Tax loss harvest international small cap with what?

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deanmoriarty
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Tax loss harvest international small cap with what?

Post by deanmoriarty » Thu Oct 11, 2018 10:20 am

Hello Bogleheads,

Almost all my assets are held at Vanguard in an almost standard 3 fund portfolio ("almost" because I do a slight small cap tilt). The international portion of the assets in taxable is split as such:

- VFWAX "Vanguard FTSE All-Wld ex-US": 75% (originally bought after a TLH event from VTIAX "Vanguard Total International Stock Index")
- VSS "Vanguard FTSE All-Wld ex-US SmCp": 25% (originally bought after a TLH event from VTIAX, and also that's where I put new contributions here to increase my small cap tilt)

Due to timing of contributions, I now find myself with a sizable amount of VSS losses that I could tax loss harvest (~$5,000) since all the taxable lots I own of VSS are currently in red. I would like to take advantage of this since I actually have a large capital gain I realized this year that is offsetting all my carryforward, and more.

The problem is: what do I TLH VSS with? Vanguard doesn't seem to offer another similar fund, so the options I can see are:

1) TLH VSS into VTIAX: seems wrong because I'm fundamentally shifting asset classes.

2) Don't do anything until VFWAX drops as well (VFWAX is all still in green so far), and when it happens swap VFWAX+VSS in the right proportion towards VTIAX (that might take a long time or never happen).

3) TLH VSS into another non-Vanguard small cap ETF that I can buy for free at Vanguard, such as SCZ ("iShares MSCI EAFE Small-Cap ETF"), which tracks a different index: I've never invested in anything non-Vanguard yet.

What would you recommend?

Thanks

stan1
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Re: Tax loss harvest international small cap with what?

Post by stan1 » Thu Oct 11, 2018 10:35 am

I would tax loss harvest the $5K.

The lesson I learned back in 2008 was not to TLH into something I didn't want to keep long term. You never know when the market will stay up and you'll be stuck with what you have.

You could leave the resulting cash in your money market fund for 31 days and buy VSS again or buy something like SCZ, GWX, or SCHC (although those do not include emerging markets). I would not use VINEX in a taxable account but would (and do) in a tax deferred account. Another option is DLS but its expense ratio is higher. A slightly bolder option is ISCF (international small multi factor). Capital gains distributions are unlikely but I'd rather have a longer record before buying it in taxable.

aristotelian
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Re: Tax loss harvest international small cap with what?

Post by aristotelian » Thu Oct 11, 2018 10:53 am

SCHC. Low expense ratio. You would be losing emerging small caps and it contains 2000 stocks vs 3000.

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vineviz
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Re: Tax loss harvest international small cap with what?

Post by vineviz » Thu Oct 11, 2018 10:58 am

I think the four best intl small cap ETFs are:

Vanguard FTSE All-Wld ex-US SmCp ETF (VSS) ER: 0.13%
Schwab International Small-Cap Eq ETF (SCHC) ER: 0.12%
Schwab Fundamental Intl Sm Co ETF (FNDC) ER: 0.39%
iShares MSCI EAFE Small-Cap ETF (SCZ) ER: 0.40%
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

deanmoriarty
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Re: Tax loss harvest international small cap with what?

Post by deanmoriarty » Thu Oct 11, 2018 11:04 am

Thanks everyone for their perspective so far. It sounds like it's not an anti pattern to buy an index fund from organizations beyond Vanguard :-)

At this time, I'm leaning towards TLH into SCHC ("Schwab International Small-Cap Eq ETF") and adding a little bit of VWO ("Vanguard Emerging Markets Stock Index Fd") to compensate for the loss of emerging markets.

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iceport
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Re: Tax loss harvest international small cap with what?

Post by iceport » Thu Oct 11, 2018 11:25 am

deanmoriarty wrote:
Thu Oct 11, 2018 11:04 am
Thanks everyone for their perspective so far. It sounds like it's not an anti pattern to buy an index fund from organizations beyond Vanguard :-)

At this time, I'm leaning towards TLH into SCHC ("Schwab International Small-Cap Eq ETF") and adding a little bit of VWO ("Vanguard Emerging Markets Stock Index Fd") to compensate for the loss of emerging markets.
Doesn't substituting VWO (essentially a large cap fund) for the small cap EM exposure in VSS have the same problem as Option #1, shifting asset classes?

Another option would be iShares MSCI Emerging Markets Sm-Cp ETF (EEMS), though with a 0.69% ER it is s bit pricey.

stan1's point deserves to be highlighted:
stan1 wrote:
Thu Oct 11, 2018 10:35 am
The lesson I learned back in 2008 was not to TLH into something I didn't want to keep long term. You never know when the market will stay up and you'll be stuck with what you have.
Whatever you choose, you must be willing to get "stuck" with your choice "permanently."

A possible way around that dilemma is to use a tax-advantaged account for the substitute fund. That way, you can swap back after 30 days. Just note that if you use an IRA for the substitute fund it still cannot be "substantially identical." This would probably involve purchasing a placeholder fixed income fund or cash equivalent in the taxable account, and swapping a fixed income fund for the small cap international fund in the tax-advantaged account. (This might not be feasible, depending on your circumstances.)
"Discipline matters more than allocation.” ─William Bernstein

deanmoriarty
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Re: Tax loss harvest international small cap with what?

Post by deanmoriarty » Thu Oct 11, 2018 11:36 am

iceport wrote:
Thu Oct 11, 2018 11:25 am
deanmoriarty wrote:
Thu Oct 11, 2018 11:04 am
Thanks everyone for their perspective so far. It sounds like it's not an anti pattern to buy an index fund from organizations beyond Vanguard :-)

At this time, I'm leaning towards TLH into SCHC ("Schwab International Small-Cap Eq ETF") and adding a little bit of VWO ("Vanguard Emerging Markets Stock Index Fd") to compensate for the loss of emerging markets.
Doesn't substituting VWO (essentially a large cap fund) for the small cap EM exposure in VSS have the same problem as Option #1, shifting asset classes?

Another option would be iShares MSCI Emerging Markets Sm-Cp ETF (EEMS), though with a 0.69% ER it is s bit pricey.

stan1's point deserves to be highlighted:
stan1 wrote:
Thu Oct 11, 2018 10:35 am
The lesson I learned back in 2008 was not to TLH into something I didn't want to keep long term. You never know when the market will stay up and you'll be stuck with what you have.
Whatever you choose, you must be willing to get "stuck" with your choice "permanently."

A possible way around that dilemma is to use a tax-advantaged account for the substitute fund. That way, you can swap back after 30 days. Just note that if you use an IRA for the substitute fund it still cannot be "substantially identical." This would probably involve purchasing a placeholder fixed income fund or cash equivalent in the taxable account, and swapping a fixed income fund for the small cap international fund in the tax-advantaged account. (This might not be feasible, depending on your circumstances.)
You are right, VWO is a large cap fund, so that's a different asset class (I might want to tilt more into that as well, but that's a different story). I'm definitely not going to spend 0.6% for a emerging small cap fund :-)

Thanks for your point on the tax advantaged, it makes sense as a strategy to make sure you can jump back into the original fund after 30 days regardless of possible gains in the replacement fund during that period. Unfortunately, it doesn't apply to my case, my only space there is a more standard employer account with very limited availability in fund choice.

Thanks

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iceport
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Re: Tax loss harvest international small cap with what?

Post by iceport » Thu Oct 11, 2018 11:41 am

deanmoriarty wrote:
Thu Oct 11, 2018 11:36 am
You are right, VWO is a large cap fund, so that's a different asset class (I might want to tilt more into that as well, but that's a different story). I'm definitely not going to spend 0.6% for a emerging small cap fund :-)
I don't blame you a bit... I wouldn't do it either!
deanmoriarty wrote:
Thu Oct 11, 2018 11:36 am
...my only space there is a more standard employer account...
Why no Roth IRA?
"Discipline matters more than allocation.” ─William Bernstein

deanmoriarty
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Re: Tax loss harvest international small cap with what?

Post by deanmoriarty » Thu Oct 11, 2018 11:46 am

iceport wrote:
Thu Oct 11, 2018 11:41 am
Why no Roth IRA?
I have a large SIMPLE IRA account locked in a previous employer account that I can't rollover into my current 401k (current company doesn't allow it). That means until I'm able to do so I can't do a backdoor Roth because of the pro rata rule. That SIMPLE doesn't have a lot of choices either (essentially it's all in a low cost total stock fund). I could look into the possibility of converting the SIMPLE account into a pre-tax traditional IRA with perhaps more choices in funds, but haven't felt the need to navigate that process yet.

Thanks

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iceport
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Re: Tax loss harvest international small cap with what?

Post by iceport » Thu Oct 11, 2018 11:58 am

very good, carry on... 8-)
"Discipline matters more than allocation.” ─William Bernstein

ofckrupke
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Re: Tax loss harvest international small cap with what?

Post by ofckrupke » Thu Oct 11, 2018 12:01 pm

deanmoriarty wrote:
Thu Oct 11, 2018 11:36 am
iceport wrote:
Thu Oct 11, 2018 11:25 am

A possible way around that dilemma is to use a tax-advantaged account for the substitute fund. That way, you can swap back after 30 days.
[...]
[...]
Thanks for your point on the tax advantaged,it makes sense as a strategy to make sure you can jump back into the original fund after 30 days
after 31 or more days. Jumping back in on the 30th day after the getting out date would turn it from TLH to wash sale.

stan1
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Re: Tax loss harvest international small cap with what?

Post by stan1 » Thu Oct 11, 2018 1:09 pm

deanmoriarty wrote:
Thu Oct 11, 2018 11:04 am
At this time, I'm leaning towards TLH into SCHC ("Schwab International Small-Cap Eq ETF") and adding a little bit of VWO ("Vanguard Emerging Markets Stock Index Fd") to compensate for the loss of emerging markets.
I wouldn't worry about that right now. You might be back in VSS in 31 more days (or 366 days if you end up with a small long term gain).

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