Vanguard Small Cap Value Index Fund tax distributions
|Vanguard Fund Info|
|Small Cap Value Index|
The Vanguard Small Value Index Fund is a suitable candidate for placement in taxable accounts. The fund tracks the CRSP US Small Value Index and is one of three passively managed Vanguard small cap funds. The fund is recommended for portfolios that employ a value tilt, such as the Schultheis "Coffeehouse" portfolio illustrated in Figure 1.
The table below summarizes the fund's relation to a number of tax factors.
|Favorable tax factors||Unfavorable tax factors|| Fig. 1 |
Bill Schultheis's "Coffeehouse" portfolio
Historical gains distributions : Recently low
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.
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 following table provides a view of the fund's historical distributions expressed in terms of yields. We can see that the fund distributed considerable levels of capital gains during the early years of its existence, a period which coincided with the late years of a long bull market. The fund has not distributed a gain since 2002, a period marked by two bear markets, and which saw the introduction of an ETF share class in the fund. The fund has distributed approximately 70% qualified dividends, which under the current tax regime, are taxed at lower capital gains tax rates. The higher taxable dividend yields distributed by value index funds make them less tax efficient than lower yielding blend and growth index funds.
The fund has changed tracking indexes twice in its history. The transition years of benchmark changes are marked in red shading.
|Year||Dividend Investor shares
|Dividend Admiral shares
|Dividend ETF shares
|Short-term Capital Gains
|Long-term Capital Gains
 [notes 2]
|Qualified Dividends||(FY) Annual Return - Investor |
- FY 2013- The fund changed benchmarks from the MSCI US Small Cap Value Index to the CRSP US Small Cap Value Index on 04/16/2013.
- FY 2011- The fund introduced Admiral shares on 09/27/2011.
- FY 2004- The fund introduced ETF shares on 01/26/2004.
- FY 2003- The fund made a change of benchmark on 05/16/2003, moving from the S&P Small Cap 600/Barra Value Index to the MSCI US Small Cap Value Index.
The accounting figures and associated ratios (tables 3 and ) 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.)
- 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: 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 (carryovers have an eight year expiration period). The second tab on the Table 3. spreadsheet shows the data in percentage of total assets form.
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.
|Taxable income up to this level||Tax rate|
|Single||Married filing joint||Head of Household||Ordinary income||Long-term gains and qualified dividends|
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.
The annual fund accounting figures show that the Vanguard Small Value Index fund, during its linkage to the MSCI benchmark, provided turnover ratios ranging between 25% to 34%. Since the change to the CRSP benchmark, turnover has ranged between 12% and 16%. This moderate turnover can be attributed to the fact that stock migration out of a small value index can come in the following dimensions:
- An individual company becomes relatively smaller and migrates to a micro cap index;
- An individual company becomes relatively larger and migrates to a mid cap index;
- An individual company migrates to a growth index;
- An individual company is bought out or merged with a second company.
Shareholder turnover, revealed in the Redemptions/Average Net Assets (R/ANA) metric, shows that shareholders have,on average, tended to maintain holding periods in the fund for 3 to 5 years. The fund saw net redemption in 2003, 2008, and 2011 (and the ETF shares have seen higher redemption.)[notes 4]
A look at realized net gains/losses shows that the fund realized net losses in the 2000-2002 and 2008-2009 bear markets (see the second tab, tax attributes in Table 3 above). These losses produced loss carryforwards. These carryforward losses have been used to offset realized gains during ensuing periods of market recovery. One should remain cognizant of the fund's tendency to distribute higher levels of taxable gains absent carryforward losses, although this risk is mitigated by the creation and redemption process central to the fund's ETF shareclass.
The following table presents the federal tax cost on the fund's historical distributions (see second tab, table 6.) under the current tax regime (with dividends taxed and long term capital gains taxed at 0%, 15%, or 20% depending on marginal tax rate, and an additional 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 0.10% 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 - 2016 average dividend yield is slightly higher than the life of fund average yield. The fund distributed capital gains during the 1992-2000 period, averaging 3.63% per annum short term gains, 0.36% per annum long term gains.
The table does not include the capital gains cost associated with selling the fund at a gain.[notes 5]
John Bogle's original insight into the relative tax inefficiency of value index funds vs. growth index funds is evidenced in the following table of relative yields:
I expect that the new style indexes will greatly assist investors in meeting their particular investment objectives. In the accumulation phase of your life, you might be well served by a relatively low dividend yield to minimize your taxes. At retirement and in the distribution phase of your life, you would presumably be better served by a higher yield.
— John Bogle, Bogle On Mutual Funds: New Perspectives for the Intelligent Investor, ISBN 978-1556238604
Table 8. Capital gains
(View Google Spreadsheet in browser, then File --> Download as to download the file.)
- 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/admiral) in the sales and redemptions totals for the fund. Vanguard does not quantify conversions. These non-transaction conversions inflate the reported shareholder ratios. The fund has experienced steady growth of the ETF share class, which makes up a growing portion of fund total 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 6 and Table 9 costs. However, you would not pay the Table 9 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 9; 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%). 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 - 2015, and reap higher after-tax returns, outside of tax-exempt municipal bonds, in all asset classes.
Table 9. 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.
- FAQ small cap funds
- Small caps
- US small cap index returns
- Vanguard statistical data spreadsheets
- Vanguard small cap index fund tracking error
- Vanguard ETF/fund ratios
- Dividend data is derived from the Complete filings: N-CSR reports back to 2003; N-30D reports back to 1994
- 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 NSAR reports
- 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
- "Revenue Procedure 2016-55" (pdf). IRS. p. 7. https://www.irs.gov/pub/irs-drop/rp-16-55.pdf. Retrieved 01 November 2016.
- Current tax attributes and distributions: Vanguard
- State Individual Income Tax Rates, 2000-2014, The Tax Foundation
- Qualified dividend income: