[WSJ] What Really Matters for an Index fund: Tax Skill

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regularguy455
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[WSJ] What Really Matters for an Index fund: Tax Skill

Post by regularguy455 » Tue Jun 05, 2018 8:22 am

Not sure if this is behind a paywall, but here's a direct link: https://www.wsj.com/articles/what-reall ... 1528078020

There seems to be a small, but real difference between SP500 index funds based on the ability of management to handle inflows and outflows of capital. This differences can add up about 0.26% when comparing 75th to 25th percentile over the long term.

It would've been nice if they had provided a ranked list of the performers, but at least it puts the tax issue on my radar.

cjg
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by cjg » Tue Jun 05, 2018 8:45 am

I also can't read due to the paywall but my guess is that all the large SP500 index ETFs are pretty similar taxwise. I haven't heard of any larger ETF making a capital gains distribution. I'd avoid smaller ETFs and non-Vanguard mutual funds (until their patent expires) in a taxable account.

rjohnsmith922
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by rjohnsmith922 » Tue Jun 05, 2018 2:36 pm

Dear WSJ Forum, thanks for your help. The following link has been posted on social media.
https://www.facebook.com/wsj/posts/10157828484288128

Northern Flicker
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by Northern Flicker » Tue Jun 05, 2018 4:15 pm

cjg wrote:
Tue Jun 05, 2018 8:45 am
I also can't read due to the paywall but my guess is that all the large SP500 index ETFs are pretty similar taxwise. I haven't heard of any larger ETF making a capital gains distribution. I'd avoid smaller ETFs and non-Vanguard mutual funds (until their patent expires) in a taxable account.
The biggest issue is that the percentage of dividends that are qualified can vary from year to year and fund to fund. Surprisingly, there even can be differences in tax efficiency for funds held in a tax-qualified account, at least for int’l funds held by US investors. This is because of potentially differing amounts of non-reimbursable foreign taxes paid.
Last edited by Northern Flicker on Tue Jun 05, 2018 10:27 pm, edited 1 time in total.
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by livesoft » Tue Jun 05, 2018 4:18 pm

It would have been nice to say that taxes don't matter that much in a tax-advantaged account. Maybe the editors edited that tidbit out of the story.
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Nate79
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by Nate79 » Tue Jun 05, 2018 4:33 pm

Wow, what a waste of space that article was. Almost no details backing up the claims and trying to somehow link a fund to tax skill.

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regularguy455
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by regularguy455 » Tue Jun 05, 2018 9:19 pm

Not sure why people think this article is a waste of time. It brings up the fact that there are non-zero differences in SP500 ETFs that, over the long term, are significantly larger than the ER. That’s news to me.

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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by livesoft » Tue Jun 05, 2018 9:23 pm

regularguy455 wrote:
Tue Jun 05, 2018 9:19 pm
Not sure why people think this article is a waste of time. It brings up the fact that there are non-zero differences in SP500 ETFs that, over the long term, are significantly larger than the ER. That’s news to me.
Discussed in May on this forum:
viewtopic.php?t=248912

Maybe that thread led to the article in some way?
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regularguy455
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by regularguy455 » Tue Jun 05, 2018 9:30 pm

That thread appears to discuss the difference in ER between funds. This article quantifies tracking error and taxes which I have not seen on this forum as a consideration for fund selection. Those issues account for significantly more cost than the ER alone.

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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by pcsrini » Tue Jun 05, 2018 9:53 pm

From the comment section on the wsj page:

"I pulled up the big ones; Vanguard 500 index fund(VFIAX), Fidelity 500 index(FUSEX), Schwab 500 index(SWPPX), and iShares is the example in the article.

After tax post-liq: All dated 03/31/2018.
Vanguard:
1yr 8.60%
3yr: 8.30%
5yr: 10.54%
10yr: 7.72%

iShares: (from the article)
1yr: 8.60%
3yr: 8.29%
5yr: 10.53%
10yr: 7.68%

Schwab:
1yr: 8.22%
3yr: 8.12%
5yr: 10.40%
10yr: 7.47%

Fidelity:
1yr: 8.17%
3yr: 8.10%
5yr: 10.36%
10yr: 7.42%"

Northern Flicker
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by Northern Flicker » Tue Jun 05, 2018 10:22 pm

regularguy455 wrote:
Tue Jun 05, 2018 9:30 pm
That thread appears to discuss the difference in ER between funds. This article quantifies tracking error and taxes which I have not seen on this forum as a consideration for fund selection. Those issues account for significantly more cost than the ER alone.
Tracking error as a measure of cost has been discussed here. It is a better measure of net cost than ER. And tax efficiency of funds has been widely discussed.
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by afan » Wed Jun 06, 2018 3:12 pm

The article did not explain how it determined the source of the, minor, variation in after tax returns. To the extent that a fund sees net redemptions it can be forced to realize capital gains. If another fund, managed identically, has no net redemptions then it would not have to realize these gains and would be more tax efficient. There is nothing direct that a fund company can do to control the investor behavior. Indirectly, the Vanguard funds have benefited with large net inflows. This lets them meet redemptions with cash, rather than having to liquidate assets. Vanguard had these inflows due to its reputation as a leader in low cost indexing. It earned that reputation, so one could credit it with good tax results due to good management.

But I suspect that all funds do the same thing to the extent they can. Meet redemptions out of new investments and only dip into assets when forced. In any case the effect seems too small to worry about.
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by livesoft » Wed Jun 06, 2018 5:03 pm

regularguy455 wrote:
Tue Jun 05, 2018 9:30 pm
That thread appears to discuss the difference in ER between funds. This article quantifies tracking error and taxes which I have not seen on this forum as a consideration for fund selection. Those issues account for significantly more cost than the ER alone.
Ooops, I meant to use this link from last week:
viewtopic.php?p=3947498#p3947498
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yeahman
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by yeahman » Wed Jun 06, 2018 5:44 pm

Now I know what new Excel spreadsheet I'm making tonight.

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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by triceratop » Wed Jun 06, 2018 6:26 pm

yeahman wrote:
Wed Jun 06, 2018 5:44 pm
Now I know what new Excel spreadsheet I'm making tonight.
This one? viewtopic.php?f=10&t=242137

At least this has actual data you can play with and verify.
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regularguy455
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by regularguy455 » Thu Jun 07, 2018 9:26 am

triceratop wrote:
Wed Jun 06, 2018 6:26 pm
yeahman wrote:
Wed Jun 06, 2018 5:44 pm
Now I know what new Excel spreadsheet I'm making tonight.
This one? viewtopic.php?f=10&t=242137

At least this has actual data you can play with and verify.
Great spreadsheet! Looks like you did all the thinking for us already. Thank you.

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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by jeffyscott » Thu Jun 07, 2018 9:49 am

livesoft wrote:
Tue Jun 05, 2018 4:18 pm
It would have been nice to say that taxes don't matter that much in a tax-advantaged account. Maybe the editors edited that tidbit out of the story.
It's beyond not much, taxes don't matter at all in tax-advantaged accounts. For Roth you have already paid all the taxes, for TIRA you will pay taxes only at withdrawal and those taxes will be the exactly the same regardless of any differences in distributions that occurred during the time you owned the fund.
Time is your friend; impulse is your enemy. - John C. Bogle

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triceratop
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Re: [WSJ] What Really Matters for an Index fund: Tax Skill

Post by triceratop » Thu Jun 07, 2018 11:16 am

regularguy455 wrote:
Thu Jun 07, 2018 9:26 am
triceratop wrote:
Wed Jun 06, 2018 6:26 pm
yeahman wrote:
Wed Jun 06, 2018 5:44 pm
Now I know what new Excel spreadsheet I'm making tonight.
This one? viewtopic.php?f=10&t=242137

At least this has actual data you can play with and verify.
Great spreadsheet! Looks like you did all the thinking for us already. Thank you.
Not all the thinking, just a lot of data gathering and assimilation. I hope it's useful.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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