NiceUnparticularMan
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Re: value stocks in taxable

Post by NiceUnparticularMan » Sat May 06, 2017 9:57 am

pkcrafter wrote:Nice work by triceratop, but I believe he used the 15% tax bracket. M* shows tax efficiency at highest tax bracket. Here is Vanguard Small Cap Value, VISVX

http://performance.morningstar.com/fund ... ture=en_US

The fund is very tax efficient.

U.S. Value Index, VUVLX

http://performance.morningstar.com/fund ... ture=en_US

Not as efficient as small, but reasonable
Just FYI, I believe you can still download the spreadsheet and then individualize it. But you'll reach the same basuc results as Morningstar, I assume, and they also score IJS as more tax efficient:

http://performance.morningstar.com/fund ... ture=en_US

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