Doc wrote: ↑
Sat Dec 16, 2017 12:55 pm
talzara wrote: ↑
Sat Dec 16, 2017 12:47 pm
For the Total Stock Market Fund, Vanguard is still relying on traditional tax-management techniques to avoid paying out capital gains.
What do you consider to be "traditional tax-management techniques"?
FWIW I don't have a dog in this "fight". The QDI's are something I don't care about except for REIT funds which I wouldn't own in taxable and for foreign in which case the non QDI's are somewhat offset by the foreign tax credit.
"Traditional" would be what Vanguard did before ETFs. They meet redemptions by selling shares with the highest cost basis, which would be the newly-acquired shares. Many of these shares haven't been held for 60 days, so the dividend would be non-qualified.
ETFs work the other way. Instead of selling the highest-basis shares, they redeem in-kind with the lowest-basis shares.
Theoretically, Vanguard could use the ETF shares to get rid of low-basis shares, and they could use the mutual fund shares to realize a capital loss on high-basis shares. They could use the capital loss to offset future capital gains realized during index changes. (For example, when they moved from to MSCI to FTSE indexes.)
I assumed that ETF shares trade so frequently that even a small percentage of ETFs could make a big difference to tax-efficiency. However, the numbers show that's not true. There isn't enough ETF redemption activity in the Total Stock Market Fund to make a big difference.