Capital gains efficiency SPY vs Fund

[airahcaz]

So are SPY and an SP500 index mutual fund about the same tax efficiency (in managing turnover) or is one more tax efficient for buy and hold for the long term?

https://finance.yahoo.com/news/etfs-ta ... 08439.html

[anon_investor]

So are SPY and an SP500 index mutual fund about the same tax efficiency (in managing turnover) or is one more tax efficient for buy and hold for the long term?

https://finance.yahoo.com/news/etfs-ta ... 08439.html

If you are referring to VFIAX, then yes. Any other mutual fund then no.

[airahcaz]

So are SPY and an SP500 index mutual fund about the same tax efficiency (in managing turnover) or is one more tax efficient for buy and hold for the long term?

https://finance.yahoo.com/news/etfs-ta ... 08439.html

If you are referring to VFIAX, then yes. Any other mutual fund then no.

what’s special about VFIAX vs other low cost SP500 index funds?

[anon_investor]

So are SPY and an SP500 index mutual fund about the same tax efficiency (in managing turnover) or is one more tax efficient for buy and hold for the long term?

https://finance.yahoo.com/news/etfs-ta ... 08439.html

If you are referring to VFIAX, then yes. Any other mutual fund then no.

what’s special about VFIAX vs other low cost SP500 index funds?

Vanguard has a patent that allows their index mutual funds to have an ETF share class. This allows them to purge all capital gains via the ETF share creation and redemption process. Therefore VFIAX has $0 of long or short term capital gains distributions annually. Most index ETFs like SPY also have no capital gains distribution (this is not dividends), but other mutual funds have such distributions. These are basically unwanted forced sales you have to pay taxes on regardless of whether you reinvest creating a tax drag.

[jeffyscott]

So are SPY and an SP500 index mutual fund about the same tax efficiency (in managing turnover) or is one more tax efficient for buy and hold for the long term?

https://finance.yahoo.com/news/etfs-ta ... 08439.html

If you are referring to VFIAX, then yes. Any other mutual fund then no.

what’s special about VFIAX vs other low cost SP500 index funds?

Vanguard has a patent that allows their index mutual funds to have an ETF share class. This allows them to purge all capital gains via the ETF share creation and redemption process. Therefore VFIAX has $0 of long or short term capital gains distributions annually. Most index ETFs like SPY also have no capital gains distribution (this is not dividends), but other mutual funds have such distributions. These are basically unwanted forced sales you have to pay taxes on regardless of whether you reinvest creating a tax drag.

https://www.bogleheads.org/wiki/ETFs_vs ... uard_funds

SPY also has higher ER 0.095% than other options, whether ETFs or mutual funds. VFIAX is 0.04%, VOO is 0.03%, IVV is 0.04%, Schwab S&P 500 Index (SWPPX) is 0.02%, Fidelity's (FXAIX) is 0.015%.

In a tax deferred account, the Fidelity and Schwab funds are cheaper than any ETF and there and there is no tax issue.

In taxable, the question would be whether the tax savings of ETFs (or VFIAX if one doesn't want to use ETFs) would exceed the savings from the lower cost of Fidelity or Schwab mutual funds.

Of course, what's conveniently available in your accounts may matter more to you than the cost and tax differences.

[airahcaz]

In taxable, the question would be whether the tax savings of ETFs (or VFIAX if one doesn't want to use ETFs) would exceed the savings from the lower cost of Fidelity or Schwab mutual funds.

Yes a taxable account. So how can one assess if low er simpler choice vs calculating tax efficiency, is that possible?

[jeffyscott]

In taxable, the question would be whether the tax savings of ETFs (or VFIAX if one doesn't want to use ETFs) would exceed the savings from the lower cost of Fidelity or Schwab mutual funds.

Yes a taxable account. So how can one assess if low er simpler choice vs calculating tax efficiency, is that possible?

If I were doing it, I would look at historical distributions and then use your expected tax rate to figure out the expected tax drag and add that to the ER. For myself LTCG and qualified dividends would be taxed at 0%, so my only concern would be short term cap gains which would be taxed at about 17% combining state and federal.

[jhfenton]

In taxable, the question would be whether the tax savings of ETFs (or VFIAX if one doesn't want to use ETFs) would exceed the savings from the lower cost of Fidelity or Schwab mutual funds.

Yes a taxable account. So how can one assess if low er simpler choice vs calculating tax efficiency, is that possible?

It's not an either or. You want lower ER and tax efficiency.

Bottom line: Don't choose SPY unless you are a day-trader prioritizing liquidity and trading costs. It has a higher ER, and, because of it's structure, it cannot internally reinvest dividends, which creates a tiny drag on performance.

Instead: In a taxable account choose VFIAX or one of the low-cost S&P 500 ETFs (VOO at 3 bp or IVV at 4 bp). There are also several total stock market ETFs at comparable expense ratios that would be functionally identical (VTI, ITOT, SCHB, SPTM, all at 3 bp).

[vineviz]

In taxable, the question would be whether the tax savings of ETFs (or VFIAX if one doesn't want to use ETFs) would exceed the savings from the lower cost of Fidelity or Schwab mutual funds.

Yes a taxable account. So how can one assess if low er simpler choice vs calculating tax efficiency, is that possible?

It's not an either or. You want lower ER and tax efficiency.

Bottom line: Don't choose SPY unless you are a day-trader prioritizing liquidity and trading costs. It has a higher ER, and, because of it's structure, it cannot internally reinvest dividends, which creates a tiny drag on performance.

Instead: In a taxable account choose VFIAX or one of the low-cost S&P 500 ETFs (VOO at 3 bp or IVV at 4 bp). There are also several total stock market ETFs at comparable expense ratios that would be functionally identical (VTI, ITOT, SCHB, SPTM, all at 3 bp).

+1

There is no good reason IMHO for an individual investor to buy SPY when cheaper and more tax-efficient ETFs are readily available.

[airahcaz]

What about FXAIX at .015% ER?

[Doc]

SPY Cap gains distributions: https://www.morningstar.com/etfs/arcx/spy/performance

Latest Distribution History
Distribution Date Distrib NAV Income S/Tap Gain L/TCap Gain Return of Cap Total
Mar 20, 2020 228.80 1.4056 0.0000 0.0000 0.0000 1.4056
Dec 20, 2019 320.73 1.5700 0.0000 0.0000 0.0000 1.5700
Sep 20, 2019 298.28 1.3836 0.0000 0.0000 0.0000 1.3836
Jun 21, 2019 294.00 1.4316 0.0000 0.0000 0.0000 1.4316
Mar 15, 2019 281.31 1.2331 0.0000 0.0000 0.0000 1.2331
Dec 21, 2018 240.70 1.4354 0.0000 0.0000 0.0000 1.4354
Sep 21, 2018 291.99 1.3226 0.0000 0.0000 0.0000 1.3226
Jun 15, 2018 277.13 1.2456 0.0000 0.0000 0.0000 1.2456
Mar 16, 2018 274.20 1.0968 0.0000 0.0000 0.0000 1.0968
Dec 15, 2017 266.51 1.3513 0.0000 0.0000 0.0000 1.3513

If the capital gains distributions are zero it matters not one iota whether you have a mutual fund share class to "get rid" of them instead.

[jeffyscott]

What about FXAIX at .015% ER?

Well, then there is FZROX, Total Market Index Fund at 0% ER.

[Robert The Bruce]

I hold the total market ETF (VTI) and Fidelity’s total market fund. Both paid out 1.77% last yr. The fund (FSKAX) paid it all as Qualified Dividends. The ETF however had a breakdown that was 94% Qualified Dividends, 5.8% as Section 199A and the tiny remainder as non-qualified dividends. As I sit here, I am thinking the 1.77% is based on the 12/31 value and not on the dividend payout date - but you get the idea.

[jhfenton]

SPY Cap gains distributions: https://www.morningstar.com/etfs/arcx/spy/performance

Latest Distribution History
Distribution Date Distrib NAV Income S/Tap Gain L/TCap Gain Return of Cap Total
Mar 20, 2020 228.80 1.4056 0.0000 0.0000 0.0000 1.4056
Dec 20, 2019 320.73 1.5700 0.0000 0.0000 0.0000 1.5700
Sep 20, 2019 298.28 1.3836 0.0000 0.0000 0.0000 1.3836
Jun 21, 2019 294.00 1.4316 0.0000 0.0000 0.0000 1.4316
Mar 15, 2019 281.31 1.2331 0.0000 0.0000 0.0000 1.2331
Dec 21, 2018 240.70 1.4354 0.0000 0.0000 0.0000 1.4354
Sep 21, 2018 291.99 1.3226 0.0000 0.0000 0.0000 1.3226
Jun 15, 2018 277.13 1.2456 0.0000 0.0000 0.0000 1.2456
Mar 16, 2018 274.20 1.0968 0.0000 0.0000 0.0000 1.0968
Dec 15, 2017 266.51 1.3513 0.0000 0.0000 0.0000 1.3513

If the capital gains distributions are zero it matters not one iota whether you have a mutual fund share class to "get rid" of them instead.

Of course SPY has no capital gains distributions, it's an ETF. It's mutual funds without an ETF share class that have a harder time avoiding capital gains distributions, not the other way around. No well-established equity ETF should ever have a capital gains distributions.

The issue with SPY is its outdated structure and unnecessarily high expense ratio. It's not terrible, but there are simply better choices if you're not a day trader.

[jhfenton]

What about FXAIX at .015% ER?

FXAIX is a fantastic choice in an IRA, 401(k) or HSA where you don't care about capital gains distributions. I own a little in my 401(k).

It wouldn't be disastrous in a taxable account, but I would pick any of the S&P500 or total market ETFs at 3 or 4 bp. Unless you're in the 0% capital gains bracket, the slightly better tax efficiency of the ETFs should more than make up for the 1.5-2.5 bp.

[airahcaz]

Sounds like the guidance is to stick with an ETF in a taxable account but not necessarily SPY? So perhaps VOO?

[jhfenton]

Sounds like the guidance is to stick with an ETF in a taxable account but not necessarily SPY? So perhaps VOO?

VOO (Vanguard) at 3 bp or IVV (iShares) at 4 bp. I'd probably go with VOO at Vanguard and IVV at Fidelity on the theory that I might get better execution. (IVV was on the commission-free list at Fidelity before everything became free, so a lot of people there will own it.) They are the big boys behind SPY with $129B in assets (VOO) and $176B (IVV). (SPY is still in the lead with $254B, but VOO and IVV have been gaining.)

SPLG (SPDR Portfolio S&P 500) at 3 bp also switched in January to track the S&P 500. Before that it tracked a broader large cap index It would work too. It *only* has $4.5B in assets.

[Yes, that means that S&P now has two competing S&P500 funds. They wanted one to compete with VOO and IVV, but they didn't want to have to cut the 9 bp cash cow that is SPY. iShares has done the same thing with some of its old funds (e.g EEM/iShares MSCI Emerging Markets at 68 bp(!) and IEMG/iShares Core MSCI Emerging Markets ETF at 13 bp).]

[Doc]

Of course SPY has no capital gains distributions, it's an ETF. It's mutual funds without an ETF share class that have a harder time avoiding capital gains distributions, not the other way around. No well-established equity ETF should ever have a capital gains distributions.

The OP asked:

So are SPY and an SP500 index mutual fund about the same tax efficiency (in managing turnover) or is one more tax efficient for buy and hold for the long term?

It seems to me that both types have a possibly to reduce cap gains because each has a choice of what shares to sell when there is a redemption. Same mechanism. The ETF just has more opportunity as you implied. This is offset by the inability to reinvest dividends internally as you suggest.

The lower E/R depends on what mutual fund you have access to. The OP didn't ask about a lower E/R Vanguard fund specifically.

As far as Vanguard's special share class deal is concerned. It seems to me that any benefit to the fund holder is as the expense of the ETF shares.

But all of this is probably a moot point for an S&P 500 index fund/ETF. Unless you of course go out of your way to find one with a high E/R.

The issue with SPY is its outdated structure.

Are you referring to the "no mutual fund share class" or something else specific to SPY?

[jhfenton]

The issue with SPY is its outdated structure.

Are you referring to the "no mutual fund share class" or something else specific to SPY?

SPY is a unit investment trust, and it must hold dividends in cash until they are paid out. It is also restricted from lending out shares to offset fund expenses. It also has a termination date of 2118 or the later of 20 years after the death of the last of 11 persons named in the trust documents (all children at the time of its creation). (Bloomberg "broke" a human interest story about some of the kids last year.)

These are minor issues, but they are slight negatives when comparing SPY to VOO or IVV. And when you add them to the 5 or 6 bp higher expense ratio of SPY, it seems an easy choice for non-traders.

There are a handful of other UITs too, all first generation ETFs. Most modern ETFs are '40 Act funds with more flexibility in their operation. (There are other kinds of trust, note, and partnership structures used for some "funds" too.)

[jeffyscott]

What about FXAIX at .015% ER?

FXAIX is a fantastic choice in an IRA, 401(k) or HSA where you don't care about capital gains distributions. I own a little in my 401(k).

It wouldn't be disastrous in a taxable account, but I would pick any of the S&P500 or total market ETFs at 3 or 4 bp. Unless you're in the 0% capital gains bracket, the slightly better tax efficiency of the ETFs should more than make up for the 1.5-2.5 bp.

Even though I have very little taxable, out of curiosity I tool a look at short-term capital gains from and S&P 500 index fund (used Schwabs, since I was able to easily find 10 years of data for that one). I am in the 0% cap gains bracket, so only STCG are would be an issue for taxes.

In most years there was no STCG distribution, the only years with some were 2016, 2017, and 2018. The total STCG distributed during those three years, and for the 10 year period, totaled about 0.1% by my calculation. So the average is about 0.01% per year. In my case, tax would be about 20% on those STCG . So my estimated tax drag would be .002%, far less than the difference between the ER of SWPPX and VFAIX. Even compared to an ETF at 0.03% ER, it looks like the Schwab or Fidelity mutual fund would be the better choice, if I wanted to invest in the S&P 500.

Here is the detailed distribution info for SWPPX:

[Doc]

Doc wrote: ↑Sat Apr 25, 2020 4:52 pm

jhfenton wrote: ↑Sat Apr 25, 2020 3:49 pm
The issue with SPY is its outdated structure.

Are you referring to the "no mutual fund share class" or something else specific to SPY?

SPY is a unit investment trust, and it must hold dividends in cash until they are paid out.

Thanks. Unfortunately I hold SPY in taxable and have a 135% gain. I guess I'll keep it for a while.

[texnic]

No well-established equity ETF should ever have a capital gains distributions.

Out of curiosity, what about active ETFs? They may change holdings often. Do they normally distribute capital gains or just increase the share price?

[jhfenton]

No well-established equity ETF should ever have a capital gains distributions.

Out of curiosity, what about active ETFs? They may change holdings often. Do they normally distribute capital gains or just increase the share price?

If they're well-managed and established, equity ETFs should not distribute capital gains, even if they are active or have relatively high turnover. ETFs can engage third parties to artificially create and them redeem shares on demand in order to dump really low-basis shares without selling them. The creations and redemptions can use custom baskets, so that only the stocks you want are added and only the stocks you want to dump are distributed.

A new ETF that launches into a market surge might have an issue early in its life. That happened to Vanguard's VSS/Vanguard FTSE All-world ex-US Small Cap, which launched April 2009, just past the market bottom. It distributed some capital gains very early, but hasn't in the decade since. (And even that might not happen now. I think funds have gotten more sophisticated at managing the artificial fund flows needed to dump low-basis shares. But it was kind of a perfect storm with less liquid small cap international stocks that had run up quickly in a brand new fund.)

[jhfenton]

Doc wrote: ↑Sat Apr 25, 2020 4:52 pm

jhfenton wrote: ↑Sat Apr 25, 2020 3:49 pm
The issue with SPY is its outdated structure.

Are you referring to the "no mutual fund share class" or something else specific to SPY?

SPY is a unit investment trust, and it must hold dividends in cash until they are paid out.

Thanks. Unfortunately I hold SPY in taxable and have a 135% gain. I guess I'll keep it for a while.

By historical standards, SPY is still a great fund. I wouldn't lose any sleep over it either. It only gets edged out these days by its nearly free competition.

[airahcaz]

Doc wrote: ↑Sat Apr 25, 2020 4:52 pm

jhfenton wrote: ↑Sat Apr 25, 2020 3:49 pm
The issue with SPY is its outdated structure.

Are you referring to the "no mutual fund share class" or something else specific to SPY?

SPY is a unit investment trust, and it must hold dividends in cash until they are paid out.

Thanks. Unfortunately I hold SPY in taxable and have a 135% gain. I guess I'll keep it for a while.

By historical standards, SPY is still a great fund. I wouldn't lose any sleep over it either. It only gets edged out these days by its nearly free competition.

And likely SPY still the best choice if one wants to occasionally do covered calls etc. I’d imagine.

[grabiner]

No well-established equity ETF should ever have a capital gains distributions.

Out of curiosity, what about active ETFs? They may change holdings often. Do they normally distribute capital gains or just increase the share price?

Active ETFs can still use the creation-redemption process to eliminate capital gains. (And index ETFs have to change holdings frequently as well. When small-cap value stocks rise in price, they become large-cap or growth, forcing small-cap value ETFs to sell them for a capital gain.)

[jhfenton]

Doc wrote: ↑Sat Apr 25, 2020 4:52 pm

jhfenton wrote: ↑Sat Apr 25, 2020 3:49 pm
The issue with SPY is its outdated structure.

Are you referring to the "no mutual fund share class" or something else specific to SPY?

SPY is a unit investment trust, and it must hold dividends in cash until they are paid out.

Thanks. Unfortunately I hold SPY in taxable and have a 135% gain. I guess I'll keep it for a while.

By historical standards, SPY is still a great fund. I wouldn't lose any sleep over it either. It only gets edged out these days by its nearly free competition.

And likely SPY still the best choice if one wants to occasionally do covered calls etc. I’d imagine.

Yes. I believe SPY has the deepest, most liquid options chain of any security in the world.