2022 tax costs for value ETFs

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grabiner
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2022 tax costs for value ETFs

Post by grabiner »

Here is 2022 data on the components of the tax cost of value factor ETFs, and of Vanguard's popular non-factor alternatives (both value and blend), as guidance for which ETFs should be held in a taxable account. I posted similar data for the last two years as 2021 tax costs for value ETFs and [2020] Tax costs for US and international value ETFs.

In 2022, emerging markets yields were three times US stock yields. Thus emerging markets were poor choices for a taxable account, whether you are a factor investor or not. Most developed-markets ETFs were somewhat less tax-efficient than the US counterparts. However, VSS had an extremely large foreign tax credit, which made it very tax-efficient (unless you run into a foreign tax credit limitation on Form 1116). If you hold both blend and factor funds, the blend funds were more tax-efficient in 2022, with the possible exception of emerging markets (AVES is in its first year and emerging markets were anomalous in 2022).

There is data for a few pairs of ETFs competing in the same segment. For US value, the tax differences are very small, and part of the dividend yield difference is the result of Vanguard having lower expenses (0.13%) than Avantis (0.20% for a 50/50 split) than DFA (0.29%); taxes shouldn't affect your choice of fund. For international large-cap value, IVLU and AVIV have very different profiles but similar costs; AVIV, with a lower dividend yield but less foreign tax, is more tax-efficient if you pay a high tax rate on qualified dividends (living in a high-tax state, or paying 23.8% rather than 15% federal because of high income). In an IRA, prefer AVIV because there is less lost foreign tax. DFIV has an even higher yield, and the estimated foreign tax is lower, so it is an inferior choice for a taxable account.

For each fund, the dividend yield is computed as the taxable dividend divided by the 12/30/22 share price. Note that this will be more than the distribution yield for international funds, because of the foreign tax credit.

To compute your own tax cost, take

Dividend yield * [(Qualified percentage*QDI tax rate)+((1-Qualified percentage)*normal tax rate)-FTC]

For example, a fund with 70% qualified dividends and 8% foreign tax has a tax cost in a 24% bracket of (.7*.15+.3*.24-.08)=9.7% of its dividend yield, or 0.19% if the dividend yield is 2.00% (and the distribution yield is 1.84%).

Code: Select all

Ticker  Name                                   Yield   FTC     Qualified
VTI     Vanguard Total Stock Market            1.66%   0       94%
VB      Vanguard Small-Cap                     1.54%   0       78%
VBR     Vanguard Small-Cap Value               2.03%   0       82%
AVLV    Avantis US Large-Cap Value             2.00%   0       100%        
VFVA    Vanguard Factor Value                  2.21%   0       100%
DFUV    DFA US Marketwide Value                1.74%   0       100%
AVUV    Avantis US Small-Cap Value             1.74%   0       100%

VXUS    Vanguard Total International           3.34%   7.85%   74%
VSS     Vanguard FTSE Ex-US Small-Cap          2.71%   15.48%  73%
IVLU    iShares MSCI Factor Value (large-cap)  3.91%   8.21%   100%
AVIV    Avantis International Large-Cap Value  2.97%   4.52%   89%
DFIV    DFA International Value                4.30%*  6.19%*  100%
AVDV    Avantis International Small-Cap Value  3.41%   6.95%   75%

VWO     Vanguard Emerging Markets              4.49%   8.47%   24%
AVES    Avantis Emerging Markets Value         4.07%   9.12%   55%
* - not published by fund provider; estimated from last annual report
DFA does not publish the foreign tax credit amount directly. The foreign tax from DFIV is estimated from the annual report, which gives the foreign tax as a percentage of income in the fiscal year ended 10/31/22; the dividend yield is obtained from the distribution yield by dividing by (1-6.19%). DFA also has value ETFs for US small-cap, US large-cap, and emerging markets with less than one year of data; these may be included next year.

Data sources:
Avantis: ETF Tax Information (XLS) (currently, the "Tax Distribution Information" is for 2021)

DFA: Tax Sheet (In the Document Center, click on the Tax Sheet for any ETF) and DFIV Annual Report

iShares: 2022 Distribution Summary Information

Vanguard: Vanguard funds that are eligible for the foreign tax credit (PDF) and Vanguard funds that distributed qualified dividend income. Note that Vanguard's reported foreign tax percentage is the percentage of the distribution amount, while the number in the table above is the percentage of the total dividend. For example, if a fund has a $100 dividend and $10 is withheld as foreign tax, the table would show 10/100=10%, while Vanguard would report 10/90=11.11%.

(Edited to correct AVUV and VWO yields)
(Later edit to add DFIV)
Last edited by grabiner on Wed Feb 08, 2023 10:04 pm, edited 5 times in total.
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BenS
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Re: 2022 tax costs for value ETFs

Post by BenS »

Hi Grabiner,

Thank you for your help. As far as I can tell while Avantis lists 2022 distribution QDI/foreign tax information in their tax center, that spreadsheet link you posted is for FY 21. See the top left. Do you have access to the FY 22 sheet? Did I miss something?

Thanks,
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Re: 2022 tax costs for value ETFs

Post by grabiner »

BenS wrote: Sun Feb 05, 2023 8:54 pm Thank you for your help. As far as I can tell while Avantis lists 2022 distribution QDI/foreign tax information in their tax center, that spreadsheet link you posted is for FY 21. See the top left. Do you have access to the FY 22 sheet? Did I miss something?
I corrected the link. I did use the correct 2022 data in the table.
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Re: 2022 tax costs for value ETFs

Post by BenS »

grabiner wrote: Sun Feb 05, 2023 8:22 pm
DFA does not publish the foreign tax credit amount, so I cannot include DFA's foreign ETFs in this table, as that is an important part of the tax cost. (There have also been requests in previous years for Schwab's funds FNDF and FNDC, and I can't find foreign tax credit on Schwab's site.) I also cannot give data for DFA's US small-cap and large-cap value ETFs, which were new in 2022 and thus do not yet have one year of dividend data.
Hi Grabiner,

I found DFA foreign tax information in the annual reports. Select an ETF/Fund --> Documents --> Annual Reports:

Image

Image

Thanks,

Ben
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Re: 2022 tax costs for value ETFs

Post by jebmke »

Isn't some of the "non-qualified" dividend for some funds QBI eligible REIT dividends?
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: 2022 tax costs for value ETFs

Post by CletusCaddy »

Thank you grabiner.

Is AVGE too new to calculate tax cost for? Because it hasn’t had a full year of distributions?
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Re: 2022 tax costs for value ETFs

Post by LeoB »

Thanks for all your work grabiner!

For anyone interested, I believe the Schwab fundamental index fund tax information can be found on this webpage: https://www.schwabassetmanagement.com/ ... tax-center. However, not all the 2022 information has been published yet.
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Re: 2022 tax costs for value ETFs

Post by grabiner »

BenS wrote: Mon Feb 06, 2023 9:57 am
grabiner wrote: Sun Feb 05, 2023 8:22 pm
DFA does not publish the foreign tax credit amount, so I cannot include DFA's foreign ETFs in this table, as that is an important part of the tax cost. (There have also been requests in previous years for Schwab's funds FNDF and FNDC, and I can't find foreign tax credit on Schwab's site.) I also cannot give data for DFA's US small-cap and large-cap value ETFs, which were new in 2022 and thus do not yet have one year of dividend data.
Hi Grabiner,

I found DFA foreign tax information in the annual reports. Select an ETF/Fund --> Documents --> Annual Reports:

Image

Image
This should be good for an estimate; thanks. (It won't match exactly because the fiscal year does not match the distribution year; the dividend and foreign tax amounts are as of October 31.)

I don't understand why DFA doesn't publish the data for the year, as it is something investors need. In order to fill out form 1116 for a fund with both US and foreign income, you need to know how much of the income is foreign (which DFA does publish), but also how much of the foreign income is qualified dividends (which I couldn't find).
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Re: 2022 tax costs for value ETFs

Post by txaggie »

Thank you Grabiner! This is very helpful.
grabiner wrote: Sun Feb 05, 2023 8:22 pm For each fund, the dividend yield is computed as the taxable dividend divided by the 12/30/22 share price.
How did you get 2.01% for the dividend yield for AVUV? My calculations have it at 1.74% which I got from (0.227+0.297+0.353+0.419)/74.51.
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Re: 2022 tax costs for value ETFs

Post by grabiner »

txaggie wrote: Mon Feb 06, 2023 8:31 pm Thank you Grabiner! This is very helpful.
grabiner wrote: Sun Feb 05, 2023 8:22 pm For each fund, the dividend yield is computed as the taxable dividend divided by the 12/30/22 share price.
How did you get 2.01% for the dividend yield for AVUV? My calculations have it at 1.74% which I got from (0.227+0.297+0.353+0.419)/74.51.
Fixed.
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Re: 2022 tax costs for value ETFs

Post by BenS »

Hi Grabiner,

I have the following TTM Yields -- they were calculated by dividing the morningstar reported dividend for Calendar Year 2022 by the end of year price:

VXUS: 3.09%
VSS: 2.29%
AVIV: 2.84%
AVDV: 3.17%
VWO: 4.11%
AVES: 3.71%

All of the domestic results you have posted I agree with. Perhaps these are the wrong yields to use though, because they are international funds which have a foreign tax correction built in?

Thanks,

Ben
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Re: 2022 tax costs for value ETFs

Post by grabiner »

BenS wrote: Mon Feb 06, 2023 9:45 pm I have the following TTM Yields -- they were calculated by dividing the morningstar reported dividend for Calendar Year 2022 by the end of year price:

VXUS: 3.09%
VSS: 2.29%
AVIV: 2.84%
AVDV: 3.17%
VWO: 4.11%
AVES: 3.71%

All of the domestic results you have posted I agree with. Perhaps these are the wrong yields to use though, because they are international funds which have a foreign tax correction built in?
Yes, that is the difference. You pay tax on the full dividend, including the foreign tax withheld which was not part of the distribution yield. For example, the 3.34% dividend for VXUS includes 0.25% withheld as foreign tax (which is 7.85% of the dividend) and 3.09% paid out. You pay tax at the qualified dividend rate on 74% of 3.34%, and at the non-qualified rate on 26% of 3.34%, and then you get back a foreign tax credit of 7.85% of 3.34%.

However, the VWO yield you posted is inconsistent with what I had in the table; I corrected the table yield.
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Schwab's fundamental ETFs

Post by grabiner »

There were requests for the last two years to include Schwab's fundamental ETFs. They don't have as much value exposure as the factor ETFs, and Schwab makes it even harder to get the data, as there is no published table of qualified dividends on Schwab's site. The annual report is as of 2/28/22, so the qualified dividends and foreign tax are mostly estimated from year-old data. The foreign tax percentage is estimated by dividing the reported foreign tax minus reclaimed amounts by the gross investment income (including the foreign tax added back in). The qualified dividend percentage is obtained by dividing the QDI in the annual report by the gross investment income.

Schwab's developed markets funds were tax-efficient, but the emerging markets fund, even with the high foreign tax credit, was less tax-efficient than the alternatives because the dividend yield is so high.

Code: Select all

Ticker  Name                                   Yield   FTC     Qualified
FNDF    Schwab Fundamental International Large 3.31%*  7.54%*  100%*
FNDC    Schwab Fundamental International Small 2.16%*  8.80%*  91%*
FNDE    Schwab Fundamental Emerging Larger     5.77%*  10.84%* 60%*
* - using estimated data from 2/28/22 annual report
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Re: 2022 tax costs for value ETFs

Post by LadyGeek »

hiddenpower has a question which I've moved into a new thread. See: Tax consequences of holding AVGV/AVGE in a taxable account
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