How tax-efficient are iShares Core in One ETFs in a taxable account?

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longinvest
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How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by longinvest »

Are balanced index ETFs tax-efficient in a taxable account?

US investors are often told that Vanguard's LifeStrategy funds are tax-inefficient in a taxable account and are encouraged to hold individual index funds for each asset instead (like Taylor's Three-Fund Portfolio) as soon as they start investing in a taxable account.

The iShares Core in One ETFs are relatively similar to Vanguard's LifeStrategy funds. They internally invest in 7 cap-weighted index ETFs to provide a global exposure to stocks and bonds with a choice of four asset allocations: 80/20, 60/40, 40/60, and 20/80 stocks/bonds.

ETFs are more efficient, taxwise, than mutual funds*. Would, for example, AOR (60/40 stocks/bonds) be a good ETF for a US investor to own in a taxable account? If so, wouldn't it be simpler to own AOR in all accounts, instead of owning multiple funds across many accounts to implement a tax-adjusted (or not) balanced (60/40 stocks/bonds) portfolio?

* Some Vanguard funds are as tax-efficient as ETFs but, unfortunately, the LifeStrategy funds don't have a dual-shares structure and aren't as tax-efficient as ETFs.

I know that in Canada, Vanguard's Asset Allocation ETFs are considered efficient enough (taxwise) in a taxable account. They're often recommended even for taxable accounts on our Canadian sister forum FWF.

My question is: Are iShares Core in One ETFs tax-efficient enough to be recommended for a single-ETF portfolio across accounts, including a taxable account, when an investor wishes to maintain a constant (80/20, 60/40, 40/60, or 20/80) asset allocation with global stock and bond exposure?

P.S. I'm aware that asset allocation across accounts with distinct tax characteristics is a complex topic. A mirror allocation, holding a Core in One ETF (US) or Asset Allocation ETF (Canada) in all accounts, would elegantly sidestep this complexity.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by stan1 »

First remember there are multiple types of income (in the US): non-qualified dividends, qualified dividends, US government obligation interest (not taxed by states), municipal bond interest (not taxed by federal or by issuing state), capital gains distributions, and realized gains at time of sale. Capital gains can be short or long term. When people talk about ETFs being more efficient it is specifically about capital gains distributions. Dividends and interest for ETFs are the same as mutual funds. As you noted it can get complex.

What is your marginal tax rate (federal and state)?

Mine is likely to be at least 30% for the rest of my life. I do not want any corporate bond income taxed as ordinary income in my taxable accounts nor do I want treasury income co-mingled with corporate or international bond income. A few states require US government obligation interest to reach a threshold within a single fund or ETF to avoid taxation. If you are in a lower tax rate it may not matter.

I also find the expense ratios too high. They are subsidized at 0.25% but actually run at 0.32%. Will Blackrock continue the subsidy forever? Who knows but I wouldn't gamble on it in a taxable account. Even if you have a simple $100K portfolio that's at least $200 per year in extra costs compared to Vanguard Admiral share total market funds.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by retiredjg »

Bonds are not tax-efficient because they throw off dividends. Dividends are taxable income whether you spend the money or not. Putting bonds into an ETF does not change that to my knowledge.

I would not hold such a fund in taxable unless in a very low tax bracket (where convenience may be more important than a bit of tax).
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by longinvest »

Vanguard Canada's Asset Allocation ETFs have a 0.25% expense ratio. That's higher than the weighted average MER of holding the underlying 7 ETFs. For example, VBAL (60/40 stocks bonds) has a 0.25% expense ratio but directly holding its 7 underlying ETFs would cost 0.16%. That's an extra 0.9%, or $90/year for each $100,000 invested. Many simple indexing proponents, in Canada, consider this additional cost low enough in regards to the simplification provided by an Asset Allocation ETF. Given that most discount brokerages charge a $10 commission per trade, Asset Allocation ETFs can even be cheaper than holding 7 ETFs. (Personally, I use a discount brokerage that lets me buy ETFs commission-free, so I have to entirely assume the additional cost).

The LifeStrategy funds (in tax-sheltered accounts) are similar; they're more expensive than holding the four underlying funds (total domestic and international stocks and bonds), but the additional cost is limited to a few additional basis points. The advantage of the single fund can be significant, especially when an investor lacks the discipline to methodically rebalance his portfolio.

I know that Core in One ETFs aren't as tax-efficient as a self-managed portfolio of 7 distinct ETFs (or fours distinct dual-share funds) spread across accounts. That's obvious.

But, not everybody is able to maintain such a portfolio. I know for a fact that I needed to build a spreadsheet for my wife, when we had a 4-ETF portfolio with a very simple 25/25/25/25 allocation (but spread across accounts, to minimize the total number of holdings). Without that spreadsheet (that she wouldn't be able to reconstruct herself), she would have been unable to rebalance her portfolio. Investing is simple for some of us; it's a bigger challenge for others.

I'm now able to see how simple my wife finds investing, with our single-ETF portfolio. When she has money to invest, she is able to divide the amount by the ETF price and submit a limit buy order. She would have no trouble dividing a desired withdrawal amount by the ETF price to submit a limit sell order.

My questions is really: Are the Core in One ETFs good enough in a taxable account for recommending to investors seeking simplicity? (I know that they're not optimal).
Last edited by longinvest on Sat May 11, 2019 12:47 pm, edited 1 time in total.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by longinvest »

retiredjg wrote: Sat May 11, 2019 12:13 pm Bonds are not tax-efficient because they throw off dividends. Dividends are taxable income whether you spend the money or not. Putting bonds into an ETF does not change that to my knowledge.

I would not hold such a fund in taxable unless in a very low tax bracket (where convenience may be more important than a bit of tax).
Are you taking into account the adjustment that one should (?) apply to his asset allocation when spreading investments across accounts with distinct tax characteristics?

I know that properly accounting for this makes tax-efficient fund placement (and allocation adjustments) quite challenging in Canada. See: Asset Location Gets REALLY Complex - Blessed by the Potato Blog.

If I'm to believe the Bogleheads wiki, it's no simpler in the US: Tax-adjusted asset allocation and Tax-efficient fund placement.

For behavioral reasons, some financial advisors, including Rick Ferri, aren't opposed to a mirrored asset allocation in all accounts (see this post).
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by retiredjg »

No. Your question was whether balanced index ETFs are tax efficient or not. They aren't. I don't see how any of those things you mentioned affect tax-efficiency, but maybe I'm missing something.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by longinvest »

retiredjg wrote: Sat May 11, 2019 12:56 pm No. Your question was whether balanced index ETFs are tax efficient or not. They aren't. I don't see how any of those things you mentioned affect tax-efficiency, but maybe I'm missing something.
Retiredjg, there's only so many letters that fit within a thread title. Here's the end of my original post, where I tried to explicit my question:
longinvest wrote: Sat May 11, 2019 10:44 am My question is: Are iShares Core in One ETFs tax-efficient enough to be recommended for a single-ETF portfolio across accounts, including a taxable account, when an investor wishes to maintain a constant (80/20, 60/40, 40/60, or 20/80) asset allocation with global stock and bond exposure?
I wrote "tax-efficient enough to be recommended for a single-ETF portfolio across accounts". I wasn't asking about absolute tax-efficiency, but about relative tax-efficiency in the context of simplifying portfolio management.

I'm seeking help to find a detailed answer to my question. I don't know the answer to my question.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by retiredjg »

In that case, I'd say "it depends".

If you are in a high tax bracket or if you have a large taxable account in relation to the rest of your portfolio or if you want a high bond allocation, the answer would probably be "no, they are not tax-efficient enough".

If your taxable account is pretty small in relation to the rest of your portfolio it probably does not matter if you have a bit of tax-inefficiency in your small taxable account. If the bond percentage is 10% as opposed to 80%, it probably does not matter much if you have a bit of tax-inefficiency in your small taxable account. If you are in a very low tax bracket, it probably does not matter much if you have a bit of tax-inefficiency in your taxable account.



A 20% bond fund in a small taxable account held by someone in a lower tax bracket - using this type of fund is probably just fine.

An 80% bond fund in a very large taxable account (relative to the portfolio) held by someone in a higher tax bracket....this type of fund is probably a mediocre to poor choice.

Does that help any?
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by KyleAAA »

I do not believe they would be any more tax efficient than the comparable Vanguard lifestrategy fund, at least not enough to matter. The vast majority of the taxes are going to be due to dividend and bond interest payments, not rebalancing. You will owe regular income tax on that interest regardless of the form. At least in the US, not sure about Canadian tax laws.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by longinvest »

retiredjg wrote: Sat May 11, 2019 2:30 pm In that case, I'd say "it depends".

If you are in a high tax bracket or if you have a large taxable account in relation to the rest of your portfolio or if you want a high bond allocation, the answer would probably be "no, they are not tax-efficient enough".

If your taxable account is pretty small in relation to the rest of your portfolio it probably does not matter if you have a bit of tax-inefficiency in your small taxable account. If the bond percentage is 10% as opposed to 80%, it probably does not matter much if you have a bit of tax-inefficiency in your small taxable account. If you are in a very low tax bracket, it probably does not matter much if you have a bit of tax-inefficiency in your taxable account.



A 20% bond fund in a small taxable account held by someone in a lower tax bracket - using this type of fund is probably just fine.

An 80% bond fund in a very large taxable account (relative to the portfolio) held by someone in a higher tax bracket....this type of fund is probably a mediocre to poor choice.

Does that help any?
It helps a little. But, I was really seeking a deeper answer with mathematical calculations.

OK, let me try to explain my concerns in more details.

In Canada, there's no such thing as a tax-efficient bond. All interest (e.g. bond coupons) is taxed at one's marginal rate at both the federal and provincial levels. In contrast, stocks enjoy favorable tax treatment: only half the amount of realized gains is taxed. (Like the US, unrealized gains don't attract taxes). Domestic stock dividends also attract lower tax rates than interest.

So, the traditional intuitive thinking was that, when a portfolio starts to spill into a taxable account, one should keep bonds in tax-deferred and tax-free accounts in priority and put stocks in taxable accounts.

But, recently, people have started analyzing the math of tax sheltering, and it appears that the intuitive thinking is actually wrong. I've linked, earlier, to a blog post that reports on this. The problem is that many issues are involved. The best "asset location" depends on how one implements his asset allocation. An investor who adjusts his asset allocation to future tax liabilities (what is called a tax-adjusted asset allocation) should prioritize asset location differently than an investor who doesn't adjust his asset allocation to future tax liabilities. (Most investors fall into the second category; they don't adjust their asset allocation to future tax liabilities).

And, when looking at the big picture, taking into account the contribution and withdrawal phases which are spread over decades, the outcome isn't as significant as one would intuitively think, because bonds tend to grow slower than stocks, so sheltering them in priority (traditional approach) can result is higher taxes on stock investments in taxable accounts. In other words, it's a mistake, at least in a Canadian context, to only look at the immediate tax impact (coupons vs dividends) and ignore the long-term impact of sheltering growth from taxes.

Here are some key excerpts from the blog post:
Ben Felix of PWL recently had a white paper that tried to quantify the boost you can get from being efficient with your asset location. The paper uses a Monte Carlo simulation, which can sometimes be confusing to interpret, but broadly speaking, he found the potential boost from optimization to average about 0.23%/yr. Earlier, Justin Bender and Dan Bortolotti used past returns to estimate the boost from tax efficiency in the same range, about 0.3%/yr. And this is likely at the high end of the effect – this very long post is going to get into some very confusing additional factors, but ultimately I think the gain to be had from optimizing is even less than that for most people.
optimizing your asset location may only provide modest savings and not be worth the effort and complexity: my general recommendation is not to bother and to simply copy your desired asset allocation in each account.
...(complex explanations and calculations to locate and rebalance "optimally" one's asset allocation across taxable and tax-sheltered accounts)... (Or, you know, throw your hands in the air and keep each account as an undifferentiated copy of the whole, like a perfect atom because you’re not going to mess around with the subatomic physics nonsense that this involves: particle accelerators are for nerds and supervillains).
US investing is different. Bonds and stocks are taxed differently. Yet, I'd like to know if a detailed study wouldn't get to a similar conclusion.

In Canada, using an Asset Allocation ETF in a taxable account loses maybe 0.20% per year to tax inefficient location and maybe 0.10% per year to the higher expense ratio of an all-in-one ETF, representing a 0.30% cost per year (or possibly less than that for most investors). This seems small enough for someone seeking the ultimate simplicity of a single holding per account; it's no more than one would pay for Vanguard's personal advisor service (PAS) in the US.

This is the kind of analysis and answer that I'm seeking. I'd like to know if the effective annual cost (relative to a tax-efficiently located multi-ETF portfolio) of AOR is closer to 0.30% or to something like 0.90%. How bad is it? Actually, it would be fun to see a similar analysis of the effective annual cost of the LifeStrategy funds over tax-efficiently locating its fours distinct funds across tax-sheltered and taxable accounts.

Is my question clearer, now?
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by retiredjg »

You mention Canada several times but never say you are Canadian. Are you?
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by retiredjg »

It helps a little. But, I was really seeking a deeper answer with mathematical calculations.
I'm sorry, I can't help you with this.

I generally would not put an asset allocation fund in taxable. But there could be reasons to do it - for example a spouse who can't manage the portfolio any other way.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by longinvest »

retiredjg wrote: Sun May 12, 2019 7:37 am I generally would not put an asset allocation fund in taxable. But there could be reasons to do it - for example a spouse who can't manage the portfolio any other way.
Thanks.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by AlohaJoe »

longinvest wrote: Sat May 11, 2019 10:44 am My question is: Are iShares Core in One ETFs tax-efficient enough to be recommended for a single-ETF portfolio across accounts, including a taxable account, when an investor wishes to maintain a constant (80/20, 60/40, 40/60, or 20/80) asset allocation with global stock and bond exposure?
AOR had an ER of 0.25, dividends of 1.029537 per share in 2018, no short-term capital gains, no long-term capital gains, foreign tax paid of 0.032674, and a QDI ratio of 51.39%.

Assuming a Federal tax rate of 24%, qualified dividends/long-term capital gains rate of 15%, and state tax rate of 6.27% it looks like AOR has a tax-drag of 0.59% a year when held in taxable.

(I know you said you're in Canada but tricerator's relative tax efficiency spreadsheet all this comes from is made for Americans.)

You're asking about relative, rather than absolute tax-efficiency. VOO (generally seen as the gold-standard of taxable efficiency) has a tax-drag of 0.45%.

Is an extra 0.14% a deal breaker?

VOO has taxes of $45 per $10,000 invested. AOR has taxes of $67 (and an $8 foreign tax credit) per $10,000.

So if you had $500,000 invested, it would result in an extra $700 of taxes. If you had $1,000,000 it would result in an extra $1,400 of taxes.

I don't know how one can decide whether that is efficient "enough" or not. I guess my gut feel is that AOR is probably fine in taxable. An extra $700 seems within the range of what people pay for other lifestyle simplification stuff. Like, I probably wouldn't recommend it myself but if I saw someone recommending it, I don't think I'd pick a fight.

That said, all that is based on US taxes. With Canadian taxes, especially the lack of qualified dividends, I guess it probably adds another $100 or $200 to those numbers. So maybe in Canada it is something like an extra $1,000 a year in taxes for a $500,000 portfolio? That feels a bit steep, to be honest. Dunno why "$1,000" feels like a meaningful threshold, though.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by longinvest »

AlohaJoe wrote: Mon May 13, 2019 10:43 am
longinvest wrote: Sat May 11, 2019 10:44 am My question is: Are iShares Core in One ETFs tax-efficient enough to be recommended for a single-ETF portfolio across accounts, including a taxable account, when an investor wishes to maintain a constant (80/20, 60/40, 40/60, or 20/80) asset allocation with global stock and bond exposure?
AOR had an ER of 0.25, dividends of 1.029537 per share in 2018, no short-term capital gains, no long-term capital gains, foreign tax paid of 0.032674, and a QDI ratio of 51.39%.

Assuming a Federal tax rate of 24%, qualified dividends/long-term capital gains rate of 15%, and state tax rate of 6.27% it looks like AOR has a tax-drag of 0.59% a year when held in taxable.

(I know you said you're in Canada but tricerator's relative tax efficiency spreadsheet all this comes from is made for Americans.)

You're asking about relative, rather than absolute tax-efficiency. VOO (generally seen as the gold-standard of taxable efficiency) has a tax-drag of 0.45%.

Is an extra 0.14% a deal breaker?

VOO has taxes of $45 per $10,000 invested. AOR has taxes of $67 (and an $8 foreign tax credit) per $10,000.

So if you had $500,000 invested, it would result in an extra $700 of taxes. If you had $1,000,000 it would result in an extra $1,400 of taxes.

I don't know how one can decide whether that is efficient "enough" or not. I guess my gut feel is that AOR is probably fine in taxable. An extra $700 seems within the range of what people pay for other lifestyle simplification stuff. Like, I probably wouldn't recommend it myself but if I saw someone recommending it, I don't think I'd pick a fight.
That was the kind of analysis I was looking for. My goal was to know if it was OK to suggest all-in-one ETFs to US members seeking simplicity in their portfolio, even if it's in a taxable account, and be able to provide information about the tax consequences of such a choice.

Thanks!

Note that it would be interesting if you did a similar analysis for a LifeStrategy fund such as VSMGX.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by BackToSchoolDad »

Bumping this thread to try to get an answer to Longinvest's final question.

Assuming one is satisfied with the underlying holdings, does the tax efficiency of iShares Core Moderate Allocation ETF AOM make it preferable to Vanguard Lifestrategy Conservative Growth in a taxable account?

The core allocation ETFs have only distributed gains once as noted in the thread, while the Lifestrategy appear to distribute them fairly regularly. Based on my very rudimentary calculations, the tax efficiency of the ETFs greatly outweighs the slight increase in ER.

Am I correct?
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by retiredjg »

I don't know for sure, but I do not think that is correct.

The tax-efficiency of the funds you are comparing probably depends mostly on the bond dividends. I would think the distributed gains contributes very little in relation to the bond dividends.

The lower the tax bracket, the less it matters. The greater the desire for simplicity, the less it matters. For a person in the 12% bracket who really values simplicity and who will spend the income anyway, either might be an appropriate choice.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by BackToSchoolDad »

retiredjg wrote: Mon Feb 22, 2021 11:08 am I don't know for sure, but I do not think that is correct.

The tax-efficiency of the funds you are comparing probably depends mostly on the bond dividends. I would think the distributed gains contributes very little in relation to the bond dividends.

The lower the tax bracket, the less it matters. The greater the desire for simplicity, the less it matters. For a person in the 12% bracket who really values simplicity and who will spend the income anyway, either might be an appropriate choice.
They both feature taxable bonds, total Bond and total international bond, so I would think they are similar in that regard.

Last December, Lifestrategy Conservative Growth distributed 0.24 LT gains, 0.11 ST gains, and 0.11 per share of dividends. The iShares Core equivalent AOM had no gains and distribute 0.26 dividends per share.

That seems like a pretty significant difference to me.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by retiredjg »

I did not think this would be easy to look up but it is.

Look at "performance" for each fund on it's own house website (not Morningstar). Subtract "return after distribution" (or some words like that) from return (or total return). Do not use "return after liquidation".

What you get is called the "tax cost" or "tax cost ratio".

You will find that the 1 year tax costs are somewhat different with AOM being a winner. I usually don't pay much attention to 1 year.

The 5 year tax cost for AOM was .93 and for LSCG is .99. This is not a significant difference. I didn't look further. You should play with the numbers yourself.

I would not be fond of either in taxable myself. I prefer tax costs to be nearer .5%. But there are certain situations where either of these might be a good choice.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by BackToSchoolDad »

retiredjg wrote: Mon Feb 22, 2021 11:22 am I did not think this would be easy to look up but it is.

Look at "performance" for each fund on it's own house website (not Morningstar). Subtract "return after distribution" (or some words like that) from return (or total return). Do not use "return after liquidation".

What you get is called the "tax cost" or "tax cost ratio".

You will find that the 1 year tax costs are somewhat different with AOM being a winner. I usually don't pay much attention to 1 year.

The 5 year tax cost for AOM was .93 and for LSCG is .99. This is not a significant difference. I didn't look further. You should play with the numbers yourself.

I would not be fond of either in taxable myself. I prefer tax costs to be nearer .5%. But there are certain situations where either of these might be a good choice.
Very helpful, thanks! I'm looking at one of these funds for my mother's portfolio which is entirely in taxable.

When you look at 10 years the difference is bigger, but only by about 25 basis points. This isn't as much as I initially thought; still more than the difference in the ER.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by sycamore »

BackToSchoolDad wrote: Mon Feb 22, 2021 1:33 pm
retiredjg wrote: Mon Feb 22, 2021 11:22 am Look at "performance" for each fund on it's own house website (not Morningstar). Subtract "return after distribution" (or some words like that) from return (or total return). Do not use "return after liquidation".

What you get is called the "tax cost" or "tax cost ratio".
...
Very helpful, thanks! I'm looking at one of these funds for my mother's portfolio which is entirely in taxable.

When you look at 10 years the difference is bigger, but only by about 25 basis points. This isn't as much as I initially thought; still more than the difference in the ER.
Note, at least for Vanguard:
After-tax returns are calculated using the highest individual federal income tax rates in effect at the time of each distribution. They don't reflect the impact of state and local taxes.
so if you're in a lower tax bracket then the tax cost will be lower than what's described above.

If you want data on your tax bracket, you'll probably have to compute the tax cost as discussed in the old thread "2017 Relative Tax Efficiency".
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by tj »

One should also consider the Vanguard Digital Advisor, and manipulating the allocation to be what you would want it to be. That way, you would get the foreign tax credit on the foreign funds.....the expense ratio should not be more than the iShares product, and new contributions will be allocated appropriately between the 4 ETFs automatically.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by BackToSchoolDad »

tj wrote: Mon Feb 22, 2021 8:32 pm One should also consider the Vanguard Digital Advisor, and manipulating the allocation to be what you would want it to be. That way, you would get the foreign tax credit on the foreign funds.....the expense ratio should not be more than the iShares product, and new contributions will be allocated appropriately between the 4 ETFs automatically.
Certainly a compelling option that I'll have to consider, but if we're going that route it makes more sense to me to just invest in the same funds as LSCG via M1 and utilize their rebalancing.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by tj »

BackToSchoolDad wrote: Tue Feb 23, 2021 8:35 am
tj wrote: Mon Feb 22, 2021 8:32 pm One should also consider the Vanguard Digital Advisor, and manipulating the allocation to be what you would want it to be. That way, you would get the foreign tax credit on the foreign funds.....the expense ratio should not be more than the iShares product, and new contributions will be allocated appropriately between the 4 ETFs automatically.
Certainly a compelling option that I'll have to consider, but if we're going that route it makes more sense to me to just invest in the same funds as LSCG via M1 and utilize their rebalancing.
A reasonable option, plus they probably are still offering incentives to bring in assets.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by lrobb »

Throwing out some numbers from Fidelity.


VTI - Total US Stock

Tax Cost Ratio 0.32%

VXUS - Total Intl

Tax Cost Ratio 0.86%

BND - Total Bond

Tax Cost Ratio 0.82%

AOM - iShares Moderate Allocation

Tax Cost Ratio 0.64%
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by sycamore »

lrobb wrote: Mon Jan 17, 2022 12:06 pm Throwing out some numbers from Fidelity.


VTI - Total US Stock

Tax Cost Ratio 0.32%

VXUS - Total Intl

Tax Cost Ratio 0.86%

BND - Total Bond

Tax Cost Ratio 0.82%

AOM - iShares Moderate Allocation

Tax Cost Ratio 0.64%
Did Fidelity indicate what federal & state tax rates they used for their calculations?
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by grabiner »

lrobb wrote: Mon Jan 17, 2022 12:06 pm Throwing out some numbers from Fidelity.


VTI - Total US Stock

Tax Cost Ratio 0.32%

VXUS - Total Intl

Tax Cost Ratio 0.86%

BND - Total Bond

Tax Cost Ratio 0.82%

AOM - iShares Moderate Allocation

Tax Cost Ratio 0.64%
These numbers (which come from Morningstar) assume the highest federal tax rate and no state tax. And in the case of VXUS and presumably AOM, I also believe they ignore the foreign tax credit; a 3% yield, 2/3 qualified, would be a 0.77% tax cost in the top bracket, which would become 0.53% if 8% of the dividend is withheld as foreign tax. Another issue is that Morningstar doesn't always know about qualified dividends.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by tj »

grabiner wrote: Mon Jan 17, 2022 5:43 pm
lrobb wrote: Mon Jan 17, 2022 12:06 pm Throwing out some numbers from Fidelity.


VTI - Total US Stock

Tax Cost Ratio 0.32%

VXUS - Total Intl

Tax Cost Ratio 0.86%

BND - Total Bond

Tax Cost Ratio 0.82%

AOM - iShares Moderate Allocation

Tax Cost Ratio 0.64%
These numbers (which come from Morningstar) assume the highest federal tax rate and no state tax. And in the case of VXUS and presumably AOM, I also believe they ignore the foreign tax credit; a 3% yield, 2/3 qualified, would be a 0.77% tax cost in the top bracket, which would become 0.53% if 8% of the dividend is withheld as foreign tax. Another issue is that Morningstar doesn't always know about qualified dividends.
Is AOM going to get a foreign tax credit? Is it not an ETF of ETFs?
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by longinvest »

It's surprising to see the difference in how the LifeStrategy Funds and the iShares Core ETFs are named:

iShares Core ETFs
Image

LifeStrategy Funds
Image

iShares Core Moderate ETF (AOM) is 40/60 stocks/bonds and corresponds to LifeStrategy Conservative Growth Fund (VSCGX).

iShares Core Growth ETF (AOR) is 60/40 stocks/bonds and corresponds to LifeStrategy Moderate Growth Fund (VSMGX).

iShares Core Aggressive ETF (AOA) is 80/20 stocks/bonds and corresponds to LifeStrategy Growth Fund (VASGX).

Here are after-tax growth comparisons for the 60/40 stocks/bonds allocation (iShares Core Growth and LifeStrategy Moderate Growth):

Code: Select all

Returns after taxes on distributions as of December 31, 2021
Ticker   1y     3y     5y     10y
VSMGX   8.88% 13.17%  9.24%  8.14%
AOR    10.56% 13.11%  9.12%  8.06%

Code: Select all

Returns after taxes on distributions and sales of fund shares as of December 31, 2021
Ticker   1y     3y     5y     10y
VSMGX   6.45% 10.91%  7.83%  7.10%
AOR     6.75% 10.61%  7.61%  6.92%
(Data source: Fund provider and ETF provider websites)
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by grabiner »

longinvest wrote: Sat May 11, 2019 3:11 pm OK, let me try to explain my concerns in more details.

In Canada, there's no such thing as a tax-efficient bond. All interest (e.g. bond coupons) is taxed at one's marginal rate at both the federal and provincial levels. In contrast, stocks enjoy favorable tax treatment: only half the amount of realized gains is taxed. (Like the US, unrealized gains don't attract taxes). Domestic stock dividends also attract lower tax rates than interest.

So, the traditional intuitive thinking was that, when a portfolio starts to spill into a taxable account, one should keep bonds in tax-deferred and tax-free accounts in priority and put stocks in taxable accounts.
This actually isn't that different from the US situation. A US taxpayer in the 24% tax bracket pays 24% tax on bond interest, but 15% on realized stock gains, 15% on stock dividends, and no tax on unrealized gains until the stock is sold. (US munis are tax-exempt, but not necessarily tax-efficient, as they have lower yields than taxable bonds of comparable risk.)

And in both the US and Canada, a bond with a low yield is more tax-efficient, because the high tax rate is imposed on a lower amount of interest. The total fraction of the stock value lost to taxes may be higher, because it is a lower tax rate imposed on a higher return.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by David Jay »

longinvest wrote: Mon Jan 17, 2022 10:16 pmiShares Core Aggressive ETF (AOA) is 80/20 stocks/bonds and corresponds to LifeStrategy Growth Fund (VASGX).
VASGX was called LifeStrategy Aggressive Growth (as opposed to Moderate Growth) until quite recently (2-3 years???)

I guess the marketing folks decided that allocation fund buyers aren't the aggressive type...
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by bbrock »


I subscribed to this thread, it’s not showing up in my subscriptions, so making this post.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by tj »

If anyone owns these funds, they'll be able to report back after the year end distributions. I will see how tax efficient AVGE is myself. :mrgreen:
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by GoatInvestor »

longinvest wrote: Mon Jan 17, 2022 10:16 pm ...
Here are after-tax growth comparisons for the 60/40 stocks/bonds allocation (iShares Core Growth and LifeStrategy Moderate Growth):

Code: Select all

Returns after taxes on distributions as of December 31, 2021
Ticker   1y     3y     5y     10y
VSMGX   8.88% 13.17%  9.24%  8.14%
AOR    10.56% 13.11%  9.12%  8.06%

Code: Select all

Returns after taxes on distributions and sales of fund shares as of December 31, 2021
Ticker   1y     3y     5y     10y
VSMGX   6.45% 10.91%  7.83%  7.10%
AOR     6.75% 10.61%  7.61%  6.92%
(Data source: Fund provider and ETF provider websites)
These returns look like it's slightly more efficient overall to hold VSMGX over AOR. Is that correct?
I currently have 100% of my taxable account in VSMGX.
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Re: How tax-efficient are iShares Core in One ETFs in a taxable account?

Post by retiredjg »

These are not the numbers to compare.

What you want is Returns Before Taxes minus Returns after taxes on distributions. That generates a number. The lower the number, the more tax-efficient the fund is.

Returns after taxes on distributions and sales of fund shares is not used at all to figure out tax cost because it assumes all shares are sold.

At least...that's how I was taught (here) to do it many years ago.
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