Tax-efficiency of value funds - update

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Robert T
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Tax-efficiency of value funds - update

Post by Robert T » Sun Feb 10, 2008 8:20 am

.
Here’s a quick update on the five-year tax-efficiency of various value funds to end December 2007 (See table below).

A few observations over the last five years:
  • 1. Tax-efficiency of the value funds (particularly the iShares S&P 400 and S&P 600 Value, and DFA TM Mktwide Value) have not been wildly different from the tax-efficiency of Vanguard TSM.

    2. Tax-efficiency of the value ETFs have been better than the DFA TM Targeted Value fund, and similar to the DFA TM Market-wide Value fund. The DFA TM Targeted Value fund had the highest after-tax return (consistent with its highest combined small and value loadings - although I would expect the load-adjusted after-tax returns to be much closer to the other ETFs).

    3. I also compared the difference between the 5-yr index return and the 5-yr after-tax return for the iShares S&P 600 value, iShares S&P 400 value and Vangard TSM. The percentage differences were 0.52, 0.58, 0.58 respectively. So implementation has cost between 0.5 to 0.6% of returns for these three funds.

    4. Will this relative tax-efficiency of value funds continue – time will tell.

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Five year returns to end Dec 2007

                           Before Tax   After Tax             Tax Cost
                           (BT) Return  (AT) Return   BT-AT     Ratio		
SMALL VALUE							
iShares S&P 600 value         15.41        15.14       0.27      0.23 
iShares Russell 2000 Value    15.55        15.11       0.44      0.38		
Vanguard Small Value          14.78        14.34       0.44      0.38		
DFA TM Targeted Value         17.54        16.51       1.03      0.88		
								
MID/LARGE VALUE							
DFA TM Mktwide Value          16.45        16.14       0.31      0.27		
iShares S&P 400 Value         16.70        16.36       0.34      0.29
iShares Russell Mid-Value     17.69        17.28       0.41      0.35		
								
TSM COMPARISON							
Vanguard TSM                  13.80        13.53       0.27      0.24

Source: iShares, DFA and Vanguard website. 

“After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes.” 

Robert
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Last edited by Robert T on Mon Feb 11, 2008 5:14 am, edited 2 times in total.

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RaleighStClaire
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Post by RaleighStClaire » Sun Feb 10, 2008 9:32 am

Thanks Robert.

For the after-tax numbers what marginal tax rate is assumed here?

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Kenster1
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Post by Kenster1 » Sun Feb 10, 2008 9:37 am

Thanks for the info.

I would like to throw in one more comparison...

10-YR Returns as of 12/31/07:

Midcap (S&P400) SPDR ETF -- (data per AMEX)
Before-tax: 10.96%
After-tax: 10.40%

Vanguard Total Stock Market -- (data per Vanguard)
Before-tax: 6.25%
After-tax: 5.81%

Vanguard S&P 500 -- (data per Vanguard)
Before-tax: 5.83%
After-tax: 5.41%

=====

Some requirements of the S&P 400 Midcap index:

Financial Viability. Companies should have four consecutive
quarters of positive as-reported earnings, where as-reported
earnings are defined as GAAP Net Income excluding
discontinued operations and extraordinary items.

Public Float. There must be public fl oat of at least 50%.

Adequate Liquidity and Reasonable Price. The ratio of
annual dollar value traded to market capitalization for the
company should be 0.30 or greater. Very low stock prices
can affect a stock’s liquidity.

Sector Representation. Companies’ industry classifications
contribute to the maintenance of a sector balance that is in
line with the sector composition of the universe of eligible
companies within the defi ned market cap range.

Company Type. Constituents must be operating companies.
Closed-end funds, holding companies, partnerships,
investment vehicles and royalty trusts are not eligible. Real
Estate Investment Trusts (REITs) and business development
companies (BDCs) are eligible for inclusion.
SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

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Robert T
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Post by Robert T » Mon Feb 11, 2008 5:20 am

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RaleighStClaire,

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For the after-tax numbers what marginal tax rate is assumed here?
The “After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes.” I have added this to the table. As the iShares site indicates: " Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts"


Kenster,

Thanks for the 10-yr numbers.


Robert
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alec
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Post by alec » Mon Feb 11, 2008 9:14 am

Here are the 5 yr after tax returns for Vanguard Mid-Cap Index Fund Investor Shares

Before - 17.24%
After - 17.02%

A quick check of M* for VIMSX, MDY, and IJH, indicates that over last 3 + 5 years, VIMSX has been more tax efficient than the ETFs. VIMSX + IJH haven't been around for 10 years.

- Alec

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stratton
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Post by stratton » Mon Feb 11, 2008 9:20 am

alec wrote:A quick check of M* for VIMSX, MDY, and IJH, indicates that over last 3 + 5 years, VIMSX has been more tax efficient than the ETFs. VIMSX + IJH haven't been around for 10 years.
How much of that was loss carry over from the 2001 - 2002 bear market? Quite a bit of mutual funds managed to store this up through the 2006 tax year. For the 2007 tax year Janus started spewing capital gains again.

Paul

Random Walker
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Value tilt in taxable?

Post by Random Walker » Mon Feb 11, 2008 1:13 pm

Do the benefits of value tilt outweigh the potential costs in a taxable account? I am very interested in value tilt, but after TIPs and REITs I have no additional room in tax deferred accounts. I would really like to have a small value tilt. Instead I am using tax managed small cap in taxable account. Thanks.

Dave

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stratton
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Re: Value tilt in taxable?

Post by stratton » Mon Feb 11, 2008 2:37 pm

Random Walker wrote:Do the benefits of value tilt outweigh the potential costs in a taxable account? I am very interested in value tilt, but after TIPs and REITs I have no additional room in tax deferred accounts. I would really like to have a small value tilt. Instead I am using tax managed small cap in taxable account. Thanks.
IJS is probably your best bet for SV in taxable.

Paul

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daniel
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Re: Value tilt in taxable?

Post by daniel » Mon Feb 11, 2008 3:02 pm

stratton wrote:
Random Walker wrote:Do the benefits of value tilt outweigh the potential costs in a taxable account? I am very interested in value tilt, but after TIPs and REITs I have no additional room in tax deferred accounts. I would really like to have a small value tilt. Instead I am using tax managed small cap in taxable account. Thanks.
IJS is probably your best bet for SV in taxable.
I know that IJS is the most tax efficient one of the small value ETF's, but I sometimes wonder whether it makes much of a difference though, i.e. according to Robert's numbers:

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Fund   Tax ratio
IJS    0.23   (S&P 600 value)
VBR    0.38   (Vanguard MSCI 1750 value)
IWN    0.38   (russell 2000 value)
VTI    0.24   (total stock market)
The differences seems rather small -- or am I underestimating the impact of the taxes? (I have just recently started investing in taxable)

Personally, I now hold VBR in my taxable account since it contains about 2.5 times as many holdings as IJS.

Best,
-- Daniel

SmallHi
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Post by SmallHi » Mon Feb 11, 2008 7:12 pm

Nice work Robert! Very helpful to update these studies from time to time.

By the way, I think in general the use of Mid Cap Value ETFs (in leu of the Marketwide Value or Large Value DFA funds) gives you the necessary size tilt to equalize Russell/S&P/MSCI/DFA allocations.

sh

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