The Vanguard Total Stock Market has a Realized capital loss of -$1.07

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iamblessed
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The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by iamblessed »

Will that get passed to us?
alex_686
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by alex_686 »

No.

The fund has a ETF class. It probably will never need to distribute a capital gains. As such it will never need to use realized losses to offset gains.
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iamblessed
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by iamblessed »

alex_686 wrote: Wed Sep 22, 2021 8:27 pm No.

The fund has a ETF class. It probably will never need to distribute a capital gains. As such it will never need to use realized losses to offset gains.
True but how about those in the mutual fund?
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nps
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by nps »

iamblessed wrote: Wed Sep 22, 2021 8:46 pm
alex_686 wrote: Wed Sep 22, 2021 8:27 pm No.

The fund has a ETF class. It probably will never need to distribute a capital gains. As such it will never need to use realized losses to offset gains.
True but how about those in the mutual fund?
The ETF class allows the mutual fund to avoid distributing capital gains.
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Silly Wabbit
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by Silly Wabbit »

nps wrote: Wed Sep 22, 2021 8:52 pm
iamblessed wrote: Wed Sep 22, 2021 8:46 pm
alex_686 wrote: Wed Sep 22, 2021 8:27 pm No.

The fund has a ETF class. It probably will never need to distribute a capital gains. As such it will never need to use realized losses to offset gains.
True but how about those in the mutual fund?
The ETF class allows the mutual fund to avoid distributing capital gains.
How does the mechanic work?
alex_686
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by alex_686 »

Silly Wabbit wrote: Wed Sep 22, 2021 8:57 pm How does the mechanic work?
Most things are calculated at the fund level. For example, income.

Only class specific expenses are calculated at the class level.

Check my sig. This used to be my day job.
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by woof755 »

Silly Wabbit wrote: Wed Sep 22, 2021 8:57 pm
nps wrote: Wed Sep 22, 2021 8:52 pm
iamblessed wrote: Wed Sep 22, 2021 8:46 pm
alex_686 wrote: Wed Sep 22, 2021 8:27 pm No.

The fund has a ETF class. It probably will never need to distribute a capital gains. As such it will never need to use realized losses to offset gains.
True but how about those in the mutual fund?
The ETF class allows the mutual fund to avoid distributing capital gains.
How does the mechanic work?
https://www.bloomberg.com/graphics/2019 ... tax-dodge/


Vanguard attaches a more tax-efficient ETF to an existing mutual fund. Then the ETF siphons appreciated stocks out of the mutual fund without incurring taxes
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing
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Silly Wabbit
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by Silly Wabbit »

alex_686 wrote: Wed Sep 22, 2021 9:12 pm
Silly Wabbit wrote: Wed Sep 22, 2021 8:57 pm How does the mechanic work?
Most things are calculated at the fund level. For example, income.

Only class specific expenses are calculated at the class level.

Check my sig. This used to be my day job.
Thanks! So, within a fund, shares of a stock are fungible letting vanguard use appreciated shares to fill redemptions of the ETF. Is that right?

https://www.investopedia.com/how-vangua ... ds-4686985

How does this apply to capital losses?
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Silly Wabbit
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by Silly Wabbit »

woof755 wrote: Wed Sep 22, 2021 9:14 pm
Silly Wabbit wrote: Wed Sep 22, 2021 8:57 pm
nps wrote: Wed Sep 22, 2021 8:52 pm
iamblessed wrote: Wed Sep 22, 2021 8:46 pm
alex_686 wrote: Wed Sep 22, 2021 8:27 pm No.

The fund has a ETF class. It probably will never need to distribute a capital gains. As such it will never need to use realized losses to offset gains.
True but how about those in the mutual fund?
The ETF class allows the mutual fund to avoid distributing capital gains.
How does the mechanic work?
https://www.bloomberg.com/graphics/2019 ... tax-dodge/


Vanguard attaches a more tax-efficient ETF to an existing mutual fund. Then the ETF siphons appreciated stocks out of the mutual fund without incurring taxes
Thanks. Here's a non pay walled article.

https://www.investopedia.com/how-vangua ... ds-4686985
alex_686
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by alex_686 »

Silly Wabbit wrote: Wed Sep 22, 2021 11:41 pm Thanks! So, within a fund, shares of a stock are fungible letting vanguard use appreciated shares to fill redemptions of the ETF. Is that right?
...
How does this apply to capital losses?
I would not use the word "fungible", but you have the general point.

Could you be more specific on your second point? I am not quite following your question. Here is my attempt.

I would like to underline that there is a difference between Total Returns (a.k.a. economic returns) and Accounting Income (a.k.a. "Reportable Transactions" to the IRS). One certainly can have positive Total Returns and yet show a accounting loss.

What we are talking about is strictly about Accounting Income. It has nothing to do with a fund's performance.

A fund for a given year will either have a net Capital Gain or a net Capital Loss. You just take all of trades, figure out each trade's gain or loss, and sum.

If you have a net Capital Gain the fund has to pay that out at the end of the year. i.e., if you had profits (i.e. income) you have to pay taxes on that.

If you have a net Capital Loss you don't pay out anything out at the end of the year. i.e., no profits, no taxes.

There is a twist. If you (or the fund) have losses you can carry over those losses for 7 years and you can use them to offset any gains over the next 7 years.

For example, lets say VTI had 700b in capital gains next year. Normally it would pay out those 700b as a capital gains dividends. But the accounts would use 1.1b in carry over losses to offset the 700b in capital gains. So $0 capital gains dividends and the fund would have 400b in carry over losses.

Except that we don't expect VTI to every have capital gains. Technically the redemptions (a.k.a. sale) of the ETF shares are not a "trade", thus no realized gains or losses. So Vanguard (and any other ETF fund) always redeems shares that have would have capital gains, thus they never have any capital gains. There are exceptions where this does not hold but most consider this as a low probability.
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by cas »

iamblessed wrote: Wed Sep 22, 2021 8:23 pm Will that get passed to us?
No. The regulations say that mutual funds must pass through net annual (fund-level) realized gains (Box 2a on 1099-DIV "Total Capital Gain Distribution"), but not losses, to the individual shareholders.

Here's a quote from a Forbes article discussing why there is such a thing as "capital gains distributions," but not such a thing as "capital loss distributions":
The [mutual fund capital gains]distributions go down a one-way street. Gains and net income are distributed. Losses are not distributed.

If the fund has a net loss from its trading, this can’t be passed through to you for you to use on your tax return. The fund just sits on it, carrying the loss forward to later years when it can be used to offset a gain.
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by Silly Wabbit »

alex_686 wrote: Thu Sep 23, 2021 8:46 am
Silly Wabbit wrote: Wed Sep 22, 2021 11:41 pm Thanks! So, within a fund, shares of a stock are fungible letting vanguard use appreciated shares to fill redemptions of the ETF. Is that right?
...
How does this apply to capital losses?
I would not use the word "fungible", but you have the general point.

Could you be more specific on your second point? I am not quite following your question. Here is my attempt.

I would like to underline that there is a difference between Total Returns (a.k.a. economic returns) and Accounting Income (a.k.a. "Reportable Transactions" to the IRS). One certainly can have positive Total Returns and yet show a accounting loss.

What we are talking about is strictly about Accounting Income. It has nothing to do with a fund's performance.

A fund for a given year will either have a net Capital Gain or a net Capital Loss. You just take all of trades, figure out each trade's gain or loss, and sum.

If you have a net Capital Gain the fund has to pay that out at the end of the year. i.e., if you had profits (i.e. income) you have to pay taxes on that.

If you have a net Capital Loss you don't pay out anything out at the end of the year. i.e., no profits, no taxes.

There is a twist. If you (or the fund) have losses you can carry over those losses for 7 years and you can use them to offset any gains over the next 7 years.

For example, lets say VTI had 700b in capital gains next year. Normally it would pay out those 700b as a capital gains dividends. But the accounts would use 1.1b in carry over losses to offset the 700b in capital gains. So $0 capital gains dividends and the fund would have 400b in carry over losses.

Except that we don't expect VTI to every have capital gains. Technically the redemptions (a.k.a. sale) of the ETF shares are not a "trade", thus no realized gains or losses. So Vanguard (and any other ETF fund) always redeems shares that have would have capital gains, thus they never have any capital gains. There are exceptions where this does not hold but most consider this as a low probability.
Thanks, your explanation makes complete sense! My confusion was around whether a funds capital loss would be distributed to fund holders. You resolved it.
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by Nate7out »

This is all discussed in depth on a recent Bogleheads podcast with the fund managers for VTSAX.
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by woof755 »

Nate7out wrote: Thu Sep 23, 2021 10:19 am This is all discussed in depth on a recent Bogleheads podcast with the fund managers for VTSAX.
So good, that pod
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by Northern Flicker »

The loss will be used to offset a gain. The net effect is that fewer shares of securities will need to participate in heartbeat trades to manage gains, reducing fund transaction costs born by investors in the fund by a little bit.
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by nisiprius »

At the moment, Vanguard is the only fund company that is able to combine ETFs and mutual funds this way, because it has a patent on the business process for creating ETFs as mutual fund share classes. The podcast referenced by others indicates that this has confers advantages on both the ETF and the mutual fund. The mutual fund gets the tax advantages of the ETF. The ETF is able to track indexes containing small microcaps without needing to make frequent trades of the smallest ones (I didn't quite understand that part).

It's this patent, "Investment company that issues a class of conventional shares and a class of exchange-traded shares in the same fund;" US patent US6879964B2, Inventor George U. Sauter and Walter Lenhard, Current Assignee Vanguard Group Inc.

Image

Doesn't it seem quaint to see that as recently as 2001, people were still using Rapidograph-pen-and-ink and Leroy lettering sets to draw charts? I always wanted to own a Leroy lettering set, but by the time I could afford one I already had MacDraw...

Vanguard originally called these ETFs "VIPERs," because SPDR's ETFs were called "Spiders." I assume that VIPER was a clumsy backronym; it was supposed to stand for Vanguard Index Participation Equity Receipts. The name VIPER was dropped; my guesses are that either they just wanted investors to think of them as "ETFs" and not stress over what the differences between "an ETF" and "a VIPER" might be, or that not all of them invest in equities.

The patent expires in 2023.

ETF fans sometimes suggest mutual funds are dinosaurs and will be supplanted by ETFs. (Radio host Ric Edelman said in 2009 that mutual funds would be completely gone in ten years; in fact mutual funds currently hold five times the amount of assets that ETFs hold). We will get an interesting reading on this in 2023. If mutual funds are irrelevant, other companies will not bother to do what Vanguard has done, and it will continue to be the only company in which ETFs are share classes of the mutual fund. On the other hand, if other companies do adopt the Vanguard system and produce ETF classes of their index funds, that will be good evidence that mutual funds are still meaningful.

It's worth remembering that many things about mutual funds and ETFs, particularly tax considerations, are not laws of nature, but provisions of the Investment Company Act of 1940 and other laws and regulations.
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Re: The Vanguard Total Stock Market has a Realized capital loss of -$1.07

Post by sycamore »

woof755 wrote: Thu Sep 23, 2021 10:38 pm
Nate7out wrote: Thu Sep 23, 2021 10:19 am This is all discussed in depth on a recent Bogleheads podcast with the fund managers for VTSAX.
So good, that pod
+1

And there's a Bogleheads thread discussing the podcast. Links to the podcast are in the first post.
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