Exchanging the S&P 500 for the TSM
Exchanging the S&P 500 for the TSM
I'm looking to exchange 50k of S&P 500 (VFIAX) for the TSM (VTSAX) in my IRA. While the performance between the 2 index funds have been similar, I'm attracted to the diversification of the TSM.
Are there any good arguments why this exchange couldn't be done at once from a potential loss perspective?
Are there any good arguments why this exchange couldn't be done at once from a potential loss perspective?
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Re: Exchanging the S&P 500 for the TSM
There are no tax implications for selling or exchanging out of funds in IRA accounts. If you exchange your 500 Index fund for TSM, you will not be out of the market for even a second. The exchange happens at market close at NAV. I'd suggest exchange ALL shares.
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Re: Exchanging the S&P 500 for the TSM
Agreed, no downside.
- ruralavalon
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Re: Exchanging the S&P 500 for the TSM
In an IRA I don't see a reason not to switch to Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX). You get additional diversification at no extra expense, with no tax cost for the switch.Fargonian wrote:I'm looking to exchange 50k of S&P 500 (VFIAX) for the TSM (VTSAX) in my IRA. While the performance between the 2 index funds have been similar, I'm attracted to the diversification of the TSM.
Are there any good arguments why this exchange couldn't be done at once from a potential loss perspective?
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Re: Exchanging the S&P 500 for the TSM
I don't think there are any reasons. I'd just do it all at once. There are no tax implications in an IRA.
The two funds are actually very close in their behavior, not only year by year, but even day by day. If you are doing it in an account in which you can make the transaction as an "exchange," i.e. buy and sell on the same day, then if you happen to make the transaction on a day when the stock market is up a little, you will "win" a bit by getting a little more when you sell, which will be balanced out by "losing" a bit by having to pay a little more when you buy. Vice versa if you do it on a day when the stock market is down a little.
I made the switch from S&P 500 to Total Stock myself sometime early in the 2000s. It really makes very little difference and you should expect much from it. The S&P 500 is 80% of the stock market, and the rest of the stock market--the small-caps that aren't in the S&P 500--have a correlation of 0.88 with the S&P 500. So you are effectively replacing 20% of your holding with something that's 88% similar to what it is replacing. That just can't matter hugely. I did it because my original goal in buying the 500 Index was to own the whole market and make no choices; for years the S&P 500 was thought to be essentially the whole market. I figured that the S&P 500 was close enough, but if I could get closer for the same expense ratio, why not?
The two funds are actually very close in their behavior, not only year by year, but even day by day. If you are doing it in an account in which you can make the transaction as an "exchange," i.e. buy and sell on the same day, then if you happen to make the transaction on a day when the stock market is up a little, you will "win" a bit by getting a little more when you sell, which will be balanced out by "losing" a bit by having to pay a little more when you buy. Vice versa if you do it on a day when the stock market is down a little.
I made the switch from S&P 500 to Total Stock myself sometime early in the 2000s. It really makes very little difference and you should expect much from it. The S&P 500 is 80% of the stock market, and the rest of the stock market--the small-caps that aren't in the S&P 500--have a correlation of 0.88 with the S&P 500. So you are effectively replacing 20% of your holding with something that's 88% similar to what it is replacing. That just can't matter hugely. I did it because my original goal in buying the 500 Index was to own the whole market and make no choices; for years the S&P 500 was thought to be essentially the whole market. I figured that the S&P 500 was close enough, but if I could get closer for the same expense ratio, why not?
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Re: Exchanging the S&P 500 for the TSM
Just a note that one potential tax implication would be that IRA's can cause wash sales if you have TSM or S&P500 in a taxable account. You didn't mention if you have a taxable account but I just wanted to throw this detail out there.
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Re: Exchanging the S&P 500 for the TSM
Total Stock is 2.9% higher than the S&P 500 fund over the last 10 years.
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Re: Exchanging the S&P 500 for the TSM
No reasons. Just do it.Fargonian wrote:I'm looking to exchange 50k of S&P 500 (VFIAX) for the TSM (VTSAX) in my IRA. While the performance between the 2 index funds have been similar, I'm attracted to the diversification of the TSM.
Are there any good arguments why this exchange couldn't be done at once from a potential loss perspective?
Edit: agreed with the poster above about possible wash sales.
Re: Exchanging the S&P 500 for the TSM
Wash sale would only apply if S&P500 was in a taxable account, to be clear, and you were reinvesting dividends or buying stock, within 30 days of selling. You are ok to buy as much TSM as your heart desires.Nate79 wrote:Just a note that one potential tax implication would be that IRA's can cause wash sales if you have TSM or S&P500 in a taxable account. You didn't mention if you have a taxable account but I just wanted to throw this detail out there.
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Re: Exchanging the S&P 500 for the TSM
Question: Wouldn't TSM always be higher than S&P 500 fund over very long time periods? Because S&P 500 is large-cap only and TSM also includes mid-cap and small-cap, which outperform over long time period-especially small-capwhaleknives wrote:Total Stock is 2.9% higher than the S&P 500 fund over the last 10 years.
Re: Exchanging the S&P 500 for the TSM
I think the answer is that it has been but who knows whether it always will be.Christian NY wrote:Question: Wouldn't TSM always be higher than S&P 500 fund over very long time periods? Because S&P 500 is large-cap only and TSM also includes mid-cap and small-cap, which outperform over long time period-especially small-capwhaleknives wrote:Total Stock is 2.9% higher than the S&P 500 fund over the last 10 years.
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Re: Exchanging the S&P 500 for the TSM
I don't see how you get 2.9%. I calculate it at (20,147.30/19,583.46)^(1/10) - 1 = 0.28%/year.whaleknives wrote:Total Stock is 2.9% higher than the S&P 500 fund over the last 10 years.
Meanwhile, for the first ten years of VTSMX, the results were VTSMX (Total Stock) underperforming VFINX (500 index) by -0.44% per year:
So how do you decide what range of years to look at? I think the most neutral thing to do is use "all available data" instead of choosing this ten years or that ten years.
Over this period of just under 25 years, representing the full history of the two Vanguard funds, once again Total Stock outperformed, but now the difference is only the difference between 9.35% for 500 Index and 9.46% for Total Stock, i.e. Total Stock outperformed by 0.11%/year.
So, you know. In the past, they've been pretty close, for some periods of time the return of 500 index was a little higher, for some the return of Total Stock was a little higher, overall Total Stock did outperform by 0.11%/year.
But then, if it had small-cap stocks in it, it was probably just a tiny bit more volatile, too. PortfolioVisualizer is showing us that over the time period Jan 1993 - Mar 2017, indeed, it was. We are really getting down to angels and heads of pins now, but:
Source
Portfolio 1 is 100% VFINX (500 index).
Portfolio 2 is 100% VTSMX (Total Stock).
So, yes, over this time period... the return of Total Stock (CAGR) was just a tiny bit higher, but the volatility/risk/Stdev was also just a tiny bit higher, and the Sharpe ratio was exactly the same (to within roundoff error). So the higher return was not a free lunch or even a free snack, it was just commensurate with compensation for taking a tiny bit more risk.
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Re: Exchanging the S&P 500 for the TSM
My calculation was simple also: $10,000 growth over 10 years, or (20,147.30-19,583.46)/19,583.46= .0288, or 2.9%. Literally, "Total Stock is 2.9% higher than the S&P 500 fund over the last 10 years."nisiprius wrote:. . . I don't see how you get 2.9%. I calculate it at (20,147.30/19,583.46)^(1/10) - 1 = 0.28%/year. . .whaleknives wrote:Total Stock is 2.9% higher than the S&P 500 fund over the last 10 years. . .
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- ruralavalon
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Re: Exchanging the S&P 500 for the TSM
As usual nisiprius has the right answer.
Over the 25 years since the creation of the first total stock market index fund, it's performance has been a tiny bit better (0.11%/yr) than an S&P 500 index fund, but with a tiny bit more volatility.
Over the last ten years the higher performance of total stock market is very small, 0.29%/yr.
The answer to the OP's question is still the same, in the IRA there is no downside to switching to Vanguard Total Stock Market Index Fund.
Over the 25 years since the creation of the first total stock market index fund, it's performance has been a tiny bit better (0.11%/yr) than an S&P 500 index fund, but with a tiny bit more volatility.
Over the last ten years the higher performance of total stock market is very small, 0.29%/yr.
The answer to the OP's question is still the same, in the IRA there is no downside to switching to Vanguard Total Stock Market Index Fund.
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Re: Exchanging the S&P 500 for the TSM
Having S&P 500 in a taxable account doesn't matter if the OP is selling S&P 500 in an IRA. A disallowed wash sale would only be an issue if OP was selling TSM at a loss in a taxable account. The loss would be disallowed and added to the cost basis of the replacement shares. If the replacement shares are TSM in an IRA, then the OP will never be able to reduce potential capital gains or sell at a larger loss because TSM is in an IRA.lazylarry wrote:Wash sale would only apply if S&P500 was in a taxable account, to be clear, and you were reinvesting dividends or buying stock, within 30 days of selling. You are ok to buy as much TSM as your heart desires.Nate79 wrote:Just a note that one potential tax implication would be that IRA's can cause wash sales if you have TSM or S&P500 in a taxable account. You didn't mention if you have a taxable account but I just wanted to throw this detail out there.
Re: Exchanging the S&P 500 for the TSM
Just wanted to thank everyone for the advice. Much appreciated.