Vanguard Short Term Inflation Protected Securities Index Fund tax distributions

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The Vanguard Short-Term Inflation Protected Securities Index Fund is usually recommended for placement in a tax-deferred account, although for some low tax bracket taxpayers living in states with a high tax rate, the fund may be suitable for taxable accounts. The fund is suggested for investor that employ a liability driven investment (LDI) strategy that duration matches real assets to targeted real retirement income, using in a balanced portfolios that include treasury inflation protected bonds.[1] The table below summarizes the fund's relation to a number of tax factors.

Table. Summary
Fund Distributions.jpg Favorable tax factors Fund Distributions.jpg Unfavorable tax factors Fig. 1 A Three-fund portfolio tailored for stable spending

Treasury interest: Yes (average 99%)
ETF shares: Yes
Historical gains distributions : None

Dividends: Taxed at marginal tax rates
"Phantom" dividends: inflation adjustments are taxed each year
Qualified dividends: No

Threefundinflationbonds.png

The following tables provide long term data on the fund's history of both dividend and capital gains distributions.

Additional tables provide 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, an additional table provides historical turnover ratios.


Distributions

The first table provides the fund's historical dividend and capital gains distributions (expressed as yields) along with a breakdown of the component parts of the distribution (treasury interest, short-term gains, long-term gains, and return of capital), which are subject to differing tax rates.

Table. Vanguard Short-Term Inflation Protected Securities Fund] Tax Distributions
Year Dividend Investor shares
[2]
Dividend Admiral shares
[2]
Dividend ETF shares
[2]
Treasury Interest
[3]
Short-term Capital Gains
[4]
Long-term Capital Gains
[4]
Return of Capital distribution
[5]
Total Return
2018 2.73% 2.81% 2.81% 99.66% 0.00% 0.00% 0.00% 0.91%
2017 1.26% 1.35% 1.35% 99.56% 0.00% 0.00% 0.00% 0.31%
2016 0.42% 0.51% 0.51% 99.72% 0.00% 0.00% 0.00% 2.48%
2015 -0.53% -0.44% -0.44% 100.00% 0.00% 0.00% 0.00% -1.36%
2014 0.88% 0.98% 0.98% 99.81% 0.00% 0.00% 0.00% -0.02%
2013 0.01% 0.11% 0.11% 100.00% 0.00% 0.00% 0.00% -0.91%

Accounting data

The accounting figures and associated ratios (tables below) 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. Bond funds have higher turnover ratios than stock funds, since the bond manager must buy and sell bonds as they mature, and as the manager maintains the maturity and duration structure of the portfolio. The gains or losses on a bond are primarily determined by changes in interest rates, and in some instances, credit quality.

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 bonds at different prices. The manager can select high basis securities when forced to sell a bond (this may realize a loss). The manager can also select low basis securities when redeeming a bond in-kind (a non-taxable transaction that can remove an unrealized gain out of the portfolio.)[note 1]
  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. [6]

The level of unrealized gains and carryover realized losses in a fund: A fund which defers gains realization accumulates unrealized appreciation, which when distributed, will 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. The third tab on the Table 3. spreadsheet shows the data in percentage of total assets form. Tab four provides treasury interest percentage. The fifth tab provides annual per share distribution data.

Table.


(View Google Spreadsheet in browser, then File --> Download as to download the file.)

Definition of terms
Net sales/redemptions
This statistic reveals whether investors are net buyers or sellers of the fund.
Realized gain/loss
A realized capital gain/loss is an increase (or decrease) in the value of a security that is "real" because the security has been sold by the portfolio manager. The capital gains/losses are "realized" by the fund, and any distributions to the shareholder as a result of realized gains (adjusted for any realized losses) are taxable during the tax year in which the security was sold. Realized losses can be used to offset realized gains in an attempt to reduce taxable gains. If realized losses are higher than realized gains, a fund can "carry forward" these excess losses to offset future gains. In-kind redemption gains are included as gains in this statistic. As these gains are not taxable, they must be deducted from the realized/gain tally to reflect the net gain/loss for the year. (see tax attributes for the net gain computation).
Distributed gains
A net realized gain will be distributed to shareholders as a capital gains distribution.
Unrealized gain/loss
An unrealized capital gain/loss (also called a "paper profit or loss") is an increase (or decrease) in the value of a security that isn't "real" because the security hasn't been sold. When a portfolio manager sells a security, however, the capital gains/losses become "realized" by the fund, and any realized gains (net of any losses) are taxable during the tax year in which the security was sold. Funds with low turnover rates, such as index funds, tend to have more unrealized gains than actively managed funds and are less likely to pass taxable gains on to investors. A fund's unrealized appreciation or depreciation figures are valuable because they can give an idea of whether a fund would need to distribute any gains if all of its securities were sold. Such information may help you determine your potential exposure to taxable distributions.
This statistic is volatile, and will increase or decrease depending on market returns.
Loss carryforward
Realized losses can be “carried forward”, over an unlimited span of years, to offset any future net realized gains.
In-kind redemptions
Instead of selling securities, a portfolio manager may elect to distribute securities in-kind to redeeming shareholders. Unlike a sale, an in-kind transfer is not taxable. This technique is frequently used in the ETF creation/redemption process. For institutional redemptions, a portfolio manager can select low-basis securities to transfer (removing the embedded tax liability) from the portfolio.

Turnover

Table.


(View Google Spreadsheet in browser, then File --> Download as to download the file.)

Definition of terms
Average net assets
Average net assets are derived from NSAR reports from the EDGAR database.
Redemptions
The dollar amount of fund shares sold by shareholders.
Sales
The dollar amount of fund shares bought by shareholders.
Turnover
The rate at which the fund manager sells securities within the portfolio. The reciprocal of this number reflects the average holding period of the portfolio. Low turnover often results in low capital gains realization.
R/ANA
The redemptions/average net assets (R/ANA) ratio reflects how fund shareholders are turning over their holdings in the fund. It is analogous to the investment manager's turnover ratio.
R/S
The redemption/sales ratio (R/S) illustrates whether investors are net buyers or sellers of the fund. A ratio of less than 1 means that investors are net purchasers of the fund. A ratio more than one means investors are net sellers of the fund. The R/ANA and R/S ratios, viewed together, can signal market timing activity within a fund. For example a fund showing an R/ANA ratio of 400% and an R/S ratio of 1 (equal buys and sells) is likely being market timed by fund shareholders.

Notes

  1. In-kind redemption is a defining feature of exchange-traded funds. The fund, over its history, has seen a gradual increase in ETF share clsss weighting in the fund asset base.

References

  1. A Three Fund Portfolio tailored for stable retirement spending Bobcat, Financial Page, Dec. 4, 2016.
  2. 2.0 2.1 2.2 Dividend data is derived from the [https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000836906&type=N-CSR&dateb=&count=100&scd=filings N-SCR filings
  3. Vanguard Tax Preparation Archive
  4. 4.0 4.1 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, derived from N-CEN and NSAR reports.
  5. Return of Capital dividends are derived from annual reports, and are calculated by dividing the dollar amount return of capital distribution by the average net assets of the fund, derived from N-CEN and NSAR reports.
  6. Larry E. Swedroe, What Wall Street Doesn’t Want You To Know, 2001, pp.227-28. ISBN 0312335725

External links