Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

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Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by triceratop » Sun Apr 03, 2016 6:55 pm

Split from Specific question regarding relative tax efficiency (VSS, VWO, VBR)

This topic discusses improvements and modifications to the sheet originally mentioned in the above thread.

livesoft wrote:Try this:
https://advisors.vanguard.com/VGApp/iip ... ?year=2015

I'd like to point out that the tax-efficiency numbers are so close that simply buying on a different day (say an RBD) could overcome any differences for at least a few years.
Here's the final sheet (columns reordered to make a little more sense). Interesting that US SCV is a wash as far as total cost is concerned, in that bracket (though if your goal is to minimize ordinary dividends, then IJS wins -- isn't this your goal, livesoft?):

Image

For my bracket, I see that VBR edges out IJS, but not by so much as you'd notice:

Image

The performance difference over 10 years (VSIAX used as proxy for VBR for M* growth chart) is, in the 15% marginal bracket (mine):

Code: Select all

ticker     CAGR (net tax, 15/6 Fed/State)
=========================================
VBR          6.46%
IJS          6.01%
For the OP (to keep this actionable):

Code: Select all

ticker     CAGR (net tax, 33/9.3 Fed/State)
===========================================
VBR          5.90%
IJS          5.69%
Granted: the expense ratios and distribution history of IJS and VBR likely differed over the past 10 years as compared to 2015. My conclusion is that choosing between the two is pretty much a wash on tax efficency. I think I remember reading that IJS is "smaller" and "more valuey" than VBR though, but that hasn't manifested in the past.
Last edited by triceratop on Sun Apr 03, 2016 8:55 pm, edited 1 time in total.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by livesoft » Sun Apr 03, 2016 7:05 pm

Thanks a bunch and a new definitive thread to link to when somebody else asks the question. :)

And yes, minimizing dividends mean more "space" available for Roth conversions.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Sun Apr 03, 2016 7:19 pm

Ah. See: I have the exact opposite problem. Plenty of Roth space but no earned income to get tax-advantaged treatment. I have to do everything with taxable accounts :|

That makes tilting to VSS or VWO not an easy decision.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by livesoft » Sun Apr 03, 2016 7:25 pm

And then throw in tax-loss harvesting opportunities, too. The fund that drops the mostest is the most tax-efficient! :twisted:
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Sun Apr 03, 2016 7:31 pm

Quick -- someone get me a time machine to 2006 and some cash to invest in an ABX.HE-based fund. :twisted:
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by KlangFool » Sun Apr 03, 2016 7:35 pm

triceratop wrote:
livesoft wrote:Try this:
https://advisors.vanguard.com/VGApp/iip ... ?year=2015

I'd like to point out that the tax-efficiency numbers are so close that simply buying on a different day (say an RBD) could overcome any differences for at least a few years.
Here's the final sheet (columns reordered to make a little more sense). Interesting that US SCV is a wash as far as total cost is concerned, in that bracket (though if your goal is to minimize ordinary dividends, then IJS wins -- isn't this your goal, livesoft?):

Image

For my bracket, I see that VBR edges out IJS, but not by so much as you'd notice:

Image

The performance difference over 10 years (VSIAX used as proxy for VBR for M* growth chart) is, in the 15% marginal bracket (mine):

Code: Select all

ticker     CAGR (net tax, 15/6 Fed/State)
=========================================
VBR          6.46%
IJS          6.01%
For the OP (to keep this actionable):

Code: Select all

ticker     CAGR (net tax, 33/9.3 Fed/State)
===========================================
VBR          5.90%
IJS          5.69%
Granted: the expense ratios and distribution history of IJS and VBR likely differed over the past 10 years as compared to 2015. My conclusion is that choosing between the two is pretty much a wash on tax efficency. I think I remember reading that IJS is "smaller" and "more valuey" than VBR though, but that hasn't manifested in the past.
triceratop,

I would greatly appreciate that if you could calculate the tax efficiency of VWELX (wellington fund) for me. My federal marginal tax rate is 15% and State marginal tax rate is 5.75%. The rest of my taxable portfolio are VEU, VTI and VBR which is covered by your table. I just need one more.

Thanks in advance.

KlangFool

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Sun Apr 03, 2016 7:44 pm

KlangFool wrote: triceratop,

I would greatly appreciate that if you could calculate the tax efficiency of VWELX (wellington fund) for me. My federal marginal tax rate is 15% and State marginal tax rate is 5.75%. The rest of my taxable portfolio are VEU, VTI and VBR which is covered by your table. I just need one more.

Thanks in advance.

KlangFool
KlangFool,
Will do, though are you sure you don't want VWENX (admiral shares)?
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by KlangFool » Sun Apr 03, 2016 7:53 pm

triceratop wrote:
KlangFool wrote: triceratop,

I would greatly appreciate that if you could calculate the tax efficiency of VWELX (wellington fund) for me. My federal marginal tax rate is 15% and State marginal tax rate is 5.75%. The rest of my taxable portfolio are VEU, VTI and VBR which is covered by your table. I just need one more.

Thanks in advance.

KlangFool
KlangFool,
Will do, though are you sure you don't want VWENX (admiral shares)?
triceratop,

Sorry, my mistake. Actually, I want VWENX not VWELX.

Thanks.

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by desiderium » Sun Apr 03, 2016 7:53 pm

Triceratop,

Maybe you could link this sheet somewhere so anyone can use it for their pet fund

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Sun Apr 03, 2016 7:59 pm

Thanks for the question. It helped me realize that my figures for BND were slightly off (by about 1bp) because of LT/ST CG considerations. The other figures above are correct due to no capital gains distributions.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Sun Apr 03, 2016 8:37 pm

KlangFool wrote: triceratop,

I would greatly appreciate that if you could calculate the tax efficiency of VWENX (wellington fund) for me. My federal marginal tax rate is 15% and State marginal tax rate is 5.75%. The rest of my taxable portfolio are VEU, VTI and VBR which is covered by your table. I just need one more.

Thanks in advance.

KlangFool
Klangfool,
It took me a bit longer because I had to adjust to consider LTCG/STCG, where before (except for BND which was off by about 1bp) I only needed dividends. Here is your tax efficiency (using 5.75% state instead of 6% as earlier) table:

Image

Cheers,
triceratop
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Sun Apr 03, 2016 8:50 pm

Here are the corrected figures from above; only BND should be affected.

Image

Image
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by KlangFool » Sun Apr 03, 2016 8:55 pm

triceratop wrote:
KlangFool wrote: triceratop,

I would greatly appreciate that if you could calculate the tax efficiency of VWENX (wellington fund) for me. My federal marginal tax rate is 15% and State marginal tax rate is 5.75%. The rest of my taxable portfolio are VEU, VTI and VBR which is covered by your table. I just need one more.

Thanks in advance.

KlangFool
Klangfool,
It took me a bit longer because I had to adjust to consider LTCG/STCG, where before (except for BND which was off by about 1bp) I only needed dividends. Here is your tax efficiency (using 5.75% state instead of 6% as earlier) table:

Image

Cheers,
triceratop
Thanks.

KlangFool

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by happenstance » Mon Apr 04, 2016 8:04 am

triceratop wrote:Here are the corrected figures from above; only BND should be affected.

Image

Image
This looks like a really set of useful calculations to run, thank you for sharing!

Can you explain where you find the breakout for the yearly dividend distribution, LTCG, and STCG? I've been trying to find this info on Vanguard's (and Schwab's for that matter) website, but haven't been able to find anything beyond the QDI ratio (https://advisors.vanguard.com/VGApp/iip ... endfigures) and the foreign tax info (which is linked in the other thread).
triceratop wrote:I don't have the spreadsheet publicly available. I am sure I could do so: in fact I may work this into a Bogleheads' wiki page since it seems like something people are interested in.
+1 would find this very useful.

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Mon Apr 04, 2016 6:47 pm

happenstance wrote:This looks like a really set of useful calculations to run, thank you for sharing!

Can you explain where you find the breakout for the yearly dividend distribution, LTCG, and STCG? I've been trying to find this info on Vanguard's (and Schwab's for that matter) website, but haven't been able to find anything beyond the QDI ratio (https://advisors.vanguard.com/VGApp/iip ... endfigures) and the foreign tax info (which is linked in the other thread).
It's simply the "Distributions" tab on the fund's page. For example: https://personal.vanguard.com/us/funds/ ... =INT#tab=4
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by GreatOdinsRaven » Tue Apr 05, 2016 7:15 am

triceratop wrote: I don't have the spreadsheet publicly available. I am sure I could do so: in fact I may work this into a Bogleheads' wiki page since it seems like something people are interested in.
+1. Would be very helpful! Great job and great post!
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by letsgobobby » Tue Apr 05, 2016 7:48 am

what row is the most important to look at when determining fund placement? If 'tax efficiency' then some of the comments in the thread don't match the results; or is a lower tax efficiency better than high?

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by happenstance » Tue Apr 05, 2016 7:56 am

triceratop wrote:
happenstance wrote:This looks like a really set of useful calculations to run, thank you for sharing!

Can you explain where you find the breakout for the yearly dividend distribution, LTCG, and STCG? I've been trying to find this info on Vanguard's (and Schwab's for that matter) website, but haven't been able to find anything beyond the QDI ratio (https://advisors.vanguard.com/VGApp/iip ... endfigures) and the foreign tax info (which is linked in the other thread).
It's simply the "Distributions" tab on the fund's page. For example: https://personal.vanguard.com/us/funds/ ... =INT#tab=4
Oh, that was thick of me, I was merely looking at funds without LTCG :eek:. I've recreated your spreadsheet above for CA, I think: https://docs.google.com/spreadsheets/d/ ... f4Etg/edit. The only discrepancy is in the calculation of foreign tax. I tried to follow your calculations here but am not sure I did so correctly: viewtopic.php?f=10&t=158519&p=2848683#p2848683. I'm calculating Foreign Tax = (Foreign Tax Per Dividend * Total Distributions / (1 + Foreign Tax Per Dividend)).

Thanks for inspiring me to do these calculations myself! It was a useful exercise, especially as I'm also in a high-tax area (NYC). It also finally showed me how the tax efficiency of ETFs actually manifests.

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by KlangFool » Tue Apr 05, 2016 8:04 am

letsgobobby wrote:what row is the most important to look at when determining fund placement? If 'tax efficiency' then some of the comments in the thread don't match the results; or is a lower tax efficiency better than high?
I believe it is the last row: Total cost.

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Tue Apr 05, 2016 9:39 am

GreatOdinsRaven wrote:
triceratop wrote: I don't have the spreadsheet publicly available. I am sure I could do so: in fact I may work this into a Bogleheads' wiki page since it seems like something people are interested in.
+1. Would be very helpful! Great job and great post!
desiderium wrote:Triceratop,

Maybe you could link this sheet somewhere so anyone can use it for their pet fund
Hi all,
This publicly-viewable link with read-only access to the sheet should work (let me know if it doesn't, obviously). You can copy it to your own google sheets to modify it for your own purposes.

https://docs.google.com/spreadsheets/d/ ... sp=sharing
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by letsgobobby » Tue Apr 05, 2016 9:46 am

KlangFool wrote:
letsgobobby wrote:what row is the most important to look at when determining fund placement? If 'tax efficiency' then some of the comments in the thread don't match the results; or is a lower tax efficiency better than high?
I believe it is the last row: Total cost.

KlangFool
That's what makes sense to me given the discussions, but total cost doesn't seem to be the right metric. Expense ratios, after all, are paid the same whether I hold the fund in my IRA or in a taxable account. To compare tax efficiency, woudn't I only want to know the relative tax costs of each fund, say per $1 invested and given my specific tax situation?

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Tue Apr 05, 2016 9:53 am

letsgobobby wrote:
KlangFool wrote:
letsgobobby wrote:what row is the most important to look at when determining fund placement? If 'tax efficiency' then some of the comments in the thread don't match the results; or is a lower tax efficiency better than high?
I believe it is the last row: Total cost.

KlangFool
That's what makes sense to me given the discussions, but total cost doesn't seem to be the right metric. Expense ratios, after all, are paid the same whether I hold the fund in my IRA or in a taxable account. To compare tax efficiency, woudn't I only want to know the relative tax costs of each fund, say per $1 invested and given my specific tax situation?
Yes. It is a good thing that tax efficiency is listed as a separate row for your viewing pleasure.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by saltycaper » Tue Apr 05, 2016 9:54 am

letsgobobby wrote:That's what makes sense to me given the discussions, but total cost doesn't seem to be the right metric. Expense ratios, after all, are paid the same whether I hold the fund in my IRA or in a taxable account. To compare tax efficiency, woudn't I only want to know the relative tax costs of each fund, say per $1 invested and given my specific tax situation?
I don't see why ER matters for fund placement either, unless you are going to estimate future returns too.

Also, I'm not sure a single year's worth of data is much help in instances where results are nearly identical. The average over, say, 10 years, would be awesome.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Tue Apr 05, 2016 10:00 am

saltycaper wrote:
letsgobobby wrote:That's what makes sense to me given the discussions, but total cost doesn't seem to be the right metric. Expense ratios, after all, are paid the same whether I hold the fund in my IRA or in a taxable account. To compare tax efficiency, woudn't I only want to know the relative tax costs of each fund, say per $1 invested and given my specific tax situation?
I don't see why ER matters for fund placement either, unless you are going to estimate future returns too.

Also, I'm not sure a single year's worth of data is much help in instances where results are nearly identical. The average over, say, 10 years, would be awesome.
True, and I suppose in order to do that I'd have to find past fund prospectuses for the data. That would be a lot of work.

The other side of it is that for funds just starting up, esp. manifesting with small-cap funds, it may take a while to accumulate enough carry-over losses to be highly tax efficient. So look at distribution data from 2007 unfortunately doesn't help you too much in making a forward-looking decision. The same goes for expense ratios: the fact that international funds used to have much higher investment costs doesn't mean they will continue to do so.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by KlangFool » Tue Apr 05, 2016 10:03 am

saltycaper wrote:
letsgobobby wrote:That's what makes sense to me given the discussions, but total cost doesn't seem to be the right metric. Expense ratios, after all, are paid the same whether I hold the fund in my IRA or in a taxable account. To compare tax efficiency, woudn't I only want to know the relative tax costs of each fund, say per $1 invested and given my specific tax situation?
I don't see why ER matters for fund placement either, unless you are going to estimate future returns too.

Also, I'm not sure a single year's worth of data is much help in instances where results are nearly identical. The average over, say, 10 years, would be awesome.
saltycaper,

I disagreed. It is useful for tax planning purposes. Our tax brackets could change every year and it is useful to look for opportunities to reduce taxes.

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by GreatOdinsRaven » Tue Apr 05, 2016 10:19 am

triceratop wrote:
letsgobobby wrote:
KlangFool wrote:
letsgobobby wrote:what row is the most important to look at when determining fund placement? If 'tax efficiency' then some of the comments in the thread don't match the results; or is a lower tax efficiency better than high?
I believe it is the last row: Total cost.

KlangFool
That's what makes sense to me given the discussions, but total cost doesn't seem to be the right metric. Expense ratios, after all, are paid the same whether I hold the fund in my IRA or in a taxable account. To compare tax efficiency, woudn't I only want to know the relative tax costs of each fund, say per $1 invested and given my specific tax situation?
Yes. It is a good thing that tax efficiency is listed as a separate row for your viewing pleasure.
Thank you for the spreadsheet link. I may have missed the explanation. How do I interpret "tax efficiency"? It appears that a lower number is more efficient, but why?
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Tue Apr 05, 2016 10:26 am

GreatOdinsRaven wrote:
triceratop wrote:
letsgobobby wrote:
KlangFool wrote:
letsgobobby wrote:what row is the most important to look at when determining fund placement? If 'tax efficiency' then some of the comments in the thread don't match the results; or is a lower tax efficiency better than high?
I believe it is the last row: Total cost.

KlangFool
That's what makes sense to me given the discussions, but total cost doesn't seem to be the right metric. Expense ratios, after all, are paid the same whether I hold the fund in my IRA or in a taxable account. To compare tax efficiency, woudn't I only want to know the relative tax costs of each fund, say per $1 invested and given my specific tax situation?
Yes. It is a good thing that tax efficiency is listed as a separate row for your viewing pleasure.
Thank you for the spreadsheet link. I may have missed the explanation. How do I interpret "tax efficiency"? It appears that a lower number is more efficient, but why?
Tax efficiency, as I have defined it, is simply the year-to-year tax drag on returns because of taxes on distributions: dividends and capital gains. It's a percentage that you lose off of total return, for a particular year. So yes, lower is better. Another way to understand it is that these are really negative quantities (because they are subtracted from total return) and from that perspective it is better to have a high tax efficiency. But I did it this way to be consistent with the positive nature of the expense ratio.

There is another factor in overall tax efficiency: rates of capital appreciation and the tax cost when selling the shares. That's more speculative and so I opted for the year-to-year calculations only, here.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by Da5id » Tue Apr 05, 2016 10:27 am

GreatOdinsRaven wrote:I may have missed the explanation. How do I interpret "tax efficiency"? It appears that a lower number is more efficient, but why?
It is the percentage of your investment that you pay in taxes each year. e.g. in the initial table for VTI (simple one that avoids foreign tax credit), it distributes $195 per $10000 invested. You pay $54.80 taxes on that, which is 0.548% of $10000 (rounded up to 0.55 in table). If it were 0% (as in a tax free instrument, or no distributions at all), you'd be paying no taxes. So lower is "better" in terms of taxes paid. The total cost is the sum of the expense ratio and the taxes you have to pay...
Last edited by Da5id on Tue Apr 05, 2016 10:46 am, edited 1 time in total.

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Tue Apr 05, 2016 10:40 am

happenstance wrote:
triceratop wrote:
happenstance wrote:This looks like a really set of useful calculations to run, thank you for sharing!

Can you explain where you find the breakout for the yearly dividend distribution, LTCG, and STCG? I've been trying to find this info on Vanguard's (and Schwab's for that matter) website, but haven't been able to find anything beyond the QDI ratio (https://advisors.vanguard.com/VGApp/iip ... endfigures) and the foreign tax info (which is linked in the other thread).
It's simply the "Distributions" tab on the fund's page. For example: https://personal.vanguard.com/us/funds/ ... =INT#tab=4
Oh, that was thick of me, I was merely looking at funds without LTCG :eek:. I've recreated your spreadsheet above for CA, I think: https://docs.google.com/spreadsheets/d/ ... f4Etg/edit. The only discrepancy is in the calculation of foreign tax. I tried to follow your calculations here but am not sure I did so correctly: viewtopic.php?f=10&t=158519&p=2848683#p2848683. I'm calculating Foreign Tax = (Foreign Tax Per Dividend * Total Distributions / (1 + Foreign Tax Per Dividend)).

Thanks for inspiring me to do these calculations myself! It was a useful exercise, especially as I'm also in a high-tax area (NYC). It also finally showed me how the tax efficiency of ETFs actually manifests.
I didn't look at your foreign tax stuff, but you can verify your calculations against livesoft's results in the other thread for a triple check.

Your numbers for BND are in the end correct due to their location in a RothIRA, but only via incorrect calculations. Cell F24 should not be $0, because you need to treat LTCGs and STCGs according to their proper tax rates (LTCGs get the LTCG/QDI rate but are not dividends). The %QDI only applies to dividends. It is not the portion of total distributions that are given qualified status. This matters more for a tax-inefficient stock fund where you have LTCG/STCG as well as qualified dividends (and where your calculations would as a result be wildly inaccurate), but are incorrect even for a bond fund in a taxable account.

Take a look at how I did it(the link to my sheet is now public)
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by saltycaper » Tue Apr 05, 2016 10:50 am

KlangFool wrote:I disagreed. It is useful for tax planning purposes. Our tax brackets could change every year and it is useful to look for opportunities to reduce taxes.

KlangFool
I don't mean to say it's useless, but I would caution against allowing a single year's data to determine fund placement decisions in cases where the numbers are close, such as which international funds are most and least tax efficient. When it comes to your tax bracket, you have more information about possible future outcomes other than simply what marginal bracket you were in for the year 2015. You are probably analyzing why you were in that bracket, your past tax history, and what might change in the future. Likewise, you need more data to answer questions like the relative tax efficiency of int't funds, which is precisely the type of question that seem to come up here with some frequency.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by letsgobobby » Tue Apr 05, 2016 10:53 am

Tax efficiency, as I have defined it, is simply the year-to-year tax drag on returns because of taxes on distributions: dividends and capital gains
This is the part I was missing. "Tax efficiency" is "tax drag", so a lower number is better than a higher number. Thank you.

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by saltycaper » Tue Apr 05, 2016 10:56 am

triceratop wrote:
saltycaper wrote:Also, I'm not sure a single year's worth of data is much help in instances where results are nearly identical. The average over, say, 10 years, would be awesome.
True, and I suppose in order to do that I'd have to find past fund prospectuses for the data. That would be a lot of work.

The other side of it is that for funds just starting up, esp. manifesting with small-cap funds, it may take a while to accumulate enough carry-over losses to be highly tax efficient. So look at distribution data from 2007 unfortunately doesn't help you too much in making a forward-looking decision. The same goes for expense ratios: the fact that international funds used to have much higher investment costs doesn't mean they will continue to do so.
You may already know about the Vanguard Funds Distributions pages on the Wiki. Perhaps the data there would be a start if someone wanted to update the tax cost calculations with a more complete/comparative matrix.

Thanks for doing this, BTW. I may have seemed unappreciative in my comments and did not mean to suggest that at all.
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Tue Apr 05, 2016 11:01 am

saltycaper wrote:
triceratop wrote:
saltycaper wrote:Also, I'm not sure a single year's worth of data is much help in instances where results are nearly identical. The average over, say, 10 years, would be awesome.
True, and I suppose in order to do that I'd have to find past fund prospectuses for the data. That would be a lot of work.

The other side of it is that for funds just starting up, esp. manifesting with small-cap funds, it may take a while to accumulate enough carry-over losses to be highly tax efficient. So look at distribution data from 2007 unfortunately doesn't help you too much in making a forward-looking decision. The same goes for expense ratios: the fact that international funds used to have much higher investment costs doesn't mean they will continue to do so.
You may already know about the Vanguard Funds Distributions pages on the Wiki. Perhaps the data there would be a start if someone wanted to update the tax cost calculations with a more complete/comparative matrix.

Thanks for doing this, BTW. I may have seemed unappreciative in my comments and did not mean to suggest that at all.
Something may be able to be done with that data, I'm not sure if it is entirely sufficient (foreign tax data looks sketchy). I might take a look one day. Of course, others are free to do so as well.

My other project is writing a program to rebalance as much as is possible by optimally distributing new contributions. Lots to do!
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by KlangFool » Tue Apr 05, 2016 11:31 am

Hi,

I am working through the spreadsheet but I am stuck on the QDI ratio. Where can I find the QDI ratio of a mutual fund?

Thanks in advance.

https://advisors.vanguard.com/VGApp/iip ... endfigures

I found it.

KlangFool

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Tue Apr 05, 2016 11:36 am

KlangFool wrote:Hi,

I am working through the spreadsheet but I am stuck on the QDI ratio. Where can I find the QDI ratio of a mutual fund?

Thanks in advance.

https://advisors.vanguard.com/VGApp/iip ... endfigures

I found it.

KlangFool
You linked yourself to it! :)

Check out the tabs at the top of the table for the various share classes (the figures are identical for the ETF / admiral classes, anyway).
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by KlangFool » Tue Apr 05, 2016 11:39 am

triceratop wrote:
KlangFool wrote:Hi,

I am working through the spreadsheet but I am stuck on the QDI ratio. Where can I find the QDI ratio of a mutual fund?

Thanks in advance.

https://advisors.vanguard.com/VGApp/iip ... endfigures

I found it.

KlangFool
You linked yourself to it! :)

Check out the tabs at the top of the table for the various share classes (the figures are identical for the ETF / admiral classes, anyway).
triceratop,

Which date did you use for the share price of VWENX? 12/31/2015?

Thanks. I am trying to learn and understand the calculation.

KlangFool

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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by triceratop » Tue Apr 05, 2016 11:45 am

KlangFool wrote:
triceratop wrote:
KlangFool wrote:Hi,

I am working through the spreadsheet but I am stuck on the QDI ratio. Where can I find the QDI ratio of a mutual fund?

Thanks in advance.

https://advisors.vanguard.com/VGApp/iip ... endfigures

I found it.

KlangFool
You linked yourself to it! :)

Check out the tabs at the top of the table for the various share classes (the figures are identical for the ETF / admiral classes, anyway).
triceratop,

Which date did you use for the share price of VWENX? 12/31/2015?

Thanks. I am trying to learn and understand the calculation.

KlangFool
KlangFool,
All calculations are for year 2015, since 2016 doesn't have a full distribution history yet. So I used 12/31/2014.

triceratop
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by KlangFool » Tue Apr 05, 2016 11:46 am

triceratop wrote:
KlangFool wrote:
triceratop wrote:
KlangFool wrote:Hi,

I am working through the spreadsheet but I am stuck on the QDI ratio. Where can I find the QDI ratio of a mutual fund?

Thanks in advance.

https://advisors.vanguard.com/VGApp/iip ... endfigures

I found it.

KlangFool
You linked yourself to it! :)

Check out the tabs at the top of the table for the various share classes (the figures are identical for the ETF / admiral classes, anyway).
triceratop,

Which date did you use for the share price of VWENX? 12/31/2015?

Thanks. I am trying to learn and understand the calculation.

KlangFool
KlangFool,
All calculations are for year 2015, since 2016 doesn't have a full distribution history yet. So I used 12/31/2014.

triceratop
triceratop,

Thanks. That makes sense.

KlangFool

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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by lee71959 » Wed Apr 06, 2016 10:38 am

Looking at the chart, is a correct takeaway that a high-tax-bracket investor with a goal of splitting VTI and VXUS into taxable and tax-advantaged accounts (assume 50%/50% split of both domestic/international allocation and tax-advantaged space for 50% of total investments) should place VTI in the taxable account and VXUS in the tax-advantaged account?

I understand the usual caveats - e.g. one year representation, different withdrawal expectations/timelines, different individual tax situations. However, from an overall tax optimization perspective, I'm wondering if my current strategy of holding VTI (or equivalent) in my pre-tax 401k and VXUS (or equivalent) in my taxable account is sub-optimal.

I haven't done in-depth research on the actual tax drag effects of different types of funds, but I've read here about the tax efficiency of international funds (foreign tax credit) and some consequent recommendations to hold international funds in taxable accounts and so was acting from that perspective. But maybe I should switch future contributions between the two accounts (and restructure my entire portfolio if international funds go down again and TLH opportunities arise).

Clarification: I am not considering bonds at this point given my risk tolerance and likelihood of working at least another 20 years (though I would certainly take fewer). Also, I'm not targeting 50%/50% domestic/international, but wanted to have a simple and understandable example to discuss the question. Thanks.

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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by gclancer » Wed Apr 06, 2016 12:25 pm

lee71959 wrote:However, from an overall tax optimization perspective, I'm wondering if my current strategy of holding VTI (or equivalent) in my pre-tax 401k and VXUS (or equivalent) in my taxable account is sub-optimal.
That appears to be the case, yes. I'll be following this thread with interest since it essentially disproves conventional wisdom. It seems like such a shame to lose the benefit of the foreign tax credit, but math is math.

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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by ray.james » Wed Apr 06, 2016 1:18 pm

Thanks Triceratop for taking time. This is new gold standard info on foreign tax efficiency. I was not looking at "qualified dividend ratio vs tax credit" correctly, which led to inefficiency especially in high tax state like California.

lee71959,
I was thinking the same until livesoft showed the QDI ratio for foreign is around 50-70% and that can make all the difference.
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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by lee71959 » Wed Apr 06, 2016 3:08 pm

ray.james wrote:lee71959,
I was thinking the same until livesoft showed the QDI ratio for foreign is around 50-70% and that can make all the difference.
Ray, thanks for the QDI point - it made me dig deeper into the spreadsheet. I'm reading the spreadsheet to say that even though VXUS has a 69% QDI assumption (at the high end of the 50-70% range) in this example, VTI is still more tax efficient than VXUS. If VXUS's QDI% were changed to 50%, I'm seeing a greater tax efficiency difference - .76% for VXUS vs .55% for VTI. [Note: I'm recreating the spreadsheet in a new file because work doesn't allow access to Google docs so calcs may be off].

For a high tax-bracket individual, I'm still arriving at the conclusion that I should have VTI in taxable and VXUS in tax-advantaged.

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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by livesoft » Wed Apr 06, 2016 3:17 pm

gclancer wrote:
lee71959 wrote:However, from an overall tax optimization perspective, I'm wondering if my current strategy of holding VTI (or equivalent) in my pre-tax 401k and VXUS (or equivalent) in my taxable account is sub-optimal.
That appears to be the case, yes. I'll be following this thread with interest since it essentially disproves conventional wisdom. It seems like such a shame to lose the benefit of the foreign tax credit, but math is math.
The conventional wisdom has not been conventional for quite a while:

For 2012: viewtopic.php?t=129164

For 2014: viewtopic.php?t=156434

One thing this thread should do is have folks question all conventional wisdom until they do their own due dlligence. What other bits of conventional wisdom do not apply to your portfolio?
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Re: Specific question regarding relative tax efficiency (VSS, VWO, VBR)

Post by happenstance » Wed Apr 06, 2016 9:52 pm

triceratop wrote:
happenstance wrote:
triceratop wrote:
happenstance wrote:This looks like a really set of useful calculations to run, thank you for sharing!

Can you explain where you find the breakout for the yearly dividend distribution, LTCG, and STCG? I've been trying to find this info on Vanguard's (and Schwab's for that matter) website, but haven't been able to find anything beyond the QDI ratio (https://advisors.vanguard.com/VGApp/iip ... endfigures) and the foreign tax info (which is linked in the other thread).
It's simply the "Distributions" tab on the fund's page. For example: https://personal.vanguard.com/us/funds/ ... =INT#tab=4
Oh, that was thick of me, I was merely looking at funds without LTCG :eek:. I've recreated your spreadsheet above for CA, I think: https://docs.google.com/spreadsheets/d/ ... f4Etg/edit. The only discrepancy is in the calculation of foreign tax. I tried to follow your calculations here but am not sure I did so correctly: viewtopic.php?f=10&t=158519&p=2848683#p2848683. I'm calculating Foreign Tax = (Foreign Tax Per Dividend * Total Distributions / (1 + Foreign Tax Per Dividend)).

Thanks for inspiring me to do these calculations myself! It was a useful exercise, especially as I'm also in a high-tax area (NYC). It also finally showed me how the tax efficiency of ETFs actually manifests.
I didn't look at your foreign tax stuff, but you can verify your calculations against livesoft's results in the other thread for a triple check.

Your numbers for BND are in the end correct due to their location in a RothIRA, but only via incorrect calculations. Cell F24 should not be $0, because you need to treat LTCGs and STCGs according to their proper tax rates (LTCGs get the LTCG/QDI rate but are not dividends). The %QDI only applies to dividends. It is not the portion of total distributions that are given qualified status. This matters more for a tax-inefficient stock fund where you have LTCG/STCG as well as qualified dividends (and where your calculations would as a result be wildly inaccurate), but are incorrect even for a bond fund in a taxable account.

Take a look at how I did it(the link to my sheet is now public)
Thanks for pointing out my calculation error and posting your sheet :sharebeer! My numbers now match yours and livesoft's. I also decided to break out taxes per income source (QDI/non-QDI/LT/ST), so that I could run it against my own taxes, as well as apply a city tax.

Based on this, it seems like I should adjust some holdings to get better tax efficiency. Definitely something to consider the the next time my IPS allows changes of that nature.

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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by triceratop » Wed Apr 06, 2016 10:26 pm

livesoft wrote:
gclancer wrote:
lee71959 wrote:However, from an overall tax optimization perspective, I'm wondering if my current strategy of holding VTI (or equivalent) in my pre-tax 401k and VXUS (or equivalent) in my taxable account is sub-optimal.
That appears to be the case, yes. I'll be following this thread with interest since it essentially disproves conventional wisdom. It seems like such a shame to lose the benefit of the foreign tax credit, but math is math.
The conventional wisdom has not been conventional for quite a while:

For 2012: viewtopic.php?t=129164

For 2014: viewtopic.php?t=156434

One thing this thread should do is have folks question all conventional wisdom until they do their own due dlligence. What other bits of conventional wisdom do not apply to your portfolio?
One criticism of this spreadsheet has been that it is only a snapshot of 2015. There are calls elsewhere, on the wiki discussions, to somehow incorporate past years in to show a more averaged representation of the tax efficiencies. I'm not sure if this is worthwhile because 1) if you go too far back for any given fund you hit cap gain distributions which aren't expected to recur 2) Funds have followed various indices, and the tax efficiencies while following those is not of predictive value 3) arguably the most recent year is most predictive.

For my purposes, this is sufficient (heck, I am not even deciding between tax-advantaged and taxable, just between funds); but if it is going to be discussed on the wiki I'm not sure whether what we have now is enough.
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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by aj76er » Fri Apr 08, 2016 1:33 pm

Great info.
I wonder if this should be added to:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

when I read through that article a while back it led me down the path of preferring international stocks in taxable (over tax-advantaged) accounts. However, when running the numbers in the spreadsheet, I'm leaning towards doing just the opposite. U.S. taxes (even excluding state) seem to be much more of a drag on returns than foreign taxes.

I suppose if you are in an extreme low tax bracket (0 QDI, 15 federal, 0 state) it's a wash, but that seems like more the exception than the rule.

Am I thinking about this correctly?
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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by grabiner » Fri Apr 08, 2016 9:24 pm

aj76er wrote:Great info.
I wonder if this should be added to:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

when I read through that article a while back it led me down the path of preferring international stocks in taxable (over tax-advantaged) accounts. However, when running the numbers in the spreadsheet, I'm leaning towards doing just the opposite. U.S. taxes (even excluding state) seem to be much more of a drag on returns than foreign taxes.

I suppose if you are in an extreme low tax bracket (0 QDI, 15 federal, 0 state) it's a wash, but that seems like more the exception than the rule.

Am I thinking about this correctly?
It's already noted on the wiki that foreign stocks are more tax-efficient assuming equal yields. In recent years, foreign yields have been higher, making foreign stocks less tax-efficient.
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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by raven15 » Sat Jun 04, 2016 9:05 pm

Can the foreign tax credit result in a negative total expense? For example, for 2015 I was apparently in the 10% tax bracket (quite an accomplishment with gross income of over $80,000...) and my state does not have income tax. When I type 10% into the spreadsheet it shows VEA had a total cost of -0.003%. Is the government actually paying me to invest abroad, or should there be an IF statement to prevent the all-in expenses from dropping below the fund's expense ratio?

(It wouldn't surprise me if they were paying me to invest abroad, I am already getting paid to be married, own a house, rent out the back of the house, hide my money in IRA's, have a cheap high deductible health plan, install a nice new door, my wife's nursing degree, etc. Here's to negative taxes!!!! :sharebeer)

Thanks
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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by aj76er » Sat Jun 04, 2016 9:28 pm

raven15 wrote:Is the government actually paying me to invest abroad?
No, they are reimbursing you for the taxes that you paid to foreign governments. And not all foreign countries taxes will be reimbursed. I wish it was called a foreign tax reimbursement, and not a foreign tax credit :-). I think the word "credit" leads to confusion.
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Re: Relative tax efficiency including Foreign Tax Credit (VSS, VWO, VBR, etc.)

Post by raven15 » Sat Jun 04, 2016 11:02 pm

aj76er wrote:
raven15 wrote:Is the government actually paying me to invest abroad?
No, they are reimbursing you for the taxes that you paid to foreign governments. And not all foreign countries taxes will be reimbursed. I wish it was called a foreign tax reimbursement, and not a foreign tax credit :-). I think the word "credit" leads to confusion.
Take VWO, which shows -0.12% tax efficiency for my 10% marginal tax rate. If I had an average of $10,000 invested in VWO throughout 2015, would the government have mailed me a check for $12?

(mostly academic, I realize)
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