Help me understanding EDV after tax returns published by Vanguard

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Box5phantom
Posts: 17
Joined: Fri Jul 14, 2017 12:32 pm

Help me understanding EDV after tax returns published by Vanguard

Post by Box5phantom » Mon Jan 13, 2020 1:46 pm

Hi,

I am looking into EDV as a small part of my bond allocation, so I look into the summary prospectus from Vanguard. The numbers I look at are from the Vanguard EDV summary prospectus on Dec/20/2019. The returns after taxes on distributions and sales of fund shares in 10 years (1.58%) are higher than after-tax returns based on distributions only in a 10 year time (1.16%). The before tax average annual returns are 3.23%. Can someone tell me what causes this in general? Further, anyone can give me an numerical example or point me to a source, with derivation of capital gain and imputed interests for STRIPs, for illustration purpose?

financeperchance
Posts: 184
Joined: Thu Nov 02, 2017 11:15 am

Re: Help me understanding EDV after tax returns published by Vanguard

Post by financeperchance » Mon Jan 13, 2020 3:29 pm

Distributions are taxable as ordinary income rather capital gains.

Topic Author
Box5phantom
Posts: 17
Joined: Fri Jul 14, 2017 12:32 pm

Re: Help me understanding EDV after tax returns published by Vanguard

Post by Box5phantom » Mon Jan 13, 2020 5:22 pm

What I do not understand is why the after tax return with the fund liquidation is higher than after tax return without liquidation for EDV during that 10 year period. I thought treasury rates are lower in general at the end of that 10 year period than the beginning. Does that imply the funds accumulated losses on tax basis at the end of 10 year period?

Is this the correction section from IRS I shall take a look at to understand the tax calculation of STRIPS?
https://www.irs.gov/publications/p1212# ... 1000206406

financeperchance
Posts: 184
Joined: Thu Nov 02, 2017 11:15 am

Re: Help me understanding EDV after tax returns published by Vanguard

Post by financeperchance » Mon Jan 13, 2020 5:48 pm

Box5phantom wrote:
Mon Jan 13, 2020 5:22 pm
What I do not understand is why the after tax return with the fund liquidation is higher than after tax return without liquidation for EDV during that 10 year period. I thought treasury rates are lower in general at the end of that 10 year period than the beginning. Does that imply the funds accumulated losses on tax basis at the end of 10 year period?

Is this the correction section from IRS I shall take a look at to understand the tax calculation of STRIPS?
https://www.irs.gov/publications/p1212# ... 1000206406
Maybe I don't understand your question, but the distribution from EDV are not actually distributions. I had a similar question because I was so confused. Here was the answer:
matt wrote:
Thu Dec 10, 2009 2:05 pm
EDV, as with all other ETFs and mutual funds, must distribute recognized income or else pay taxes on it at the fund level. Interest accrued on a zero-coupon bond is taxable, so it is distributed.

ETFs and mutual funds often have distributions that are not representative of the returns of the fund. A simple example follows: XYZ ETF has 100 shares at the start of the year with NAV at $100 ($10,000 total assets in fund). NAV rises to $110 ($11,000 for 100 shares), at which point 50 shares are redeemed ($5,500 for 50 shares). The ETF has thus recognized $500 in gains on the redeemed shares. The NAV subsequently falls back to $100 by the end of the year. So the NAV was unchanged for the full year, but the ETF recognized $500 in gains. With 50 shares remaining at the time of the year-end distribution, $10 of gains will be distributed per share.
The bottom line is, make sure you own EDV in a tax-sheltered account.

Walkure
Posts: 145
Joined: Tue Apr 11, 2017 9:59 pm

Re: Help me understanding EDV after tax returns published by Vanguard

Post by Walkure » Mon Jan 13, 2020 6:32 pm

Here is the relevant section from the summary prospectus:
Average Annual Total Returns for Periods Ended December 31, 2018

Vanguard Extended Duration Treasury Index Fund ETF Shares

Based on NAV 1 Year 5 Years 10 Years
Return Before Taxes –3.51% 9.12% 3.23%
Return After Taxes on Distributions –4.68 7.54 1.16
Return After Taxes on Distributions
and Sale of Fund Shares –2.11 6.51 1.58
If you look at the 1-yr numbers, I think there's a clue is in the return being smaller in the sense of "less negative" by 2.5%, a much larger gap than the 10-yr spread. In any event, if you look at the current numbers on the price and performance tab on the Vanguard website the anomaly has disappeared after a strong 2019, so I guess it has something to do with the way the after sale of fund shares formula accounts for a capital loss.

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