AtlasShrugged? wrote: ↑
Sat May 04, 2019 9:41 am
Wait...Can a really smart Boglehead explain WTH a 'heartbeat' transaction is, so a second grader could understand it?
This just seems like a financial 'sleight of hand' where value somehow just disappears. Poof! The value is gone. Wouldn't the IRS get irritated?
If it is such a good thing, why doesn't every investment house do this? Or a variation of it? How can an individual investor do it? Now THAT would make this thread actionable.
The "value" does not disappear, it simply does not force the fund to pass on a LTCG or STCG distribution to the shareholder in the year of the transaction. The cost basis for the fund shareholder (you and me) remains the same so there is no tax avoided, only deferred in the sense that the fund shareholder is not subject to a current year capital gain distribution.
Any ETF provider can take advantage of this process and almost all of them do with some providers appearing to be more effective/efficient than others.
Vanguard has a patent on combining an ETF with mutual fund so that this process can essentially be extended to MF share holders as well as ETFs.
Since the tax laws are different between mutual funds and ETFS, no other provider has extended the process to mutuals because they to license the patent from Vanguard or wait until the patent expires in a couple years and them copy the process. There has been a lot of speculation about if anyone will take advantage (several mutual funds licensed/inquired a decade ago, but none of them moved forward). There seems to a stream of thought that most fund providers will not follow in large part because they do not have the behemoth index portfolios in mutual funds that Vanguard has to make this worthwhile. Most of the index funds are now in ETF shares already.
If a large part of the funds are also held in tax-deferred accounts like 401(k) or IRA accounts, this does not provide any advantage either. Basically, it is a very nice solution to a somewhat niche problem, namely, deferring capital gains distributions on index mutual funds held in taxable accounts.
The actionable component of this thread is thus: If you plan on holding Mutual fund shares of an index fund in a taxable brokerage account, Vanguard's structure is by far the most tax efficient in the industry. If you are willing to hold ETF shares, look at the tax efficiency of the ETFs you have available and choose the one that has been most successful in avoiding CG distributions in the last decade, all other things being equal such as the same index. Vanguard and Blackrock iShares for example almost never distribute them.