Tax efficiencies of combination of funds

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international001
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Tax efficiencies of combination of funds

Post by international001 » Sat Feb 09, 2019 3:29 pm

According to Morningstar, tax efficiency for 10 years:

Total Stock (US): VTSMX 0.49%
Total International: VGTSXL 0.76%
Total world: VTWSX 0.70%

So it would seem holding VTSMX and VGTSXL individually it's better. But if I choose other periods it changes. Would I be correct assuming in average it's equivalent? Or I'm missing something?

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Peter Foley
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Re: Tax efficiencies of combination of funds

Post by Peter Foley » Sat Feb 09, 2019 7:51 pm

The ratios of US to international might come into play here. If you hold 80% US and 20% international you get one ratio, if you hold 50/50 you get another.

livesoft
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Re: Tax efficiencies of combination of funds

Post by livesoft » Sat Feb 09, 2019 8:20 pm

There is no point in believing anything that Morningstar states about tax cost ratio for one's own personal situation. Furthermore, I doubt Morningstar even considers the foreign tax credit in its algorithm.
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Re: Tax efficiencies of combination of funds

Post by grabiner » Sun Feb 10, 2019 1:00 pm

international001 wrote:
Sat Feb 09, 2019 3:29 pm
According to Morningstar, tax efficiency for 10 years:

Total Stock (US): VTSMX 0.49%
Total International: VGTSXL 0.76%
Total world: VTWSX 0.70%

So it would seem holding VTSMX and VGTSXL individually it's better. But if I choose other periods it changes. Would I be correct assuming in average it's equivalent? Or I'm missing something?
Use Vanguard's numbers instead; Morningstar doesn't always know about qualified dividends, so its numbers are often inaccurate. (You can confirm this by comparing ETF and Admiral shares of the same fund, which have identical distributions and thus should have identical tax costs, but often have different tax costs reported by Morningstar.)

There is a minuscule advantage in the combination. If a fund has over 95% qualified dividends, the IRS allows it to report 100%. Thus, if Total Stock Market happens to have a 2% yield and 96% qualified dividends, you avoid the non-qualified tax on 0.08% by holding the fund separately. But that is 0.04% of your portfolio, so even in the top tax bracket, the 17% tax difference on 0.04% is less than 0.01% of your portfolio.
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international001
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Re: Tax efficiencies of combination of funds

Post by international001 » Sun Feb 10, 2019 5:13 pm

MS doesn't consider foreign tax credits AFAIK
Thanks for the ideas, but sine international > 40% on VT, whatever tricks you do with QD wouldn't make such a big difference

I guess I don't understand how MS does its computations. I could look at the BH way of looking at tax efficiencies (viewtopic.php?t=242137), but VT is not displayed

Interestingly, I see in the spreadsheet from above that VEU is more tax efficient that holding its components, VEA and VWO. Why?

Also, I wonder why MS has different tax efficiencies for the ETF version and the fund version

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Re: Tax efficiencies of combination of funds

Post by livesoft » Sun Feb 10, 2019 5:16 pm

international001 wrote:
Sun Feb 10, 2019 5:13 pm
Interestingly, I see in the spreadsheet from above that VEU is more tax efficient that holding its components, VEA and VWO. Why?
The components of VEU are NOT VEA and VWO since VEU contains no small caps.

The components of VXUS might be VEA and VWO. And they could be VEU and VSS, too.
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international001
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Re: Tax efficiencies of combination of funds

Post by international001 » Tue Feb 12, 2019 5:02 am

livesoft wrote:
Sun Feb 10, 2019 5:16 pm
international001 wrote:
Sun Feb 10, 2019 5:13 pm
Interestingly, I see in the spreadsheet from above that VEU is more tax efficient that holding its components, VEA and VWO. Why?
The components of VEU are NOT VEA and VWO since VEU contains no small caps.

The components of VXUS might be VEA and VWO. And they could be VEU and VSS, too.
Ok.. i guess you are right and I didn't realize VEU is a small fund.
It seems VXUS is different since it doesn't own some special type of China stock : viewtopic.php?t=221949

I guess it's more complicated than I thought and you cannot make the math work easily

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