ETF Tax Advantage

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firmsoil
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ETF Tax Advantage

Post by firmsoil »

I am looking at 10-Year Total Return % for the following industry's star financial products and do not find a significant difference that illustrates the much talked about "tax-efficiency advantage" aspect of owing ETFs like IVV and VOO over a TIF like FXAIX.

Ticker Symbol 10-Year Total Return %
FXAIX 16.15%
IVV 16.12%
VOO 16.13%

Sources:
https://www.morningstar.com/funds/xnas/ ... erformance
https://www.morningstar.com/etfs/arcx/ivv/performance
https://www.morningstar.com/etfs/arcx/voo/performance

Your thoughts and comments that shed light on this are welcome.
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anon_investor
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Re: ETF Tax Advantage

Post by anon_investor »

firmsoil wrote: Wed Dec 01, 2021 8:28 pm I am looking at 10-Year Total Return % for the following industry's star financial products and do not find a significant difference that illustrates the much talked about "tax-efficiency advantage" aspect of owing ETFs like IVV and VOO over a TIF like FXAIX.

Ticker Symbol 10-Year Total Return %
FXAIX 16.15%
IVV 16.12%
VOO 16.13%

Sources:
https://www.morningstar.com/funds/xnas/ ... erformance
https://www.morningstar.com/etfs/arcx/ivv/performance
https://www.morningstar.com/etfs/arcx/voo/performance

Your thoughts and comments that shed light on this are welcome.
Those are "total return" numbers, not "after-tax" return numbers.
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David Jay
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Re: ETF Tax Advantage

Post by David Jay »

Morningstar Total Return is pre-tax. It does not factor in taxes in any manner.
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Re: ETF Tax Advantage

Post by anon_investor »

firmsoil wrote: Wed Dec 01, 2021 10:04 pm Thank much for your responses.

Is there any open-source tool/calculator that reports typical adjusted returns that account for the (typically) annual dividend distributions that TIFs report even if they are reinvested in additional shares on which the TIF shareholders are made to owe taxes...
For a rough estimate you can look on Fidelity:

VOO:
https://screener.fidelity.com/ftgw/etf/ ... ymbols=VOO

IVV:
https://screener.fidelity.com/ftgw/etf/ ... ymbols=IVV

FXAIX:
https://fundresearch.fidelity.com/mutua ... e=o-NavBar
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firmsoil
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Re: ETF Tax Advantage

Post by firmsoil »

Thanks again for sharing the links. Looks like "Returns after taxes on distributions" (as shown below) seem to be the closest to incorporating the tax efficiency or dodge (depending on your point of view).

Symbol 10 Yr Market Return
ivv 15.95%
fxaix 16.02%
voo 16.07%

Overall the differences here seem not to be substantially large with IVV ETF return slightly lower than FXAIX TIF.

https://screener.fidelity.com/ftgw/etf/ ... ymbols=IVV
https://fundresearch.fidelity.com/mutua ... e=o-NavBar
https://investor.vanguard.com/etf/profi ... rmance/voo
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anon_investor
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Re: ETF Tax Advantage

Post by anon_investor »

firmsoil wrote: Wed Dec 01, 2021 10:44 pm Thanks again for sharing the links. Looks like "Returns after taxes on distributions" (as shown below) seem to be the closest to incorporating the tax efficiency or dodge (depending on your point of view).

Symbol 10 Yr Market Return
ivv 15.95%
fxaix 16.02%
voo 16.07%

Overall the differences here seem not to be substantially large with IVV ETF return slightly lower than FXAIX TIF.

https://screener.fidelity.com/ftgw/etf/ ... ymbols=IVV
https://fundresearch.fidelity.com/mutua ... e=o-NavBar
https://investor.vanguard.com/etf/profi ... rmance/voo
I wonder if IVV's slightly lower performance can be attributed to its higher expense ratios over the years. Only recently did iShares lower it to match VOO.
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Re: ETF Tax Advantage

Post by nalor511 »

Unnecessary capital gains distributions have a greater effect than just the raw taxes on those distributions. They increase your AGI which can affect things like ACA subsidy, and many other tax credits

Especially because you have an avenue to avoid them. ETFs
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Re: ETF Tax Advantage

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firmsoil
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Re: ETF Tax Advantage

Post by firmsoil »

https://www.morningstar.com/articles/83 ... ratio-tool seems like the tool for researching this aspect the TIFs tax efficiency.
livesoft
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Re: ETF Tax Advantage

Post by livesoft »

firmsoil wrote: Sat Dec 04, 2021 9:38 am https://www.morningstar.com/articles/83 ... ratio-tool seems like the tool for researching the TIFs tax efficiency.
I suppose if one was in the highest marginal income tax bracket and paid no state income taxes and didn't know anything about the Foreign Tax Credit, then that tool might work. There are better tools if you can find the input data. For instance the spreadsheet linked in this thread: viewtopic.php?t=342995

That way, one can plug in their own personal tax situation.

The reality is that passively-managed, low-expense ratio index funds are quite tax-efficient whether they are mutual funds or ETFs. If you like to hoe around in the weeds that are less than a eighth of an inch high, then the spreadsheet is for you. Otherwise, ETFs vs mutual funds of the same or similar passive-managed index are virtually identical in terms of tax efficiency.

But let us know what you figure out please. :)
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Re: ETF Tax Advantage

Post by grabiner »

livesoft wrote: Sat Dec 04, 2021 9:56 am
firmsoil wrote: Sat Dec 04, 2021 9:38 am https://www.morningstar.com/articles/83 ... ratio-tool seems like the tool for researching the TIFs tax efficiency.
I suppose if one was in the highest marginal income tax bracket and paid no state income taxes and didn't know anything about the Foreign Tax Credit, then that tool might work. There are better tools if you can find the input data.
And it's better to get the data from the source. Morningstar doesn't always know about qualified dividends, so its tax cost ratios are sometimes too high. Vanguard's tax costs on Vanguard funds are more reliable.
For instance the spreadsheet linked in this thread: viewtopic.php?t=342995

That way, one can plug in their own personal tax situation.

The reality is that passively-managed, low-expense ratio index funds are quite tax-efficient whether they are mutual funds or ETFs. If you like to hoe around in the weeds that are less than a eighth of an inch high, then the spreadsheet is for you. Otherwise, ETFs vs mutual funds of the same or similar passive-managed index are virtually identical in terms of tax efficiency.
ETFs still have an advantage in higher-turnover asset classes. For example, Fidelity Extended Market Index regularly distributes significant capital gains (6% of NAV in April 2021); Vanguard Extended Market Index hasn't distributed any since it added an ETF class.
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firmsoil
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Re: ETF Tax Advantage

Post by firmsoil »

A well researched article that sheds light in this context (within the vanguard universe) is https://seekingalpha.com/article/446859 ... -long-term.
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Re: ETF Tax Advantage

Post by arcticpineapplecorp. »

when the patent on vanguard mutual funds expire in 2023, will the fund start distribute gains that are now excluded? if so, would etfs be more advantageous than the corresponding mutual fund after 2023?
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Re: ETF Tax Advantage

Post by anon_investor »

arcticpineapplecorp. wrote: Sat Dec 11, 2021 9:29 am when the patent on vanguard mutual funds expire in 2023, will the fund start distribute gains that are now excluded? if so, would etfs be more advantageous than the corresponding mutual fund after 2023?
It shouldn't. The patent expiration just means other companies can start using the same strategy.
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Re: ETF Tax Advantage

Post by arcticpineapplecorp. »

anon_investor wrote: Sat Dec 11, 2021 9:46 am
arcticpineapplecorp. wrote: Sat Dec 11, 2021 9:29 am when the patent on vanguard mutual funds expire in 2023, will the fund start distribute gains that are now excluded? if so, would etfs be more advantageous than the corresponding mutual fund after 2023?
It shouldn't. The patent expiration just means other companies can start using the same strategy.
ah, that makes sense. good to know. thanks.
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Re: ETF Tax Advantage

Post by anon_investor »

arcticpineapplecorp. wrote: Sat Dec 11, 2021 10:39 am
anon_investor wrote: Sat Dec 11, 2021 9:46 am
arcticpineapplecorp. wrote: Sat Dec 11, 2021 9:29 am when the patent on vanguard mutual funds expire in 2023, will the fund start distribute gains that are now excluded? if so, would etfs be more advantageous than the corresponding mutual fund after 2023?
It shouldn't. The patent expiration just means other companies can start using the same strategy.
ah, that makes sense. good to know. thanks.
To he honest, I doubt other companies will bother. The recent trend has been for companies to wholesale convert their mutual funds to ETFs. Having a dual share class probably only makes sense when you have very large funds like Vanguard. It is much cheaper to run an all ETF fund.
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