Vanguard Developed Markets Index Fund (VDVIX) tax distributions

The Vanguard Tax-Managed International Fund is a very suitable candidate for placement in taxable accounts. The fund is specifically designed for taxable accounts (the mutual fund shares are not allowed in IRA accounts.) The fund tracks the MSCI EAFE index of developed market international stocks and is one of four broadly diversified passively managed Vanguard international funds.

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. 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.

When dividing international allocations among regional index funds in taxable accounts, an investor will need to occasionally rebalance the allocation in a tax efficient manner, and should remain aware of any opportunities to  harvest tax losses. Because the mutual fund share classes (investor and institutional) of the Tax-Managed International fund impose a 1% redemption fee on funds invested for less than five years, an investor should consider holding the ETF share class of the fund, if the total costs, including transaction costs, of using the ETF are advantageous. The fund allows no cost tax-free conversions to ETF shares, so if one wants to harvest a loss inside the five year redemption fee period, one can convert to the ETF and avoid the redemption fee.

Keep in mind that Vanguard calculates redemption fees on a first in first out (FIFO) basis, even if you specify lots in another way for tax accounting. Thus, once you have held a large number of shares in the fund for more than five years, you will only pay a redemption fee if your sales exceed the number of shares held more than five years.

Distributions
The Vanguard Tax-Managed International Fund, in keeping with its tax management mandate, has not distributed a capital gain in its history. Since the advent in 2004 of the qualified dividend tax preference, the fund has provided 100% qualified dividends to its investors.


 * FY 1999 - fund inception, dividends annualized.
 * FY 2002 - MSCI transitions to "free-float" market weighting.
 * FY 2008 - introduction of ETF (Euro-Pacific) shares.

Accounting statistics
The accounting figures and associated ratios (tables 3 and 4) 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.) This redemption technique is primarily employed with institutional creation and redemption of ETF shares.  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.

The level of unrealized gains and carryover realized losses in a fund: Index funds defer gains realization and often accumulate significant unrealized appreciation, which if distributed, would be taxed; thus the unrealized gain/loss figure shows the potential gain (or loss) that would be realized if the portfolio was to be entirely liquidated. Any loss carryovers a fund possesses can be used to offset future realized gains (carryovers have an eight year expiration period).

Fund analysis
Table 3.

Turnover
''Reference article: Average net assets

Table 4.

Tax rates
Mutual fund distributions will be taxed according to the tax laws governing the investment over the holding period of the investment, which are subject to change. The actual tax imposed will depend upon each individual's tax rate and the timing of purchases and sales. The federal tax rates applicable to mutual fund distributions and investor sales of securities for the period 2008 - 2012 are outlined below. Keep in mind that investment income may also be subject to state and local taxation.
 * 1) Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates up to 35%. Mutual fund short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
 * 2) Long-term capital gains distributions are made from realized gains on securities held for more than one year. Long-term gains are taxed at 0% for taxpayers in the 10% and 15% tax brackets and at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets. (These tax rates are mandated for 2008-2012.) They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
 * 3) Qualified dividends are the ordinary dividends that are subject to the same 0% or 15% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive. Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 0% rate.
 * 4) When you sell at a loss you will either offset capital gains which would have otherwise been taxed at your capital gains rate or you will offset income (up to $3,000 maximum per year) which would have otherwise been taxed at your marginal income tax rate, or both. If you offset capital gains that would have otherwise not been taxed at all (because your capital gains tax rate is 0%) then this part of the tax loss harvest may be an outright loss.