EFAV has more tax cost than EDV

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EFAV has more tax cost than EDV

Post by klaus14 » Wed Feb 19, 2020 9:37 pm

I suspect this will apply to other funds too so i wanted to share my calculation. Also wondering if i am making any errors

My marginal Fed tax rate is 39% (35%+3.8% investment tax). Qualified dividend rate is 19% (15%+3.8%). State tax rate is 11.30%. EDV is exempt from state taxes.

Yield: 4.17% (based on 2019 payments)
Qualified: 52.78% (of total payments)
Foreign Tax Paid: 4.88% (of yield). This is a tax credit.

Net Fed Tax Cost = 0.97% (19% of Qualified portion of the yield + 39% of rest - foreign tax rate * yield)
State Tax Cost = 0.47%

Yield: 2.11% (based on current SEC yield)
Net Fed Tax Cost = 0.82%

So i am placing EFAV in tax advantaged, and EDV in taxable.
This will save me 0.63% (0.97 + 0.47 - 0.82) of invested money compared to opposite.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds.

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Re: EFAV has more tax cost than EDV

Post by MoneyMarathon » Thu Feb 20, 2020 3:48 am

klaus14 wrote:
Wed Feb 19, 2020 9:37 pm
Yield: 4.17% (based on 2019 payments)
Qualified: 52.78% (of total payments)
Foreign Tax Paid: 4.88% (of yield). This is a tax credit.
Thanks for this. I noticed that IQLT (iShares Edge MSCI Intl Quality Factor ETF) had 92.94% qualified dividends and 2.8% distribution with 0.25% foreign tax paid (8.9% of distribution).

Net Fed Tax Cost = (18.8% * 92.94% + 38.8% * 7.06%) * 2.8% - 0.25% = 0.316% federal
State Tax Cost = 11.3% * 2.8% = 0.316% state
Total 0.633%

The fund is historically more volatile than EFAV (iShares Edge MSCI Min Vol EAFE ETF), but it has similar (slightly lower) historical Sharpe and better tax efficiency. You could even argue that higher volatility with good Sharpe is a nice feature if you're looking at it from a "space in the portfolio" point of view (more bang for buck). However, EFAV does have lower correlation to the US market.

After much agonizing over things like this, I eventually chose IQLT in taxable, instead of EFAV or VIGI (Vanguard International Dividend Appreciation ETF).

Someone who puts EFAV in tax-advantaged could use similar reasoning to put some IQLT in taxable.

If anyone's curious, here are the iShares tax pages:
https://www.ishares.com/us/literature/t ... 088762.pdf
https://www.ishares.com/us/literature/t ... 067863.pdf

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Re: EFAV has more tax cost than EDV

Post by Startled Cat » Thu Feb 20, 2020 9:57 am

This is where a tax-managed international ETF would really come in handy. I'm not aware of any, but they would fill an important need.

IQLT looks interesting. I don't know offhand how its exposure to various regions and factors differs from a market-weighted index, though, and its ER is a bit high. I don't think I'd want to commit to an ER this high in taxable where I might be stuck with it for a long time.

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Re: EFAV has more tax cost than EDV

Post by HEDGEFUNDIE » Thu Feb 20, 2020 10:20 am

I take a slightly different approach with my taxable investing.

My taxable account is essentially my emergency fund / large purchases fund, so I prioritize low volatility investments for it.

I hold both EFAV and EDV, but I hold EFAV in taxable despite the higher tax cost. It’s the price I’m willing to pay for the money to (more likely) be there when I want to spend it.

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Re: EFAV has more tax cost than EDV

Post by grabiner » Thu Feb 20, 2020 8:38 pm

The overriding principle is that the tax cost of a bond fund depends on bond yields. Treasury bonds, because they are the least risky bonds, have the lowest yields and are thus the most tax-efficient bonds; this is even more the case if you benefit from Treasuries' tax exemption.

In a 24% or lower bracket, it would be a very reasonable strategy to split your bond allocation, holding a corporate fund in your IRA and a Treasury fund in your taxable account. If this doesn't give the corporate/Treasury split you want, you could rebalance in either account with little tax cost.
Wiki David Grabiner

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