Small cap interantional and tax efficiency FNDC v SCZ

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international001
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Small cap interantional and tax efficiency FNDC v SCZ

Post by international001 » Mon Mar 18, 2019 2:17 pm

Somebody said in the past that FNDC was for tax efficient. From morningstar ratios, it seems in the last year SCZ got better

Which one would you choose? From Portfolio Visualizer, they look alike

Tx

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grabiner
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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by grabiner » Mon Mar 18, 2019 7:00 pm

Don't use Morningstar for tax-efficiency data; it doesn't always know about qualified dividends. Instead, check with the fund provider, and work out the numbers for yourself.

I would expect SCZ to be more tax-efficient, because it has a lower SEC yield, and that is the best estimate of the yield going forward. In addition, FNDC overweights stocks with a higher dividend yield by its nature, and thus you expect it to have a higher dividend yield/ Neither fund has ever distributed a capital gain.

But tax efficiency shouldn't be the only criterion; you want to minimize the total cost, including both taxes and expenses. Rather than SCZ (0.39% expenses), you can use Vanguard's international small-cap VSS (0.13%) if you want emerging markets, or Schwab's SCHC (0.12%) if you don't. Even if you have to pay a commission to buy one of those ETFs at your brolerage, this will cost you less than the 0.26%-0.27% annual difference in expenses. (I have held VSS for my international small-cap since just after the ETF opened in 2009.)
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international001
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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by international001 » Tue Mar 19, 2019 11:44 am

I guess I could try to find QD ratio, but I thought this would be included on MS ratio. It's my understanding that makes the assumption of highest tax bracket, thus considers QD taxes at 15%. Or perhaps you are saying that their info is usually buggy

Something else I don't understand, FNDC seems to be more towards value, and thus it has a higher dividend yield. But both FNDC and SCZ show of a distribution of around 2.5% for this year. None of them capital distribution. How is that possible having FNDC a higher dividend yield? What is the difference

I looked at VSS and SCHC (I own some VSS). In portofolio visaualized, they move along. But they seem to be underperforming FNDC/VSS (also move about toguether). What is the big difference? VSS/SCHC seem smaller, so would it be fair to assume they are expected to outperform over the long run (small size premium)?

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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by hdas » Tue Mar 19, 2019 1:33 pm

grabiner wrote:
Mon Mar 18, 2019 7:00 pm
Don't use Morningstar for tax-efficiency data; it doesn't always know about qualified dividends. Instead, check with the fund provider, and work out the numbers for yourself.

I would expect SCZ to be more tax-efficient, because it has a lower SEC yield, and that is the best estimate of the yield going forward. In addition, FNDC overweights stocks with a higher dividend yield by its nature, and thus you expect it to have a higher dividend yield/ Neither fund has ever distributed a capital gain.

But tax efficiency shouldn't be the only criterion; you want to minimize the total cost, including both taxes and expenses. Rather than SCZ (0.39% expenses), you can use Vanguard's international small-cap VSS (0.13%) if you want emerging markets, or Schwab's SCHC (0.12%) if you don't. Even if you have to pay a commission to buy one of those ETFs at your brolerage, this will cost you less than the 0.26%-0.27% annual difference in expenses. (I have held VSS for my international small-cap since just after the ETF opened in 2009.)
I own VSS as well, but compare the big performance difference between VSS and the mix of SCZ and DGS.......seems like in this case the higher fee might be justified. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by grabiner » Tue Mar 19, 2019 8:01 pm

hdas wrote:
Tue Mar 19, 2019 1:33 pm
grabiner wrote:
Mon Mar 18, 2019 7:00 pm
But tax efficiency shouldn't be the only criterion; you want to minimize the total cost, including both taxes and expenses. Rather than SCZ (0.39% expenses), you can use Vanguard's international small-cap VSS (0.13%) if you want emerging markets, or Schwab's SCHC (0.12%) if you don't. Even if you have to pay a commission to buy one of those ETFs at your brolerage, this will cost you less than the 0.26%-0.27% annual difference in expenses. (I have held VSS for my international small-cap since just after the ETF opened in 2009.)
I own VSS as well, but compare the big performance difference between VSS and the mix of SCZ and DGS.......seems like in this case the higher fee might be justified. :greedy
This is a good example of past performance not being an indication of future results. I don't know why the MSCI index (tracked by SCZ) outperformed the FTSE index (tracked by SCHC and VSS), but I see no reason to expect that to continue in the future. All three ETFs tracked their benchmarks well.

If one of those ETFs had a large negative tracking error, that would be a more likely indication of future underperformance.
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international001
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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by international001 » Wed Mar 20, 2019 6:10 am

Yes.. I would be interesting in knowing what are the differences between the indexes. From the difference in performance in the last few years, MSCI has the edge.

Is there any place to look an historical graph of both indexes?

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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by BJJ_GUY » Wed Mar 20, 2019 9:04 am

international001 wrote:
Wed Mar 20, 2019 6:10 am
Yes.. I would be interesting in knowing what are the differences between the indexes. From the difference in performance in the last few years, MSCI has the edge.

Is there any place to look an historical graph of both indexes?
Not the same country constituents, which drives a lot of the difference. Korea is EM in MSCI and DM in FTSE. Also, China is being sized at different sizes and intervals in the two EM indices. Same goes for Saudi Arabia which is already in FTSE (I think), added to MSCI later. There are some other country differences on the bottom end too.

This is the reason why ETF portfolios should stick within the same index family to avoid unwanted betas, or to be sure that certain betas desired are not being completely missed.

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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by international001 » Wed Mar 20, 2019 10:02 am

Plus MSCI has a little bit higher size and lower P/B

But somehow those differences seems small to justify a CAGR 2.5% higher over the past 8 years!

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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by anil686 » Wed Mar 20, 2019 11:43 am

international001 wrote:
Wed Mar 20, 2019 6:10 am
Yes.. I would be interesting in knowing what are the differences between the indexes. From the difference in performance in the last few years, MSCI has the edge.

Is there any place to look an historical graph of both indexes?
There are no emerging markets in either SCZ (https://www.ishares.com/us/products/239 ... allcap-etf) nor in FNDC nor in SCHC. The latter three are strictly developed markets small cap. It is said so explicitly in the prospectus of each. VSS includes EM which makes up about 20% of the fund. I would venture to guess that the lack of EM exposure accounts for a bulk of the difference between the international small cap funds. JMO though...

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international001
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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by international001 » Wed Mar 20, 2019 11:57 am

No.. SCHC follows the same index than VSS w/o EM, and their performance it's about the same.
Must be something else

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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by hdas » Wed Mar 20, 2019 12:46 pm

BJJ_GUY wrote:
Wed Mar 20, 2019 9:04 am
This is the reason why ETF portfolios should stick within the same index family to avoid unwanted betas, or to be sure that certain betas desired are not being completely missed.
this would force one to exit Vanguard funds to move to Ishares for my international large cap....what's wrong with this? :

VWO + VEA + SCZ(or DLS) + DGS........(in the proportions desired by the investor)
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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international001
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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by international001 » Thu Mar 21, 2019 8:30 am

From what I gather, some folks argue than indexes MSCI is not better FTSE, thus SCZ is bad just because it has higher costs
But I still have doubts on that claim. I guess we may know in 10 more years when we have more data.

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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by jeffyscott » Thu Mar 21, 2019 12:43 pm

international001 wrote:
Mon Mar 18, 2019 2:17 pm
Somebody said in the past that FNDC was for tax efficient. From morningstar ratios, it seems in the last year SCZ got better

Which one would you choose? From Portfolio Visualizer, they look alike

Tx
I would think you should choose between these two based on the investment strategy, not tax efficiency. Do you want a fundamentally weighted fund or cap weighted?

However, as was mentioned by someone above, SCZ also seems over-priced for a cap weighted index fund at 0.39% ER. (FNDC may be also, but there is no alternative).

I have the mutual fund versions of both FNDC and VSS in tax-deferred. If I had to put one in taxable, I would guess the vanguard fund would be more tax-efficient, since cap weighting naturally results in lower turnover (unless maybe the higher ER of the Schwab fund is enough to offset that :?: ). But, in any case, I don't think I would switch assets from fundamental to cap weighting based on tax-efficiency.
Time is your friend; impulse is your enemy. - John C. Bogle

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international001
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Re: Small cap interantional and tax efficiency FNDC v SCZ

Post by international001 » Thu Mar 21, 2019 5:43 pm

jeffyscott wrote:
Thu Mar 21, 2019 12:43 pm
international001 wrote:
Mon Mar 18, 2019 2:17 pm
Somebody said in the past that FNDC was for tax efficient. From morningstar ratios, it seems in the last year SCZ got better

Which one would you choose? From Portfolio Visualizer, they look alike

Tx
I would think you should choose between these two based on the investment strategy, not tax efficiency. Do you want a fundamentally weighted fund or cap weighted?

However, as was mentioned by someone above, SCZ also seems over-priced for a cap weighted index fund at 0.39% ER. (FNDC may be also, but there is no alternative).

I have the mutual fund versions of both FNDC and VSS in tax-deferred. If I had to put one in taxable, I would guess the vanguard fund would be more tax-efficient, since cap weighting naturally results in lower turnover (unless maybe the higher ER of the Schwab fund is enough to offset that :?: ). But, in any case, I don't think I would switch assets from fundamental to cap weighting based on tax-efficiency.
FNDC and SCZ use the same index and their performance seems equivalent. ER is the same as well. That's why IMO tax efficiency was the only concern.

VSS seems less tax efficient (looking at Morningstar), but a lower ER that far compensates that. But in any case, the main difference seems the index they follow

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