Vanguard says VTI is more tax-efficient than VTSAX

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michaeljmroger
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Vanguard says VTI is more tax-efficient than VTSAX

Post by michaeljmroger » Fri Jul 19, 2019 10:33 am

I just had a call with a Vanguard Flagship representative who told me the Total Stock Market mutual fund’s distributions could be higher than the ETF’s, making the ETF more tax-efficient despite Vanguard's dual-share fund structure.

It’s literally the first time I hear this. I was convinced the tax efficiency was exactly the same. Is it possible that this representative was totally incompetent?

schooner
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by schooner » Fri Jul 19, 2019 10:45 am

michaeljmroger wrote:
Fri Jul 19, 2019 10:33 am
I just had a call with a Vanguard Flagship representative who told me the Total Stock Market mutual fund’s distributions could be higher than the ETF’s, making the ETF more tax-efficient despite Vanguard's dual-share fund structure.

It’s literally the first time I hear this. I was convinced the tax efficiency was exactly the same. Is it possible that this representative was totally incompetent?
Here are the actual STCG and LTCG distributions for VTSAX. Nothing since 2000. Also note, before that, the distributions were mostly LTCG and much less than 1%.

https://www.bogleheads.org/wiki/Vanguar ... tributions

I'll say it a million times - many ETFs have capital gains! And the vast majority of the "tax efficiency" doesn't come from the ETF structure but from the low turn-over strategy of a market-cap weighted index.

Re the rep, they probably have a quota. Vanguard has been pushing retail investors towards ETFs for a while. It's starting to feel like a used car sales pitch.

MrJones
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by MrJones » Fri Jul 19, 2019 11:05 am

michaeljmroger wrote:
Fri Jul 19, 2019 10:33 am
I just had a call with a Vanguard Flagship representative who told me the Total Stock Market mutual fund’s distributions could be higher than the ETF’s, making the ETF more tax-efficient despite Vanguard's dual-share fund structure.

It’s literally the first time I hear this. I was convinced the tax efficiency was exactly the same. Is it possible that this representative was totally incompetent?
An easy way to find out: call or mail the same agent and ask them to please point you to data proving their point. And then post their response here. Whatever you find out would be interesting to the folks here.

livesoft
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by livesoft » Fri Jul 19, 2019 11:09 am

I think they are probably talking about subfractions of a fraction of a percent here. Are you ready to go exploring in the weeds?

I also want to state that VTI and VTSAX have different mechanisms for paying out the dividend and reinvesting the dividend. They happen a few days apart for the 2 funds. Market action that happens during the intervening days is probably a bigger effect than any of this tax-efficiency difference.
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MittensMoney
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by MittensMoney » Fri Jul 19, 2019 11:20 am

Well, it's an accurate statement. It will mainly apply to & effect mutual funds with high-turnover (actively managed funds) so people on this forum don't really need to worry about it.

For some reading: A 2010 study by Lipper (Taxes in the Mutual Funds Industry – 2010; Assessing the Impact of Taxes on Shareholder Return) showed owners of mutual funds in taxable accounts gave up an average of 0.98% to 2.08% in annual return to taxes over the previous 10 years. Profits are also usually distributed to shareholders once per year, so it’s likely that mutual fund owners will have to pay taxes on gains they didn’t individually realize. I think the most important thing is that when gains are distributed to shareholders of a mutual fund they apply to all fund holders according to the amount of the fund they hold, regardless of duration they've held. For ETF's, how long you've held matters so you're only paying taxes on your actual share of the gains.

schooner
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by schooner » Fri Jul 19, 2019 11:27 am

livesoft wrote:
Fri Jul 19, 2019 11:09 am
I think they are probably talking about subfractions of a fraction of a percent here. Are you ready to go exploring in the weeds?

I also want to state that VTI and VTSAX have different mechanisms for paying out the dividend and reinvesting the dividend. They happen a few days apart for the 2 funds. Market action that happens during the intervening days is probably a bigger effect than any of this tax-efficiency difference.
If you want to get into the weeds, here is the annual report. Still no difference in capital gains. They're both zero (see page 17-18):
https://advisors.vanguard.com/funds/reports/q850.pdf

Silence Dogood
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by Silence Dogood » Fri Jul 19, 2019 11:34 am

MittensMoney wrote:
Fri Jul 19, 2019 11:20 am
Well, it's an accurate statement. It will mainly apply to & effect mutual funds with high-turnover (actively managed funds) so people on this forum don't really need to worry about it.

For some reading: A 2010 study by Lipper (Taxes in the Mutual Funds Industry – 2010; Assessing the Impact of Taxes on Shareholder Return) showed owners of mutual funds in taxable accounts gave up an average of 0.98% to 2.08% in annual return to taxes over the previous 10 years. Profits are also usually distributed to shareholders once per year, so it’s likely that mutual fund owners will have to pay taxes on gains they didn’t individually realize. I think the most important thing is that when gains are distributed to shareholders of a mutual fund they apply to all fund holders according to the amount of the fund they hold, regardless of duration they've held. For ETF's, how long you've held matters so you're only paying taxes on your actual share of the gains.
With all due respect, did you read the original post?

The OP is referring specifically to VTSAX and VTI.

schismal
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by schismal » Fri Jul 19, 2019 11:36 am

schooner wrote:
Fri Jul 19, 2019 10:45 am
Vanguard has been pushing retail investors towards ETFs for a while. It's starting to feel like a used car sales pitch.
VTI: ER 0.03%
VTSAX: ER 0.04%

While I'm equally dubious of the tax efficiency claims the OP presents, Vanguard is fulfilling their fiduciary duty to inform their customers of a lower cost alternative.

anon_investor
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by anon_investor » Fri Jul 19, 2019 11:44 am

The entire point of Vanguard's patented fund structure with admiral/ETF share classes is to make the tax efficiency almost equal. So I too am dubious of any tax efficiency claims between VTI/VTSAX. Lower ER is another story/debate.

MittensMoney
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by MittensMoney » Fri Jul 19, 2019 11:51 am

Silence Dogood wrote:
Fri Jul 19, 2019 11:34 am
MittensMoney wrote:
Fri Jul 19, 2019 11:20 am
Well, it's an accurate statement. It will mainly apply to & effect mutual funds with high-turnover (actively managed funds) so people on this forum don't really need to worry about it.

For some reading: A 2010 study by Lipper (Taxes in the Mutual Funds Industry – 2010; Assessing the Impact of Taxes on Shareholder Return) showed owners of mutual funds in taxable accounts gave up an average of 0.98% to 2.08% in annual return to taxes over the previous 10 years. Profits are also usually distributed to shareholders once per year, so it’s likely that mutual fund owners will have to pay taxes on gains they didn’t individually realize. I think the most important thing is that when gains are distributed to shareholders of a mutual fund they apply to all fund holders according to the amount of the fund they hold, regardless of duration they've held. For ETF's, how long you've held matters so you're only paying taxes on your actual share of the gains.
With all due respect, did you read the original post?

The OP is referring specifically to VTSAX and VTI.
The point is that ETF's are ALWAYS more tax efficient than their mutual fund counterpart. The tax efficiency cannot be exactly the same, but in the case of VTI/VTSAX the difference is entirely negligible.

Northern Flicker
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by Northern Flicker » Fri Jul 19, 2019 11:51 am

There is no guarantee that the strategies used to avoid capital gains distributions in the mutual fund share class will always avoid them even when they are avoided in the ETF. Historically, they have been able to do so.

For instance, one of the strategies is selecting the specific shares of individual stocks with the lowest cost basis to use when minting new ETF shares. If interest in buying ETF shares were very low, there theoretically might not be enough new ETF shares to absorb enough of the low cost basis shares to achieve zero capital gains distributions.

Of course this is theoretical. The trend is that the demand for ETF shares is increasing. I would be extremely surprised if Vanguard reps have ETF conversion quotas.

anon_investor
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by anon_investor » Fri Jul 19, 2019 11:58 am

Northern Flicker wrote:
Fri Jul 19, 2019 11:51 am
I would be extremely surprised if Vanguard reps have ETF conversion quotas.
I also doubt they have quotas. But from what I can tell, ETFs are likely cheaper for Vanguard to administer, which is why the ER is now for VTI vs. VTSAX. So it is my guess that Vanguard is pushing customers towards ETFs because of this.

schooner
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by schooner » Fri Jul 19, 2019 12:04 pm

anon_investor wrote:
Fri Jul 19, 2019 11:58 am
Northern Flicker wrote:
Fri Jul 19, 2019 11:51 am
I would be extremely surprised if Vanguard reps have ETF conversion quotas.
I also doubt they have quotas. But from what I can tell, ETFs are likely cheaper for Vanguard to administer, which is why the ER is now for VTI vs. VTSAX. So it is my guess that Vanguard is pushing customers towards ETFs because of this.
Are you ready to be extremely surprised...

"financial planners who don't reach company-set quotas for signing up customers for Personal Advisor Services don't qualify for performance bonuses."

https://www.thestreet.com/story/1339645 ... oyees.html

Again, there's nothing wrong with that. I love being a Vanguard investor. But you have to be a little realistic about these things. It's a business.

Edit: I know this doesn't specifically mention ETFs. But quotas are quotas.

Longdog
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by Longdog » Fri Jul 19, 2019 12:09 pm

MittensMoney wrote:
Fri Jul 19, 2019 11:20 am
For ETF's, how long you've held matters so you're only paying taxes on your actual share of the gains.
Stock ETFs have a declaration date, an ex-dividend date, and a distribution date whenever a distribution occurs. If you hold the ETF prior to the ex-dividend date, you will get the full declared distribution. If you buy shares the day prior to the ex-dividend date, you get the full distribution on those shares. If you buy shares a month prior to the ex-dividend date, you get the full distribution on those shares. In no case (for stock index ETFs) will you receive a pro-rated portion of the distribution that depends on how long you've held the shares in question.
Steve

MittensMoney
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by MittensMoney » Fri Jul 19, 2019 12:41 pm

Longdog wrote:
Fri Jul 19, 2019 12:09 pm
MittensMoney wrote:
Fri Jul 19, 2019 11:20 am
For ETF's, how long you've held matters so you're only paying taxes on your actual share of the gains.
Stock ETFs have a declaration date, an ex-dividend date, and a distribution date whenever a distribution occurs. If you hold the ETF prior to the ex-dividend date, you will get the full declared distribution. If you buy shares the day prior to the ex-dividend date, you get the full distribution on those shares. If you buy shares a month prior to the ex-dividend date, you get the full distribution on those shares. In no case (for stock index ETFs) will you receive a pro-rated portion of the distribution that depends on how long you've held the shares in question.
We weren't referring to dividends though. We're talking about turnover within the fund.

Here's a very simplified example: identical funds, one is a mutual fund and the other is an ETF. Both have existed for the same amount of time, let's say two decades. Let's assume the fund had zero appreciation for an entire year and two people bought shares exactly a year ago, but one bought the ETF and the other bought the mutual fund. Even with zero appreciation of your fund, if there was turnover within the fund if you own the mutual fund you can actually owe tax due to the turnover of a company which appreciated over the past two decades, meanwhile the holder of the ETF will not owe any tax.

lazyday
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by lazyday » Fri Jul 19, 2019 1:01 pm

MittensMoney wrote:
Fri Jul 19, 2019 11:51 am
The point is that ETF's are ALWAYS more tax efficient than their mutual fund counterpart.
Not if the ETF and the traditional mutual fund are the exact same fund.

Northern Flicker
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by Northern Flicker » Fri Jul 19, 2019 1:08 pm

Are you ready to be extremely surprised...

"financial planners who don't reach company-set quotas for signing up customers for Personal Advisor Services don't qualify for performance bonuses."
Did you leave out that reps have quotas to convince people to use ETFs instead of index mutual funds, or are you describing a different issue?

schooner
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by schooner » Fri Jul 19, 2019 1:10 pm

lazyday wrote:
Fri Jul 19, 2019 1:01 pm
MittensMoney wrote:
Fri Jul 19, 2019 11:51 am
The point is that ETF's are ALWAYS more tax efficient than their mutual fund counterpart.
Not if the ETF and the traditional mutual fund are the exact same fund.
+1 Folks need to actually read the annual report for their funds.

The amount of misinformation about why and how much ETFs are tax efficient is amazing.

Again, virtually all of the tax savings come from a low turnover, market-cap weighted index

KyleAAA
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by KyleAAA » Fri Jul 19, 2019 1:16 pm

It is theoretically possible but I don’t believe it has ever manifested. I use ETFs in taxable mainly because I use Fidelity as my brokerage.

schooner
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by schooner » Fri Jul 19, 2019 1:16 pm

Northern Flicker wrote:
Fri Jul 19, 2019 1:08 pm
Are you ready to be extremely surprised...

"financial planners who don't reach company-set quotas for signing up customers for Personal Advisor Services don't qualify for performance bonuses."
Did you leave out that reps have quotas to convince people to use ETFs instead of index mutual funds, or are you describing a different issue?
Haha, you’re right, I don’t have any direct proof that Vanguard reps have a quota to convert MFs to ETFs. Guilty as charged. But come on, read the article.

Northern Flicker
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by Northern Flicker » Fri Jul 19, 2019 1:29 pm

ETFs are likely cheaper for Vanguard to administer, which is why the ER is now for VTI vs. VTSAX. So it is my guess that Vanguard is pushing customers towards ETFs because of this.
Yes. I would specifically add that the smaller the percentage of assets in mutual fund shares the cheaper the fund is to administer and the more competitive is the published ER. So they are encouraging ETFs both with the differential administrative costs charged to investors and through recommendations by reps so that they can publish the lowest possible ER.

As a side effect, investors will pay the lower ER. Vanguard’s interests and investor interests are aligned here. If you prefer the mutual fund structure, you get to decide how much extra you are willing to pay for that. ETF investors have been subsidizing mutual fund investors if it is true that it is cheaper to administer the ETF shares, and I trust Vanguard when they say that it is.

Longdog
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by Longdog » Fri Jul 19, 2019 2:22 pm

MittensMoney wrote:
Fri Jul 19, 2019 12:41 pm
Longdog wrote:
Fri Jul 19, 2019 12:09 pm
MittensMoney wrote:
Fri Jul 19, 2019 11:20 am
For ETF's, how long you've held matters so you're only paying taxes on your actual share of the gains.
Stock ETFs have a declaration date, an ex-dividend date, and a distribution date whenever a distribution occurs. If you hold the ETF prior to the ex-dividend date, you will get the full declared distribution. If you buy shares the day prior to the ex-dividend date, you get the full distribution on those shares. If you buy shares a month prior to the ex-dividend date, you get the full distribution on those shares. In no case (for stock index ETFs) will you receive a pro-rated portion of the distribution that depends on how long you've held the shares in question.
We weren't referring to dividends though. We're talking about turnover within the fund.

Here's a very simplified example: identical funds, one is a mutual fund and the other is an ETF. Both have existed for the same amount of time, let's say two decades. Let's assume the fund had zero appreciation for an entire year and two people bought shares exactly a year ago, but one bought the ETF and the other bought the mutual fund. Even with zero appreciation of your fund, if there was turnover within the fund if you own the mutual fund you can actually owe tax due to the turnover of a company which appreciated over the past two decades, meanwhile the holder of the ETF will not owe any tax.
Are you saying that there is a legal requirement for a mutual fund to distribute realized gains as a result of turnover, but there is no such requirement for the equivalent ETFs to do so? I ask because it is the distribution that causes the fund owner to have a tax obligation.
Steve

latak215
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by latak215 » Fri Jul 19, 2019 2:53 pm

I believe VG is encouraging etf s to save expenses which will benefit its customers eventually. I wonder if that advantage disappears when etf proliferation, make their market cap exceed that of the underlying mf Thanks

MittensMoney
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by MittensMoney » Fri Jul 19, 2019 3:05 pm

Longdog wrote:
Fri Jul 19, 2019 2:22 pm
MittensMoney wrote:
Fri Jul 19, 2019 12:41 pm
Longdog wrote:
Fri Jul 19, 2019 12:09 pm
MittensMoney wrote:
Fri Jul 19, 2019 11:20 am
For ETF's, how long you've held matters so you're only paying taxes on your actual share of the gains.
Stock ETFs have a declaration date, an ex-dividend date, and a distribution date whenever a distribution occurs. If you hold the ETF prior to the ex-dividend date, you will get the full declared distribution. If you buy shares the day prior to the ex-dividend date, you get the full distribution on those shares. If you buy shares a month prior to the ex-dividend date, you get the full distribution on those shares. In no case (for stock index ETFs) will you receive a pro-rated portion of the distribution that depends on how long you've held the shares in question.
We weren't referring to dividends though. We're talking about turnover within the fund.

Here's a very simplified example: identical funds, one is a mutual fund and the other is an ETF. Both have existed for the same amount of time, let's say two decades. Let's assume the fund had zero appreciation for an entire year and two people bought shares exactly a year ago, but one bought the ETF and the other bought the mutual fund. Even with zero appreciation of your fund, if there was turnover within the fund if you own the mutual fund you can actually owe tax due to the turnover of a company which appreciated over the past two decades, meanwhile the holder of the ETF will not owe any tax.
Are you saying that there is a legal requirement for a mutual fund to distribute realized gains as a result of turnover, but there is no such requirement for the equivalent ETFs to do so? I ask because it is the distribution that causes the fund owner to have a tax obligation.
The tax obligation is treated differently - in a mutual fund all holders share the obligation even if you bought the fund last year when someone else has been holding for a decade. You may not have personally realized gains from the holding being turned over, but you're still going to get the tax obligation, thus leading to the possibility that the fund that you bought has had zero appreciation since you bought it yet you still owe tax due to a long term holding being turned over.

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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by jeffyscott » Fri Jul 19, 2019 4:16 pm

schismal wrote:
Fri Jul 19, 2019 11:36 am
schooner wrote:
Fri Jul 19, 2019 10:45 am
Vanguard has been pushing retail investors towards ETFs for a while. It's starting to feel like a used car sales pitch.
VTI: ER 0.03%
VTSAX: ER 0.04%

While I'm equally dubious of the tax efficiency claims the OP presents, Vanguard is fulfilling their fiduciary duty to inform their customers of a lower cost alternative.
The mutual fund is more tax efficient because the expenses consume 0.01% more of the dividends :D .

Since for Vanguard, ETF and admiral are two share classes of the same fund, this claim would be like saying that the institutional shares are more tax efficient admiral or visa versa. That can not happen, can it? If for some reason, there were a need to distribute capital gains, they can not distribute them only to admiral shares and not to institutional. In the same way they could not distribute gains only to mutual fund shares and not to ETF shares of the same fund, could they?
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by Silence Dogood » Fri Jul 19, 2019 4:29 pm

MittensMoney wrote:
Fri Jul 19, 2019 11:51 am
The point is that ETF's are ALWAYS more tax efficient than their mutual fund counterpart. The tax efficiency cannot be exactly the same, but in the case of VTI/VTSAX the difference is entirely negligible.
Are you taking into account Vanguard's patented dual-share fund structure?

sarabayo
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by sarabayo » Fri Jul 19, 2019 4:34 pm

MittensMoney wrote:
Fri Jul 19, 2019 3:05 pm
Longdog wrote:
Fri Jul 19, 2019 2:22 pm
MittensMoney wrote:
Fri Jul 19, 2019 12:41 pm
Longdog wrote:
Fri Jul 19, 2019 12:09 pm
MittensMoney wrote:
Fri Jul 19, 2019 11:20 am
For ETF's, how long you've held matters so you're only paying taxes on your actual share of the gains.
Stock ETFs have a declaration date, an ex-dividend date, and a distribution date whenever a distribution occurs. If you hold the ETF prior to the ex-dividend date, you will get the full declared distribution. If you buy shares the day prior to the ex-dividend date, you get the full distribution on those shares. If you buy shares a month prior to the ex-dividend date, you get the full distribution on those shares. In no case (for stock index ETFs) will you receive a pro-rated portion of the distribution that depends on how long you've held the shares in question.
We weren't referring to dividends though. We're talking about turnover within the fund.

Here's a very simplified example: identical funds, one is a mutual fund and the other is an ETF. Both have existed for the same amount of time, let's say two decades. Let's assume the fund had zero appreciation for an entire year and two people bought shares exactly a year ago, but one bought the ETF and the other bought the mutual fund. Even with zero appreciation of your fund, if there was turnover within the fund if you own the mutual fund you can actually owe tax due to the turnover of a company which appreciated over the past two decades, meanwhile the holder of the ETF will not owe any tax.
Are you saying that there is a legal requirement for a mutual fund to distribute realized gains as a result of turnover, but there is no such requirement for the equivalent ETFs to do so? I ask because it is the distribution that causes the fund owner to have a tax obligation.
The tax obligation is treated differently - in a mutual fund all holders share the obligation even if you bought the fund last year when someone else has been holding for a decade. You may not have personally realized gains from the holding being turned over, but you're still going to get the tax obligation, thus leading to the possibility that the fund that you bought has had zero appreciation since you bought it yet you still owe tax due to a long term holding being turned over.
My understanding is that the same applies to ETFs, but that ETF managers can typically avoid incurring capital gains taxes on their turnover since they try to process all their turnover through in-kind redemptions with institutional Authorized Participants; in-kind redemptions do not incur capital gains taxes.

And because of the above, since VTI is a share class of VTSAX, Vanguard is able to use in-kind redemptions of VTI to perform turnover in VTSAX just as well as it performs turnover in VTI. In fact, turnover in VTSAX is turnover in VTI because they're the same fund.

No?

retiringwhen
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by retiringwhen » Fri Jul 19, 2019 4:48 pm

There is a lot of confusion in this thread. I won't try to untangle in detail, but will reference two articles that may help.

One: Barry Ritholz describing at a high level how the Vanguard ETF/MF Patent works and its impact on tax efficiency. https://www.bloomberg.com/opinion/artic ... ying-taxes
(Bonus the original negative article describing the heart-beat system in conspiratorial terms: https://www.bloomberg.com/graphics/2019 ... tax-dodge/)

Two: A paper by Vanguard on how to understand difference between MF and ETF shares. It provides a helpful intro into how ETFs work.
https://pressroom.vanguard.com/content/ ... cle_inline

Bottom line from my perspective, I have to believe that the Vanguard person talking mis-spoke. There is no practical way the two can have different efficiency at the fund level that is meaningful.

Silence Dogood
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by Silence Dogood » Fri Jul 19, 2019 4:49 pm

retiringwhen wrote:
Fri Jul 19, 2019 4:48 pm
Bottom line from my perspective, I have to believe that the Vanguard person talking mis-spoke. There is no practical way the two can have different efficiency at the fund level that is meaningful.
I agree. Here is your answer, OP.

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J G Bankerton
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by J G Bankerton » Fri Jul 19, 2019 5:03 pm

schismal wrote:
Fri Jul 19, 2019 11:36 am
schooner wrote:
Fri Jul 19, 2019 10:45 am
Vanguard has been pushing retail investors towards ETFs for a while. It's starting to feel like a used car sales pitch.
VTI: ER 0.03%
VTSAX: ER 0.04%

While I'm equally dubious of the tax efficiency claims the OP presents, Vanguard is fulfilling their fiduciary duty to inform their customers of a lower cost alternative.
Vanguard calls for tweaks to the ‘fiduciary rule’

Beehave
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by Beehave » Fri Jul 19, 2019 5:33 pm

When the ETFs first came out I had a discussion first with a Vanguard level-1 phone rep and then was transferred to a specialist precisely on this question. My recollection is that she told me that the mutual fund would be further sheltered from capital gains distributions by the creation of the ETF class. If that's not right (it was a while back), then definitely the claim from Vanguard was that the ETF would in no way adversely affect the mutual fund.

retiringwhen
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by retiringwhen » Fri Jul 19, 2019 8:16 pm

Beehave wrote:
Fri Jul 19, 2019 5:33 pm
When the ETFs first came out I had a discussion first with a Vanguard level-1 phone rep and then was transferred to a specialist precisely on this question. My recollection is that she told me that the mutual fund would be further sheltered from capital gains distributions by the creation of the ETF class. If that's not right (it was a while back), then definitely the claim from Vanguard was that the ETF would in no way adversely affect the mutual fund.
Your memory is correct, the ETF class extends the ability to wash-out low-cost basis shares to all share classes including the MF class.

Interestingly if you read articles written at the time of the VIPERS being created (now just called the ETFs) many folks did not understand this and predicted that exactly the opposite would happen (that the Mutual funds would cause LTCG/STCG distributions in the ETFs). At the time of the VIPER debuts, I remember thinking that I would never be interested those things!

Vanguard has demonstrated they had a good plan that benefits all share class owners, and one that no one as of yet has replicated. With the expiration of the patents coming soon, it will be interesting to see if anyone will follow suit. My guess is that the answer is no unless folks like Fidelity can figure out how to merge funds without causing CG problems since they have separate pairs of most index funds (one in ETF form and one in MF) in fact they often have more than one index fund with different ER and restrictions.

TropikThunder
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Re: Vanguard says VTI is more tax-efficient than VTSAX

Post by TropikThunder » Sat Jul 20, 2019 4:03 am

schooner wrote:
Fri Jul 19, 2019 1:10 pm
lazyday wrote:
Fri Jul 19, 2019 1:01 pm
MittensMoney wrote:
Fri Jul 19, 2019 11:51 am
The point is that ETF's are ALWAYS more tax efficient than their mutual fund counterpart.
Not if the ETF and the traditional mutual fund are the exact same fund.
+1 Folks need to actually read the annual report for their funds.

The amount of misinformation about why and how much ETFs are tax efficient is amazing.

Again, virtually all of the tax savings come from a low turnover, market-cap weighted index
That's not necessarily true. For example, Schwab has both mutual fund and ETF versions of Total Stock Market funds (SWTSX and SCHB) that are distinct separate funds (unlike at Vanguard where the ETF and mutual fund are different share classes of the same fund). Over the last 10 years, SWTSX has had capital gains distributions six times vs zero times for SCHB, despite SWTSX actually having slightly lower turnover. Over that same period, neither VTSAX nor VTI have had any capital gains distributions. In fact, VTSAX hasn't had a capital gain distribution since 2000, when VTI was established (that's not a coincidence).

Yes, having low turnover helps, but it is just a fact that ETF's have tax management advantages that mutual funds do not.

And what do you mean by "the amount of misinformation about why and how much ETFs are tax efficient is amazing"? Capital gains distributions happen when the fund has to sell shares of the underlying security, and broad market ETF's (the kind Jack Bogle said were OK) just flat don't have to do that. The entire creation-redemption process is non-taxable. I would give a more thorough explanation but your mind is already made up.

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