VTCLX vs VFIAX or VTSAX

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aha
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VTCLX vs VFIAX or VTSAX

Post by aha »

These 3 funds have a very close growth chart. The tax-managed fund has a higher expense ratio. As I understand it, the expense ratio is built into the NAV. So does it mean VTCLX has a higher return historically?

Trying to pick a fund for elderly in 70s and 24% tax bracket. Priorities are tax efficiency and growth.
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sycamore
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Re: VTCLX vs VFIAX or VTSAX

Post by sycamore »

VTCLX = Vanguard Tax Managed Capital Appreciation Fund.
aha wrote: Fri Jan 31, 2025 11:55 am These 3 funds have a very close growth chart. The tax-managed fund has a higher expense ratio. As I understand it, the expense ratio is built into the NAV. So does it mean VTCLX has a higher return historically?
Here's a backtest since the inception of VTCLX: https://testfol.io/?s=f7fz6GgqLPx.

It had a high return for that one period of time in history - VTSAX beat it by a bit. I'm sure we could find other periods where it outperformed the other funds. And other periods where it trailed the other funds.

All in all, the three funds have had similar performance because of the rather high degree of overlap in each fund's holdings. Personally I expect that the overlap will continue to remain high.
aha wrote: Fri Jan 31, 2025 11:55 am Trying to pick a fund for elderly in 70s and 24% tax bracket. Priorities are tax efficiency and growth.
All three of those funds fit the bill if you're looking for US Stock market exposure.

VFIAX and VTSAX are tax efficient because US stocks in general don't pay at dividend rates like they did decades ago.

VTCLX has a mandate to focus on tax efficiency. So if for some unknown reason the universe of US publicly traded companies suddenly started paying more in dividends (rather than say buying back stock), VTCLX would be more likely to more tax efficiency.

All three have a low expense ratio, though VTSAX and VFIAX are lower (0.04%) than VTCLX (0.09%).

All three have relatively low dividend distributions.

I'd pick VTSAX if only because I prefer having exposure the full range of US companies (small & mid cap, and whatever companies are excluded by VTCLX for not being tax efficient enough). I'm a "satisficer" when it comes to tax-efficiency.
Topic Author
aha
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Re: VTCLX vs VFIAX or VTSAX

Post by aha »

The backtest showed higher return for VTCLX if not reinvesting dividend and higher for index funds if reinvesting dividend. I never thought of looking at whether reinvesting dividends when looking at growth charts.
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Re: VTCLX vs VFIAX or VTSAX

Post by doobiedoo »

I started investing in VFIAX 31 years ago. I don't have any complaints on it.
Today 15% of my net worth is in SP500 funds [VFIAX, FXAIX].
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Re: VTCLX vs VFIAX or VTSAX

Post by Northern Flicker »

If just holding the one stock fund, I'd go with VTSAX unless you can articulate a genuinely legitimate reason not to hold small caps. VTSAX is the most diversified of the three.
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Re: VTCLX vs VFIAX or VTSAX

Post by InNameOnly »

Northern Flicker wrote: Sat Feb 01, 2025 1:27 am If just holding the one stock fund, I'd go with VTSAX unless you can articulate a genuinely legitimate reason not to hold small caps. VTSAX is the most diversified of the three.
If I remember right, there was a fellow named Jack, that suggested to not look for the needle, but buy the haystack…

Maybe he was onto something. :sharebeer
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aha
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Re: VTCLX vs VFIAX or VTSAX

Post by aha »

Risk tolerance is low. So will probably go with VFIAX. Although S&P 500 and total stock market have almost identical performance.
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Re: VTCLX vs VFIAX or VTSAX

Post by clip651 »

aha wrote: Sat Feb 01, 2025 6:12 pm Risk tolerance is low. So will probably go with VFIAX. Although S&P 500 and total stock market have almost identical performance.
None of those funds go well with low risk tolerance unless they are a small slice of an otherwise conservative portfolio. They are all subject to market volatility and will all crash together in a stock crash.
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aha
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Re: VTCLX vs VFIAX or VTSAX

Post by aha »

clip651 wrote: Sat Feb 01, 2025 6:37 pm
aha wrote: Sat Feb 01, 2025 6:12 pm Risk tolerance is low. So will probably go with VFIAX. Although S&P 500 and total stock market have almost identical performance.
None of those funds go well with low risk tolerance unless they are a small slice of an otherwise conservative portfolio. They are all subject to market volatility and will all crash together in a stock crash.
Yes. The rest are in CD.
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Re: VTCLX vs VFIAX or VTSAX

Post by grabiner »

Wiki link: Tax-managed fund comparison

TM Capital Appreciation and 500 Index track very similar indexes (Russell 1000 and S&P 500), so you should expect essentially the same performance from their stock. Therefore, the choice should be based on the lower total cost, which is expenses plus taxes. And in a moderate tax bracket, 500 Index has a lower cost. (However, if you hold either one, you should not sell for a capital gain to switch, as the cost difference is trivial.)

Total Stock Market similarly comes out ahead in a comparison with 90% TM Capital Appreciation and 10% TM Small-Cap.
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Re: VTCLX vs VFIAX or VTSAX

Post by Northern Flicker »

aha wrote: Sat Feb 01, 2025 6:12 pm Risk tolerance is low. So will probably go with VFIAX. Although S&P 500 and total stock market have almost identical performance.
It is unclear which has lower risk, but they are close in risk. The percentage of stock holdings in your asset allocation will be a far greater driver of risk than whether you hold VFIAX or VTSAX.

The absence or near absence of REITs in VFIAX enable it generally to achieve 100% qualified dividends more easily than can VTSAX, which may have 5-7% of its dividends not be qualified. There is no guarantee that VFIAX will have 100% of dividends qualified, however.
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Re: VTCLX vs VFIAX or VTSAX

Post by Northern Flicker »

grabiner wrote: Total Stock Market similarly comes out ahead in a comparison with 90% TM Capital Appreciation and 10% TM Small-Cap.
That would have been during a period when VTCLX was managed with a mild growth tilt (and value overperformed).

I have a hard time being concerned with replacing the R2000 with the S&P Smallcap 600 in a market portfolio, which is what holding VTCLX and VTMSX primarily does today if held at relative market weight.
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Re: VTCLX vs VFIAX or VTSAX

Post by grabiner »

Northern Flicker wrote: Sun Feb 02, 2025 7:24 pm
grabiner wrote: Total Stock Market similarly comes out ahead in a comparison with 90% TM Capital Appreciation and 10% TM Small-Cap.
That would have been during a period when VTCLX was managed with a mild growth tilt (and value overperformed).

I have a hard time being concerned with replacing the R2000 with the S&P Smallcap 600 in a market portfolio, which is what holding VTCLX and VTMSX primarily does today if held at relative market weight.
The comparison on the wiki ignores returns, because it is random whether the Russell 2000 or S&P 600 (which hold the same market segment) will outperform. It compares expenses and taxes, as expenses are a known factor, and past tax costs are a good approximation of future tax costs. And unless you pay more than 23.8% tax on qualified dividends, the expenses and tax costs of Total Stock Market are lower.
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Re: VTCLX vs VFIAX or VTSAX

Post by Northern Flicker »

Ok, I thought you were referring return in the quoted text.

It is worth noting that there are two drivers of a lower tax drag on dividends for the tax-managed funds-- lower dividend distributions and a higher percentage of qualified dividends. Neither are fixed from year to year.

Even if dividends are 100% qualified, our de facto marginal rate on them would be 29.6% just from state income tax and ACA tax credits. Federal tax on any non-qualified dividends just increases it further.
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Re: VTCLX vs VFIAX or VTSAX

Post by grabiner »

Northern Flicker wrote: Sun Feb 02, 2025 9:54 pm Ok, I thought you were referring return in the quoted text.

It is worth noting that there are two drivers of a lower tax drag on dividends for the tax-managed funds-- lower dividend distributions and a higher percentage of qualified dividends. Neither are fixed from year to year.
The wiki article uses five-year averages for qualified dividends. The actual dividend yield varies from year to year, but the ratio between funds is relatively consistent, so I used yields at the time I last updated the article.
Even if dividends are 100% qualified, our de facto marginal rate on them would be 29.6% just from state income tax and ACA tax credits. Federal tax on any non-qualified dividends just increases it further.
In that case, the math from the wiki comparison may favor the funds for you. At 29.6% on qualified dividends and 36.6% on non-qualified dividends, Total Stock Market and a combination of the two tax-managed funds would break even using the wiki numbers. (Investors in the top tax bracket in a high-tax state have even higher tax rates, and would prefer the tax-managed funds.)
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Re: VTCLX vs VFIAX or VTSAX

Post by grabiner »

grabiner wrote: Sun Feb 02, 2025 10:56 pm
Northern Flicker wrote: Sun Feb 02, 2025 9:54 pm Ok, I thought you were referring return in the quoted text.

It is worth noting that there are two drivers of a lower tax drag on dividends for the tax-managed funds-- lower dividend distributions and a higher percentage of qualified dividends. Neither are fixed from year to year.
The wiki article uses five-year averages for qualified dividends. The actual dividend yield varies from year to year, but the ratio between funds is relatively consistent, so I used yields at the time I last updated the article.
As I discovered when working on another post, "Relatively consistent" turned out not to be "perfectly consistent"; the difference can change by a basis point or two either way. The dividend yield difference between Large-Cap Index and Tax-Managed Capital Appreciation was 14 basis points when I updated the article, and is now 19 points. Also, the expense gap narrowed from five basis points to four. Since 23.8% of 19 basis points is 4.52 basis points, these two funds are now break-even if you pay 23.8% tax on qualified dividends, and the tax-managed fund is slightly better if you pay a higher tax:
Northern Flicker wrote: Sun Feb 02, 2025 9:54 pm Even if dividends are 100% qualified, our de facto marginal rate on them would be 29.6% just from state income tax and ACA tax credits. Federal tax on any non-qualified dividends just increases it further.
So, at the moment, you would save two basis points with the tax-managed fund.
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Re: VTCLX vs VFIAX or VTSAX

Post by Northern Flicker »

Right. 3+ bps if your calculation of 2bps did not take the extra 11bps of non-QDI income for VTSAX in 2024 into account. VTCLX also has had a lower turnover rate than VTSAX which will lower transaction cost a little. But the takeaway is that even though we currently are in the 12% Federal bracket, we still are coming out slightly ahead. The tax-managed funds have been a net win for us in most if not all years we've held them. One doesn't always have to be in an upper tax bracket to benefit from them.

The tax-managed funds were developed well before it became clear that equity index ETFs and associated Vanguard mutual fund share classes likely had distributed their last capital gain. For most investors wanting to hold an untilted portfolio today, a total market ETF or mutual fund is preferred, and what I generally recommend (including in this thread above). Nonetheless, I don't see any reason to malign the tax-managed funds.
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