Tax Efficient Placement of ETFs

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Copernicus
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Tax Efficient Placement of ETFs

Post by Copernicus » Mon Mar 26, 2018 11:48 pm

To decide tax efficient place for certain ETFs in my tax deferred and taxable accounts, I looked at their Tax Cost ratios on Morningstar.
I found that international stock index ETFs are better than, but not too much better than BND. The rank order is consistent with the wiki, but I thought I will post the findings here.

BND 1.09

VEU 0.78
VWO 0.79
VGK 0.75
VSS 0.98

VNQ 1.82 (No surprise here)

VTI 0.44
VOO 0.45
VIOV 0.38
VB 0.44
VBR 0.53

VFH 0.52

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triceratop
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Re: Tax Efficient Placement of ETFs

Post by triceratop » Tue Mar 27, 2018 12:15 am

I'm still waiting for Morningstar to explain how their tax cost ratios for VTSAX and VTI can both be simultaneously correct considering that the two share classes have identical stakes in the underlying fund.

In the meantime, I use my own calcuations .
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Copernicus
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Re: Tax Efficient Placement of ETFs

Post by Copernicus » Tue Mar 27, 2018 6:39 pm

triceratop wrote:
Tue Mar 27, 2018 12:15 am
I'm still waiting for Morningstar to explain how their tax cost ratios for VTSAX and VTI can both be simultaneously correct considering that the two share classes have identical stakes in the underlying fund.

In the meantime, I use my own calcuations .
Thank you, triceratop. Your calculations are useful. No idea why the tax cost ratio of the two share classes should be different!
If one was to calculate using your and Morningstar methods, the numbers will be different. However, the rank order should remain the same. Am I correct?

livesoft
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Re: Tax Efficient Placement of ETFs

Post by livesoft » Tue Mar 27, 2018 6:46 pm

Copernicus wrote:
Tue Mar 27, 2018 6:39 pm
If one was to calculate using your and Morningstar methods, the numbers will be different. However, the rank order should remain the same. Am I correct?
I don't think you are correct. So much depends on one's personal taxes and morningstar makes a big assumption about that which does not apply to the majority of investors.
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Copernicus
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Re: Tax Efficient Placement of ETFs

Post by Copernicus » Tue Mar 27, 2018 8:40 pm

livesoft wrote:
Tue Mar 27, 2018 6:46 pm
Copernicus wrote:
Tue Mar 27, 2018 6:39 pm
If one was to calculate using your and Morningstar methods, the numbers will be different. However, the rank order should remain the same. Am I correct?
I don't think you are correct. So much depends on one's personal taxes and morningstar makes a big assumption about that which does not apply to the majority of investors.
I understand that the actual numbers would differ, but I am not able to understand why the rank order would change. In other words, the Morningstar tax cost ratio should indicate for all investors, the relative tax efficiency of a fund compared with anther fund. Then, when one factors in the individual tax situation, the actual impact can be assessed. A person's tax bracket, state tax rate, etc., would impact each investor differently. However, among given two funds funds, the desirability of a fund over another due to tax efficiency should remain the same. No?

livesoft
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Re: Tax Efficient Placement of ETFs

Post by livesoft » Tue Mar 27, 2018 8:45 pm

No. Foreign tax credit, state income tax, and the amount of the dividend that is qualified versus non-qualified come into play. You can use triceratop's spreadsheet and work your own examples.
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triceratop
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Re: Tax Efficient Placement of ETFs

Post by triceratop » Tue Mar 27, 2018 10:06 pm

Copernicus wrote:
Tue Mar 27, 2018 8:40 pm
livesoft wrote:
Tue Mar 27, 2018 6:46 pm
Copernicus wrote:
Tue Mar 27, 2018 6:39 pm
If one was to calculate using your and Morningstar methods, the numbers will be different. However, the rank order should remain the same. Am I correct?
I don't think you are correct. So much depends on one's personal taxes and morningstar makes a big assumption about that which does not apply to the majority of investors.
I understand that the actual numbers would differ, but I am not able to understand why the rank order would change. In other words, the Morningstar tax cost ratio should indicate for all investors, the relative tax efficiency of a fund compared with anther fund. Then, when one factors in the individual tax situation, the actual impact can be assessed. A person's tax bracket, state tax rate, etc., would impact each investor differently. However, among given two funds funds, the desirability of a fund over another due to tax efficiency should remain the same. No?
Obviously not, and the reason is I think I have already given a counterexample. Just find a fund which has a morningstar tax efficiency between the morningstar tax efficiencies of VTI and VTSAX. et voila!
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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grabiner
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Re: Tax Efficient Placement of ETFs

Post by grabiner » Wed Mar 28, 2018 12:37 pm

triceratop wrote:
Tue Mar 27, 2018 12:15 am
I'm still waiting for Morningstar to explain how their tax cost ratios for VTSAX and VTI can both be simultaneously correct considering that the two share classes have identical stakes in the underlying fund.
Morningstar doesn't always know about qualified dividends; it may know that a mutual fund dividend was qualified but assume that the ETF dividend in the same year was non-qualified. You can get more reliable tax data from the fund provider; Vanguard knows which Vanguard fund and ETF dividends were qualified.
In the meantime, I use my own calcuations .
This is a good idea in any case, because you don't have to use the standardized numbers which assume the highest federal tax rate and no state tax. If you are in a moderate tax bracket but pay state tax, you probably pay higher taxes on qualified dividends and lower taxes on non-qualified dividends than the standardized assumptions.
Wiki David Grabiner

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