Vanguard Developed Markets Index Fund (VDVIX) tax distributions
|Vanguard Fund Info|
|Developed Markets Index Fund|
|On April 4, 2014 the Tax-Managed International Fund absorbed the assets of the Vanguard Developed Market Index fund (VDMIX). The fund has been renamed as the Vanguard Developed Market Index fund (VDVIX). As part of the merger, the Tax-Managed International Fund has adopted the investment objective and the strategies of the Developed Markets Index Fund.|
The Vanguard Developed Markets Index Fund (VDVIX) (also known as the Vanguard FTSE Developed Markets ETF) is a suitable candidate for placement in taxable accounts. The fund tracks the FTSE Developed ex North America Index of developed market international stocks and is one of three broadly diversified passively managed Vanguard international funds. The table below summarizes the fund's relation to a number of tax factors.
|Favorable tax factors||Unfavorable tax factors||Fig. 1 David Swensen's lazy portfolio utilizing a developed market allocation|
Historical gains distributions : None
Dividends: Higher than growth indexes
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.
|Vanguard funds: distributions|
The Vanguard Developed Markets Index Fund will no longer follow the tax management mandate that it followed during its period as a tax-managed fund. While the fund will likely produce infrequent capital gains distributions, the future percentage of qualified dividends distributions can be expected to drop to approximately 75% - 80% of the dividend distribution.
|Year||Dividend Investor shares
|Dividend ETF shares
|Short-term Capital Gains
|Long-term Capital Gains
| Qualifying Dividends
|Foreign tax credit
|(FY) Annual Return - Investor |
- FY 2013 - fund transitions to FTSE Developed ex North America Index, May 28, 2013.
- FY 2008 - introduction of ETF (Euro-Pacific) shares.
- FY 2002 - MSCI transitions to "free-float" market weighting.
- FY 1999 - fund inception, dividends annualized.
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:
- 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. [notes 2] 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.
- 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).
Reference article: Average net assets
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 2013 onward are outlined below. Keep in mind that investment income may also be subject to state and local taxation.
- 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 39.6%. 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.
- 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, at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets, and at 20% in the 39,6% tax bracket. They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
- Qualified dividends are the ordinary dividends [notes 3] that are subject to the same tax rate that applies to long-term capital gains. They should be shown in box 1b of the Form 1099-DIV you receive.
- 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.
- The Affordable Care Act imposes a Medicare surcharge of 3.8% on all net investment income (NII) once the taxpayer's adjusted gross income exceeds $200,000 (single) or $250,000 (married); while this tax is not part of the income tax, it has the same effect on investors as a higher tax rate. The NII tax begins to apply to individuals falling in the 33% tax bracket. Thus the top effective marginal tax rate is 23.8% on qualified dividends and long-term gains, 43.4% on ordinary investment income.
|Filing status and annual taxable income - 2018||Ordinary income tax rate||Long-term capital gain rate|
|Single||Married Filing Jointly or Qualified Widow(er)||Married Filing Separately||Head of Household||Trusts and Estates||Collectibles and certain small business stock[* 1]||Unrecaptured Section 1250 gain|
In addition, there is a 3.8% Medicare tax rate on investment income in excess of an adjusted gross income of $200,000 ($250,000 for married filing jointly), and 0.9% on salary and self-employment income in excess of this level. See: ACA net investment income tax
|Filing status and annual taxable income - 2018||Long-term capital gain rate|
|Single||Married Filing Jointly or Qualified Widow(er)||Married Filing Separately||Head of Household||Trusts and Estates||Qualified dividends and other investments|
|$38,601-$425,800||$77,201 - $479,000||$38,601-$239,500||$51,701-$452,400||$2,601-$12,700||15%|
The fund can be expected to provide limited capital gains distributions and to provide roughly 75% qualified dividend distributions to investors over time.
The annual fund accounting figures show that the fund turnover ratio usually stays in single digits. The FTSE Developed ex North America Index, being a large and mid cap market index, can be expected to exhibit low turnover in future years. This low turnover can be attributed to the fact that stock migration out of the index can come in three dimensions:
- An individual company grows smaller and migrates out of the FTSE index into the Small Cap FTSE index;
- Merger and acquisition activity removes a stock from the index;
- A developed market country is reclassified from its status as a developed market and is placed into an Emerging market index.
Shareholder turnover, revealed in the Redemptions/Average Net Assets (R/ANA) metric, shows that shareholders have historically turned over their holdings in the fund at 5%-29% annual rates, suggesting average holding periods of between three and ten years.
The fund has received net inflows every year of its history. The fund's mutual fund shares have recorded net redemption from 2008-2010 and in 2012. This period corresponds with a deep bear market (in FY 2008) which suggests redemption for tax loss harvesting purposes. In addition, Vanguard created ETF shares for the fund in 2007 and allows for a tax free conversion of mutual fund shares into ETF shares. These conversions are included in the mutual fund share redemption figure. [notes 4]
A look at realized net gains/losses shows that the fund has realized net losses over a plurality of its history. The fund has always had a loss carryforward position. Low fund and shareholder turnover should help retain most of these carryforward losses as offsets to potential future gains.
The following table presents the federal tax cost on the fund's historical distributions under the current tax regime (with dividends and long term capital gains taxed at 0%, 15%, or 20% depending on marginal tax rates, and an additional 3.8% ACA Net Investment Income tax assessed at higher tax brackets). Keep in mind that distributions can also be subject to state and local taxation, with marginal rates ranging from 0% to 12% (an average 5% state tax rate will add an approximate 0.14% to the annual tax cost of holding the fund.) The average is based on the results from 2004-2015, the period comprising the qualified dividend tax regime. The 2004 - 2015 average dividend yield is somewhat higher than the long term (1999 forward) fund average yield.
The table does not include the capital gains cost associated with selling the fund at a gain. [notes 5]
- The foreign tax credit is estimated from annual reports, and the EDGAR NSAR reports by:
- Dividing the foreign tax paid by the average net assets of the fund.
Table 7. Foreign tax credit
(View Google Spreadsheet in browser, then File --> Download as to download the file.)
- When a fund redeems ETF shares, it prepares a basket of securities that it exchanges in-kind to an institutional investor. The basket often includes a modest cash component for exact settlement. An astute ETF manager can use this as an opportunity to raise cash by selling some high basis stock for a realized loss.
- Fairmark says:
A portion of your ordinary dividend may be nonqualified because it can include items like these:
- Taxable interest. When a mutual fund receives taxable interest, the income gets paid out as a dividend. It's a dividend when it goes out of the mutual fund, but it wasn't a dividend when it came into the mutual fund, so it can't be a qualified dividend.
- Nonqualified dividends. Your mutual fund may receive dividends that are nonqualified. For example, the mutual fund may sell shares just 35 days after buying them, but after receiving a dividend. The mutual fund has to hold the shares at least 61 days to have a qualified dividend. Any amount the mutual fund receives as a nonqualified dividend gets paid to you as a nonqualified dividend.
- Short-term capital gain. When a mutual fund has a short-term capital gain, it pays this amount to the mutual fund shareholders as an ordinary dividend.
- Holding mutual fund shares less than 61 days. You should also be aware that any dividend you receive on mutual fund shares held less than 61 days is a nonqualified dividend, even if the mutual fund reports that amount to you as a qualified dividend. You don't have to buy the shares 61 days before the dividend is paid, but the total amount of time you hold the shares (including time before and after the dividend) has to be at least 61 days.
- Because ETF share classes reduce transaction costs and bring tax benefits to the fund portfolio regardless of share class turnover (which can be quite high) we provide separate R/ANA and R/S ratios for the ETFs. We must approximate the average net asset figure for ETFs. One should also note that Vanguard includes share class conversions (investor/ETF) in the sales and redemptions totals for the fund. Vanguard does not quantify conversions. These non-transaction conversions inflate the reported mutual fund shareholder ratios. The fund has experienced a steady growth in ETF shares. The 2013 merger of the Vanguard Developed Markets Index Fund into the fund added over 17 billion dollars of mutual fund assets to the fund. The addition dropped the ratio of ETF assets to total fund assets.
Chart: ETF ratio to total fund assets
google drive spreadsheet
- This table indicates the additional cost for the capital-gains tax when you sell, assuming that you pay taxes on the distribution and reinvest the after-tax portion of the distribution; since it is a one-time cost, the effect is annualized. For example, if you hold an investment for 30 years and lose 10% to taxes when you sell, that is equivalent to losing 0.35% every year. Thus, if you sell the fund, your cost will be the sum of the Table 1 and Table 2 costs. However, you would not pay the Table 2 cost on any stock which you either leave to your heirs or donate to charity, and thus may not pay that cost on your full investment. In particular, you might estimate your total tax cost by using the low-return line in Table 2; if stock returns are high, you will have a large taxable account and will reduce the tax cost by taking longer to deplete it or by not spending it all during your lifetime.
Taxes are computed at a tax rate of 15% on long-term gains (except in the "rate rises to 20% column", which applies if that tax reduction is allowed to expire), and on qualified dividends (except in the "no QDI" column, which applies if the tax reduction on qualified dividends expires and the rate is 35%). The foreign tax credit is added to the dividend yield before computing taxes; for example, if a fund had $100 withheld in foreign taxes on dividends, and you pay $20 in taxes on the withheld dividends, you get a $100 credit for a net benefit of $80. Although not tabulated, keep in mind that investors in the lower tax brackets (15% or lower) pay lower federal tax rates on investment income for the period 2003 - 2012, and reap higher after-tax returns, outside of tax-exempt municipal bonds, in all asset classes.
Table 2. Additional hypothetical tax costs (after taxable funds are sold) Fund Pre-tax Returns Distributions Tax Cost Annualized cost over 10 years Annualized cost over 20 years Annualized cost over 30 years 30-year cost if CG tax rate rises to 20% Any bond any all any 0.00% 0.00% 0.00% 0.00% Tax-efficient stock, low returns 5.00% 2.00% 0.30% 0.36% 0.30% 0.25% 0.33% Tax-efficient stock, medium returns 8.00% 2.00% 0.30% 0.63% 0.47% 0.37% 0.50% Tax-efficient stock, high returns 11.00% 2.00% 0.30% 0.84% 0.58% 0.43% 0.58% Tax-inefficient stock, low returns 5.00% 4.00% 1.00% 0.12% 0.10% 0.09% 0.12% Tax-inefficient stock, medium returns 8.00% 4.00% 1.00% 0.43% 0.33% 0.26% 0.35% Tax-inefficient stock, high returns 11.00% 4.00% 1.00% 0.66% 0.47% 0.35% 0.47%
Almost all of the dividends distributed by Equity REITS come in the form of non-qualified dividends. Non-qualified dividends are taxed at marginal income tax rates.
- Dividend data is derived from the EDGAR annual reports database N-CSR reports back to 2003; N-30D reports back to 1995
- Capital Gains are derived from annual reports, and are calculated by dividing the dollar amount capital gain distribution by the average net assets of the fund.
- Data derived from Vanguard site.
- data derived from annual reports.
- Larry E. Swedroe, What Wall Street Doesn’t Want You To Know, 2001, pp.227-28. ISBN 0312335725
- Current tax attributes and distributions: Vanguard
- State Individual Income Tax Rates, 2000-2014, The Tax Foundation
- Qualified dividend income: