Is the Total Stock Market Index fund tax efficient?

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vuduthmb
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Is the Total Stock Market Index fund tax efficient?

Postby vuduthmb » Mon Apr 23, 2012 3:23 pm

VTSAX.
Something I read made me doubt my understanding of that fund.
Thank you.


dbr
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Re: Is the Total Stock Market Index fund tax efficient?

Postby dbr » Mon Apr 23, 2012 4:10 pm

vuduthmb wrote:VTSAX.
Something I read made me doubt my understanding of that fund.
Thank you.


It would sure help if you would explain what that was.

Tax efficiency is not all or none; there is a range. VTSAX is more tax efficient than most investments for most people. There can be more tax efficient investments available and investors for whom tax efficiency of various things differs from that of other investors.

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Taylor Larimore
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Re: Is the Total Stock Market Index fund tax efficient?

Postby Taylor Larimore » Mon Apr 23, 2012 4:25 pm

vuduthmb wrote:VTSAX.
Something I read made me doubt my understanding of that fund.
Thank you.


vuduthmb:

Total Stock Market Index fund turns tax-inefficient stocks into tax-efficient stocks. This allows more room in tax-deferred accounts for bonds and tax-inefficient stock funds.

I never heard that TSM is tax-inefficient. Please give us your source if you can.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

natureexplorer
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Re: Is the Total Stock Market Index fund tax efficient?

Postby natureexplorer » Mon Apr 23, 2012 4:31 pm

The Total Stock Market Index fund is tan-inefficient. It returns some of the money you invest in the form of taxable dividends. About half of all domestic equity funds are less tax-inefficient.

yobria
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Re: Is the Total Stock Market Index fund tax efficient?

Postby yobria » Mon Apr 23, 2012 5:41 pm

It's fairly tax efficient, but not as much so as a pure ETF, like SPY.

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joe8d
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Re: Is the Total Stock Market Index fund tax efficient?

Postby joe8d » Mon Apr 23, 2012 7:54 pm

nature explorer wrote:The Total Stock Market Index fund is tan-inefficient. It returns some of the money you invest in the form of taxable dividends. About half of all domestic equity funds are less tax-inefficient.


Those dividends have been 100% Qualified since that tax rule has been in effect.
All the Best, | Joe

Dave76
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Re: Is the Total Stock Market Index fund tax efficient?

Postby Dave76 » Mon Apr 23, 2012 8:36 pm

VFINX is better.

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Taylor Larimore
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Tax efficiency of Total Stock Market Index Fund

Postby Taylor Larimore » Mon Apr 23, 2012 9:24 pm

It's fairly tax efficient, but not as much so as a pure ETF, like SPY.


VFINX is better


Facts according to Morningstar:

ETF/Fund---15 year Return---Tax Cost Ratio

SPY-----------------6.00%-----------0.43
VTSMX------------6.52%-----------0.41
VFINX--------------6.02%-----------0.41

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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grabiner
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Re: Is the Total Stock Market Index fund tax efficient?

Postby grabiner » Mon Apr 23, 2012 9:33 pm

yobria wrote:It's fairly tax efficient, but not as much so as a pure ETF, like SPY.


The ETF class (or pure ETF structure) allows a mutual fund to reduce its capital gains. For a tax-efficient index, a partial ETF structure should be enough to eliminate all capital-gain distributions; Total Stock Market hasn't distributed a capital gain since the ETF class was created. (Neither have any of Vanguard's other diversified US stock ETFs; even Small-Cap Value Index, which would be expected to be tax-inefficient, hasn't distributed a gain.)

Note that if you look at tax cost ratios, Total Stock Market Admiral shares will have a slightly higher tax cost than many other index funds, because the extremely low cost means a higher dividend yield.
David Grabiner

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Taylor Larimore
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Total Stock Market Index Fund IS tax-efficient

Postby Taylor Larimore » Mon Apr 23, 2012 9:54 pm

natureexplorer wrote:The Total Stock Market Index fund is tax-inefficient. It returns some of the money you invest in the form of taxable dividends. About half of all domestic equity funds are less tax-inefficient.


I believe the underlined part of your statement must be incorrect. According to Morningstar, "the average tax-cost ratio for equity funds tends to fall between 1 and 1.2." Vanguard's Total Stock Market Index Fund tax-cost ratio is about one-third of that, probably due to its 100% qualified dividends and exceptionally low turnover.

I put "Total Stock Market" and "tax efficient" into Google and got 46,600 results.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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cheese_breath
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Re: Is the Total Stock Market Index fund tax efficient?

Postby cheese_breath » Mon Apr 23, 2012 10:01 pm

The surest way to know the future is when it becomes the past.

ftobin
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Re: Is the Total Stock Market Index fund tax efficient?

Postby ftobin » Mon Apr 23, 2012 11:03 pm

natureexplorer wrote:The Total Stock Market Index fund is tan-inefficient. It returns some of the money you invest in the form of taxable dividends. About half of all domestic equity funds are less tax-inefficient.

This is objectively incorrect. KyleAAA's link shows the tax-cost ratio for VTSMX to be 0.31 over 10 years. Morningstar says "The average tax-cost ratio for equity funds tends to fall between 1 and 1.2."

dbr
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Re: Is the Total Stock Market Index fund tax efficient?

Postby dbr » Mon Apr 23, 2012 11:16 pm

ftobin wrote:
natureexplorer wrote:The Total Stock Market Index fund is tan-inefficient. It returns some of the money you invest in the form of taxable dividends. About half of all domestic equity funds are less tax-inefficient.

This is objectively incorrect. KyleAAA's link shows the tax-cost ratio for VTSMX to be 0.31 over 10 years. Morningstar says "The average tax-cost ratio for equity funds tends to fall between 1 and 1.2."


And, of course, by far the largest source of tax cost in those funds is capital gains distributions and not dividends. The advantage of TSM in that respect is mentioned above.

vuduthmb
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Re: Is the Total Stock Market Index fund tax efficient?

Postby vuduthmb » Tue Apr 24, 2012 12:05 am

Glad we are all on the same page 'bout this...
Seriously, thanks for all the helpful input. I especially found cheese_breath's article helpful.
Thanks.

natureexplorer
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Re: Is the Total Stock Market Index fund tax efficient?

Postby natureexplorer » Wed Apr 25, 2012 9:52 am

dbr wrote:
ftobin wrote:
natureexplorer wrote:The Total Stock Market Index fund is tan-inefficient. It returns some of the money you invest in the form of taxable dividends. About half of all domestic equity funds are less tax-inefficient.
This is objectively incorrect. KyleAAA's link shows the tax-cost ratio for VTSMX to be 0.31 over 10 years. Morningstar says "The average tax-cost ratio for equity funds tends to fall between 1 and 1.2."
And, of course, by far the largest source of tax cost in those funds is capital gains distributions and not dividends. The advantage of TSM in that respect is mentioned above.
By definition, if using dividends as the source of tax costs only, the Total Stock Market fund has to be average. Most Vanguard index funds haven't had capital gains distributions lately. FWIW, I don't believe that Morningstar quote is up-to-date.

ftobin
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Re: Is the Total Stock Market Index fund tax efficient?

Postby ftobin » Wed Apr 25, 2012 11:25 am

natureexplorer wrote:
dbr wrote:
ftobin wrote:
natureexplorer wrote:The Total Stock Market Index fund is tan-inefficient. It returns some of the money you invest in the form of taxable dividends. About half of all domestic equity funds are less tax-inefficient.
This is objectively incorrect. KyleAAA's link shows the tax-cost ratio for VTSMX to be 0.31 over 10 years. Morningstar says "The average tax-cost ratio for equity funds tends to fall between 1 and 1.2."
And, of course, by far the largest source of tax cost in those funds is capital gains distributions and not dividends. The advantage of TSM in that respect is mentioned above.
By definition, if using dividends as the source of tax costs only, the Total Stock Market fund has to be average. Most Vanguard index funds haven't had capital gains distributions lately. FWIW, I don't believe that Morningstar quote is up-to-date.

I would be hesitant when using the the word "average" unqualified in this case, as there can be a big difference between the AUM-weighted average and the equally-weighted average of funds (not even mentioning the fact that mutual funds are a minority of market participants). I think it would be more accurate to say that TSM funds have the same dividend stream as the average-invested dollar.

WRT the Morningstar quote being out of date, is there anything fundamental that has changed about how active mutual funds trade that you think would would cause the data to require updating? I'm not sure why one would not consider capital gains distributions anyways.

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HomerJ
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Re: Is the Total Stock Market Index fund tax efficient?

Postby HomerJ » Wed Apr 25, 2012 11:39 am

natureexplorer wrote:
dbr wrote:
ftobin wrote:
natureexplorer wrote:The Total Stock Market Index fund is tan-inefficient. It returns some of the money you invest in the form of taxable dividends. About half of all domestic equity funds are less tax-inefficient.
This is objectively incorrect. KyleAAA's link shows the tax-cost ratio for VTSMX to be 0.31 over 10 years. Morningstar says "The average tax-cost ratio for equity funds tends to fall between 1 and 1.2."
And, of course, by far the largest source of tax cost in those funds is capital gains distributions and not dividends. The advantage of TSM in that respect is mentioned above.
By definition, if using dividends as the source of tax costs only, the Total Stock Market fund has to be average. Most Vanguard index funds haven't had capital gains distributions lately. FWIW, I don't believe that Morningstar quote is up-to-date.


Most index funds don't have large capital gains, because they don't sell a lot. In fact, prety much the only time they sell is when a stock is dropped from an index which usually happens as a capital loss.

Active funds though buy and sell all the time, and have a lot more capital gains. That morningstar quote is probably quite up-to-date.

TSM is very tax-efficient. 2% dividends right now, taxed at 15%... That's 0.3% tax on your money.

If you have a million dollars in TSM, you're only paying $3000 a year in taxes on it. (And pulling down $20,000 in dividends). That's pretty tax-efficient.

You'll also be paying $700 a month in fees to invest in it... Meanwhile, the average active fund is costing you $10,000 in taxes, and $10,000 in fees.

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Re: Is the Total Stock Market Index fund tax efficient?

Postby BlackStrat » Thu May 18, 2017 2:31 pm

HomerJ wrote:If you have a million dollars in TSM, you're only paying $3000 a year in taxes on it. (And pulling down $20,000 in dividends). That's pretty tax-efficient.

You'll also be paying $700 a month in fees to invest in it... Meanwhile, the average active fund is costing you $10,000 in taxes, and $10,000 in fees.


Homer - where (on the vanguard site) would I see the $700 in fees reflected?

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HomerJ
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Re: Is the Total Stock Market Index fund tax efficient?

Postby HomerJ » Thu May 18, 2017 3:28 pm

BlackStrat wrote:
HomerJ wrote:If you have a million dollars in TSM, you're only paying $3000 a year in taxes on it. (And pulling down $20,000 in dividends). That's pretty tax-efficient.

You'll also be paying $700 a month in fees to invest in it... Meanwhile, the average active fund is costing you $10,000 in taxes, and $10,000 in fees.


Homer - where (on the vanguard site) would I see the $700 in fees reflected?


It's the expense ratio...

https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0585

Used to be 0.07%, now it's down to 0.04% so $400 a year (I made a typo up there saying a month, it's a year) in fees to own $1 million in that fund.

$1 million in a typical active fund will cost you 1% fees, or $10,000 a year. $10,000 a year, or $400 a year. That's why we say fees matter.

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Re: Is the Total Stock Market Index fund tax efficient?

Postby BlackStrat » Fri May 19, 2017 6:40 am

HomerJ wrote:It's the expense ratio...

https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0585

Used to be 0.07%, now it's down to 0.04% so $400 a year (I made a typo up there saying a month, it's a year) in fees to own $1 million in that fund.

$1 million in a typical active fund will cost you 1% fees, or $10,000 a year. $10,000 a year, or $400 a year. That's why we say fees matter.


whew - I saw the $700 a month and it grabbed my attention.

Thanks for the clarification.


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