Harvested, but to a higher expense ratio

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InvestInLife
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Joined: Mon Aug 22, 2016 2:36 pm

Harvested, but to a higher expense ratio

Post by InvestInLife » Wed Oct 04, 2017 8:58 am

In August, I harvested losses from VBR by moving funds to VTWV. Since then, VTWV has skyrocketed up 9.2%, but VTWV's fee is 0.2% vs. VBR's 0.07%.

Would you just leave funds in VTWV indefinitely, or wait one year and then move back into VBR for the lower expense ratio, incurring a lot of capital gains?

John Laurens
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Re: Harvested, but to a higher expense ratio

Post by John Laurens » Wed Oct 04, 2017 9:02 am

I keep my tlh partner indefinitely if the lots have cap gains.

What do you mean by skyrocketed?

Regards,
John

mcraepat9
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Re: Harvested, but to a higher expense ratio

Post by mcraepat9 » Wed Oct 04, 2017 9:40 am

TLH partners should be positions you would hold indefinitely.

Paying capital gains taxes to get a 5 basis point expense savings is lunacy.
Amateur investors are not cool-headed logicians.

InvestInLife
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Re: Harvested, but to a higher expense ratio

Post by InvestInLife » Wed Oct 04, 2017 9:52 am

Great responses, thanks.

InvestInLife
Posts: 73
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Re: Harvested, but to a higher expense ratio

Post by InvestInLife » Fri Mar 16, 2018 9:42 am

Revisiting this topic. So I had moved 153k from VBR to VTWV, to harvest about $500 in losses last year.
VTWV expense ratio is .2%, or appx $300 per year. VBR is .07%, or appx $100/year. This tells me I am paying a $200 annual premium for being in VTWV.
As I plan to hold this long term, I'm not sure that harvesting saved me any money at all. The numbers tell me I would do better to move the funds back over to VBR, even if a taxable gain is incurred. The only difference now is that I'll need to wait a full year so those gains (currently 13,763) are not considered short-term.

Am I calculating this correctly?
Last edited by InvestInLife on Fri Mar 16, 2018 10:06 am, edited 1 time in total.

aristotelian
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Re: Harvested, but to a higher expense ratio

Post by aristotelian » Fri Mar 16, 2018 10:04 am

InvestInLife wrote:
Fri Mar 16, 2018 9:42 am
Revisiting this topic. So I had moved 153k from VBR to VTWV, to harvest about $500 in losses last year.
VTWV expense ratio is .2%, or appx $300 per year. VBR is .07%, or appx $100/year. This tells me I am paying a $200 annual premium for being in VTWV.
As I plan to hold this long term, I'm not sure that harvesting saved me any money at all. The numbers tell me I would do better to move the funds back over to VBR, even if a taxable gain is incurred. The only difference now is that I'll need to wait a full year so those gains are not considered short-term.

Am I calculating this correctly?
I think so. Just consider it a lesson learned that you want to harvest into funds that you are OK keeping indefinitely and the loss should be significant enough to make up for any differences between the old and new fund. Capital gains aren't a terrible thing to pay since you will likely have to pay them now or in the future, so if doing so can lower your expense ratio it is probably worth it.

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House Blend
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Re: Harvested, but to a higher expense ratio

Post by House Blend » Fri Mar 16, 2018 2:52 pm

InvestInLife wrote:
Fri Mar 16, 2018 9:42 am
Revisiting this topic. So I had moved 153k from VBR to VTWV, to harvest about $500 in losses last year.
VTWV expense ratio is .2%, or appx $300 per year. VBR is .07%, or appx $100/year. This tells me I am paying a $200 annual premium for being in VTWV.
As I plan to hold this long term, I'm not sure that harvesting saved me any money at all. The numbers tell me I would do better to move the funds back over to VBR, even if a taxable gain is incurred. The only difference now is that I'll need to wait a full year so those gains (currently 13,763) are not considered short-term.

Am I calculating this correctly?
Not necessarily. For one thing, the tax costs of the two funds may be different. One fund may have
a higher div yield and/or a higher percentage of non-QDI. Second, if you are convinced that the TLH was a mistake, and you still have carryover losses, you can sell and incur at least some capital gains (short or long) without having to pay taxes.

For simplicity, let's suppose you had no carryover losses, and that you could sell $10K of shares netting $4K of LT gains taxed at 15%. That's $600, or 6%. The ER difference between the two funds is 0.13%. So you would break even after ~45 years, assuming that the two funds had the same returns before expenses and after taxes.

That brings us to a third point: you TLHd between two different funds that track different SV indexes.

Different indexes are going to have different returns. In fact some people believe that Fund X can be expected to do better than Fund Y if it has a smaller and/or valueyer slice of the SV market. ("Factor loadings" is the buzzword that the cognoscenti use.)

I haven't compared the returns of those two benchmark indexes, but I have compared the Russell 2000 Small Cap and the S&P 600 Small Cap, and the differences are rather significant. Maybe VTWV tracks a "better" index than VBR.

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iceport
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Re: Harvested, but to a higher expense ratio

Post by iceport » Fri Mar 16, 2018 4:02 pm

There's a wiki article that discusses this dilemma. It includes a link to a spreadsheet so you can play around with the assumptions and explore just how much money might be at stake. Note that the discussion and spreadsheet includes the beneficial effect of gaining a higher cost basis through switching back to the lower cost fund. That may or may not be something you want to factor in.

Paying a tax cost to switch funds
"Discipline matters more than allocation.” ─William Bernstein

InvestInLife
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Re: Harvested, but to a higher expense ratio

Post by InvestInLife » Tue Mar 27, 2018 9:41 am

[/quote]Maybe VTWV tracks a "better" index than VBR.
[/quote]

I understand your point that the index (and index accuracy) should be considered. In this case, I have read a lot of criticism about the Russell 2000 indexing, which adds further to my desire to not be in that fund. The fund was suggested to me in another boglehead post about tax-loss harvesting, but I will now consider it bad advice for my situation.

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