Vanguard Developed Markets Index Fund (VDMIX) tax distributions

The Vanguard Developed Market Index Fund is a suitable candidate for placement in taxable accounts. The fund is now more attractive as a taxable holding since it is no longer structured as a fund of funds portfolio (which is ineligible for the foreign tax credit). As a fund now directly holding securities, the fund qualifies for the credit.

The following tables provide long term data on the fund's history of both dividend and capital gains distributions. The first table also provides the historical distribution of qualified dividends and an estimate of the foreign tax credit. One should note that the fund has a fiscal year ending in October, so its reported distributions for a year reflect the prior year's December distribution of dividends and capital gains.

The second table provides a database of the fund's accounting figures: the annual level of realized and distributed gains; its level of unrealized gains and loss carryforwards; as well as the annual in-kind redemption gains the fund has realized. These figures highlight the level of a fund's tax liabilities.

Because both manager turnover of securities inside the portfolio and investor turnover of fund shares can affect the level of gains realization, a third table provides historical turnover ratios.

The fund tracks the same benchmark (MSCI EAFE) as the Vanguard Tax-Managed International Fund. Compare Vanguard International Funds provides a breakdown of comparable features between the funds.

Distributions
The following table provides a view of the fund's historical distributions expressed in terms of yields. We can see that the fund distributed a very small short-term capital gain in both 2007 and 2008, but has distributed no other gains in its history. Approximately 75% of dividend distributions have been qualified dividends, which under the current tax regime, are taxed at lower capital gains tax rates.


 * FY 2001 - annualized dividends, fund changed fiscal years.
 * FY 2002 - MSCI transitions to "free-float" market weighting.
 * FY 2003 - Introduction of 2% transaction fee on redemptions of shares held < 2 mos.
 * FY 2008 - Fund begins transition from fund of funds to direct ownership of securities. Transition completed in March 2009.
 * FY 2010 - Fund reorganization merges institutional fund into fund, transition completed January 2010.

Accounting data
The accounting figures and associated ratios (tables 2 and 3) can help one visualize some of the major determinants of a fund’s tendency to distribute taxable gains. These determining features include:

Turnover: The rate at which a fund manager sells securities within the fund has a major effect on potential gains realization. Single digit annual fund turnover percentages result in a low rate of realized gains. Similarly, fund shareholders' sales flows have major effects on a fund’s distribution tendencies. Net flows into the fund have the following effects:


 * 1) Constant inflows allow a fund manager to purchase a wide range of price lots for shares. The manager can select high basis shares when forced to sell a stock (this may realize a loss). The manager can also select low basis shares when redeeming a stock in-kind (a non-taxable transaction that can remove an unrealized gain out of the portfolio.) Net inflows mean that shareholders are not forcing the manager to liquidate assets (and realize gains or losses) in order to meet redemptions. Large outflows can force such liquidation.
 * 2) A large and growing net asset base serves to diffuse any realized capital gains across a large base of shareholders and reduces the per share gain distribution. Large outflows have the opposite effect; any gains realized are spread across a smaller asset base and result in higher per share distributed gains.

Fund analysis
Table 2.

Turnover
Reference article: Average net assets

Table 3.