Do fund-of-funds TLH internally?

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CarefullyCarele$$
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Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

I was just reading @longinvest's thread on the one-fund portfolio as a default. And came across this post: viewtopic.php?p=4796720#p4796720

He makes a point about how these funds supposedly tax-loss harvest internally. Could someone please explain this and if this is cost consequentially different from TLH-ing oneself? (especially when used to offset potential capital gains from other sources)

One of the reasons I decided to not go the one-fund route in taxable is to take advantage of the potential for TLH and municipal bonds, which makes sense at my bracket.

Would love to get people's thoughts.
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Re: Do fund-of-funds TLH internally?

Post by placeholder »

All funds do that by selling components but it's not the same as personal tlh as capital losses are not distributed but are retained by the funds to offset future capital gains.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

placeholder wrote: Sat Jun 03, 2023 4:35 pm All funds do that by selling components but it's not the same as personal tlh as capital losses are not distributed but are retained by the funds to offset future capital gains.
Hi, appreciate your explanation. I guess what I'm wondering is — what effect does this have returns wise? Is there potential for further benefit TLH-ing oneself? Or is it the same?
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Hacksawdave
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Re: Do fund-of-funds TLH internally?

Post by Hacksawdave »

CarefullyCarele$$ wrote: Sat Jun 03, 2023 4:14 pm I was just reading @longinvest's thread on the one-fund portfolio as a default. And came across this post: viewtopic.php?p=4796720#p4796720

He makes a point about how these funds supposedly tax-loss harvest internally. Could someone please explain this and if this is cost consequentially different from TLH-ing oneself? (especially when used to offset potential capital gains from other sources)

One of the reasons I decided to not go the one-fund route in taxable is to take advantage of the potential for TLH and municipal bonds, which makes sense at my bracket.

Would love to get people's thoughts.
Well, a fund-of-fund is subject to the management of the underlying funds. Much like a single fund, I would think that losses would be rolled over as the fund-of-fund would have to distribute the gains to the shareholder like an individual fund or have the parent fund be subject to taxation instead of the shareholder.

I own Vanguard’s STAR fund in taxable, and as far as I have seen the distributions and carryovers are based upon the underlying funds, not something STAR gets to control. STAR controls the underlying fund’s allocation percentages to the overall picture. Yes, it makes my bookkeeping easy tracking a single fund set of distributions versus the 10 underlying funds.

I too would love to hear other thoughts.
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CarefullyCarele$$
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

Hacksawdave wrote: Sat Jun 03, 2023 4:58 pm
CarefullyCarele$$ wrote: Sat Jun 03, 2023 4:14 pm I was just reading @longinvest's thread on the one-fund portfolio as a default. And came across this post: viewtopic.php?p=4796720#p4796720

He makes a point about how these funds supposedly tax-loss harvest internally. Could someone please explain this and if this is cost consequentially different from TLH-ing oneself? (especially when used to offset potential capital gains from other sources)

One of the reasons I decided to not go the one-fund route in taxable is to take advantage of the potential for TLH and municipal bonds, which makes sense at my bracket.

Would love to get people's thoughts.
Well, a fund-of-fund is subject to the management of the underlying funds. Much like a single fund, I would think that losses would be rolled over as the fund-of-fund would have to distribute the gains to the shareholder like an individual fund or have the parent fund be subject to taxation instead of the shareholder.

I own Vanguard’s STAR fund in taxable, and as far as I have seen the distributions and carryovers are based upon the underlying funds, not something STAR gets to control. STAR controls the underlying fund’s allocation percentages to the overall picture. Yes, it makes my bookkeeping easy tracking a single fund set of distributions versus the 10 underlying funds.

I too would love to hear other thoughts.
I see.

I would assume rebalancing (in fixed allocation funds) and reallocating (in target date index funds) gives off capital gains that could be offset by losses booked along the journey: since fund-of-funds don't generally pass on tax losses to shareholders. But does the fund's on-book capital losses apply when individual shareholders withdraw? I'm not sure.

I wonder how this is different from tax-loss harvesting oneself in terms of benefits — except of course when using tax-loss harvesting to offset capital gains from other sources, or up to $3,000 in ordinary income.
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Re: Do fund-of-funds TLH internally?

Post by Hacksawdave »

CarefullyCarele$$ wrote: Sat Jun 03, 2023 5:20 pm
Hacksawdave wrote: Sat Jun 03, 2023 4:58 pm
CarefullyCarele$$ wrote: Sat Jun 03, 2023 4:14 pm I was just reading @longinvest's thread on the one-fund portfolio as a default. And came across this post: viewtopic.php?p=4796720#p4796720

He makes a point about how these funds supposedly tax-loss harvest internally. Could someone please explain this and if this is cost consequentially different from TLH-ing oneself? (especially when used to offset potential capital gains from other sources)

One of the reasons I decided to not go the one-fund route in taxable is to take advantage of the potential for TLH and municipal bonds, which makes sense at my bracket.

Would love to get people's thoughts.
Well, a fund-of-fund is subject to the management of the underlying funds. Much like a single fund, I would think that losses would be rolled over as the fund-of-fund would have to distribute the gains to the shareholder like an individual fund or have the parent fund be subject to taxation instead of the shareholder.

I own Vanguard’s STAR fund in taxable, and as far as I have seen the distributions and carryovers are based upon the underlying funds, not something STAR gets to control. STAR controls the underlying fund’s allocation percentages to the overall picture. Yes, it makes my bookkeeping easy tracking a single fund set of distributions versus the 10 underlying funds.

I too would love to hear other thoughts.
I see.

I would assume rebalancing (in fixed allocation funds) and reallocating (in target date index funds) gives off capital gains that could be offset by losses booked along the journey: since fund-of-funds don't generally pass on tax losses to shareholders. But does the fund's on-book capital losses apply when individual shareholders withdraw? I'm not sure.

I wonder how this is different from tax-loss harvesting oneself in terms of benefits — except of course when using tax-loss harvesting to offset capital gains from other sources, or up to $3,000 in ordinary income.
STAR does not have a glide path like TDF fund do. In the past I have just seen STAR underlying funds basically evaporate or (in the case of the Morgan Growth portion) merge. STAR decided to begin accumulation of international funds in 2013 but did so over time.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

Hacksawdave wrote: Sat Jun 03, 2023 5:46 pm
CarefullyCarele$$ wrote: Sat Jun 03, 2023 5:20 pm
Hacksawdave wrote: Sat Jun 03, 2023 4:58 pm
CarefullyCarele$$ wrote: Sat Jun 03, 2023 4:14 pm I was just reading @longinvest's thread on the one-fund portfolio as a default. And came across this post: viewtopic.php?p=4796720#p4796720

He makes a point about how these funds supposedly tax-loss harvest internally. Could someone please explain this and if this is cost consequentially different from TLH-ing oneself? (especially when used to offset potential capital gains from other sources)

One of the reasons I decided to not go the one-fund route in taxable is to take advantage of the potential for TLH and municipal bonds, which makes sense at my bracket.

Would love to get people's thoughts.
Well, a fund-of-fund is subject to the management of the underlying funds. Much like a single fund, I would think that losses would be rolled over as the fund-of-fund would have to distribute the gains to the shareholder like an individual fund or have the parent fund be subject to taxation instead of the shareholder.

I own Vanguard’s STAR fund in taxable, and as far as I have seen the distributions and carryovers are based upon the underlying funds, not something STAR gets to control. STAR controls the underlying fund’s allocation percentages to the overall picture. Yes, it makes my bookkeeping easy tracking a single fund set of distributions versus the 10 underlying funds.

I too would love to hear other thoughts.
I see.

I would assume rebalancing (in fixed allocation funds) and reallocating (in target date index funds) gives off capital gains that could be offset by losses booked along the journey: since fund-of-funds don't generally pass on tax losses to shareholders. But does the fund's on-book capital losses apply when individual shareholders withdraw? I'm not sure.

I wonder how this is different from tax-loss harvesting oneself in terms of benefits — except of course when using tax-loss harvesting to offset capital gains from other sources, or up to $3,000 in ordinary income.
STAR does not have a glide path like TDF fund do. In the past I have just seen STAR underlying funds basically evaporate or (in the case of the Morgan Growth portion) merge. STAR decided to begin accumulation of international funds in 2013 but did so over time.
I understand, but since it's a stocks/bonds balanced fund — I would assume internal rebalancing events between stocks & bonds would generate capital gains that could be offset by losses that have been booked in the past.
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Re: Do fund-of-funds TLH internally?

Post by arcticpineapplecorp. »

CarefullyCarele$$ wrote: Sat Jun 03, 2023 4:14 pm I was just reading @longinvest's thread on the one-fund portfolio as a default. And came across this post: viewtopic.php?p=4796720#p4796720

He makes a point about how these funds supposedly tax-loss harvest internally. Could someone please explain this and if this is cost consequentially different from TLH-ing oneself? (especially when used to offset potential capital gains from other sources)

One of the reasons I decided to not go the one-fund route in taxable is to take advantage of the potential for TLH and municipal bonds, which makes sense at my bracket.

Would love to get people's thoughts.
In life there are no solutions only tradeoffs. Longinvest is wanting simplicity over complexity but the tradeoff is all in one funds are more likely to distribute cap gains because they're likely selling whats gone up to buy what's gone down. Now they may be able to avoid some of this with new incoming funds they can use to buy the underweighted asset without having to rebalance. But because there's no losses passed onto the investor, just gains, you have far less control taxwise. You do remember what happened to investors in taxable accounts with vanguard target date funds in 2020 right? You can say it's a one off but less control sometimes costs you big time.
Last edited by arcticpineapplecorp. on Sat Jun 03, 2023 6:14 pm, edited 1 time in total.
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CarefullyCarele$$
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

arcticpineapplecorp. wrote: Sat Jun 03, 2023 6:07 pm
CarefullyCarele$$ wrote: Sat Jun 03, 2023 4:14 pm I was just reading @longinvest's thread on the one-fund portfolio as a default. And came across this post: viewtopic.php?p=4796720#p4796720

He makes a point about how these funds supposedly tax-loss harvest internally. Could someone please explain this and if this is cost consequentially different from TLH-ing oneself? (especially when used to offset potential capital gains from other sources)

One of the reasons I decided to not go the one-fund route in taxable is to take advantage of the potential for TLH and municipal bonds, which makes sense at my bracket.

Would love to get people's thoughts.
In life there are no solutions only tradeoffs. Longinvest is wanting simplicity over complexity but the tradeoff is all in one funds are more likely to distribute cap gains because they're likely selling whats gone up to buy what's gone down. Now they may be able to avoid some of this with new incoming funds they can use to buy the underweighted asset without having to rebalance. But because there's no losses passed onto the investor, just gains, you have far less control taxwise. You do remember what happened to investors in taxable accounts with vabguard target date funds in 2020 right? You can say it's a one off but less control sometimws costs you big time.
Fair point, appreciate the perspective.
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Re: Do fund-of-funds TLH internally?

Post by alex_686 »

I used to work in fund accounting. Ask me anything.

Funds do not do “tax loss harvesting” as you think about it. Portfolio managers are almost always paid on pre-tax performance.

Managing the taxes and thus selecting the tax lots to be sold fall in accounting’s domain, which I should note is located in a completely separate company.

We tried to minimize taxes by we were in a reactive mode, not a proactive mode.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Do fund-of-funds TLH internally?

Post by Northern Flicker »

Most fund of funds would not harvest tax losses at the included fund granularity. The underlying funds would consider cost basis when deciding on shares to sell, trying to minimize gains or offset gains with losses.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

alex_686 wrote: Sat Jun 03, 2023 6:23 pm I used to work in fund accounting. Ask me anything.

Funds do not do “tax loss harvesting” as you think about it. Portfolio managers are almost always paid on pre-tax performance.

Managing the taxes and thus selecting the tax lots to be sold fall in accounting’s domain, which I should note is located in a completely separate company.

We tried to minimize taxes by we were in a reactive mode, not a proactive mode.
Super helpful to get an insider's perspective. So no TLH (or associated benefits from it) as one would conventionally think of it. I wonder then if losses are not booked in this sense, why do some fund-of-funds state a negative number on "unrealised capital gains"?
Last edited by CarefullyCarele$$ on Sat Jun 03, 2023 7:34 pm, edited 2 times in total.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

Northern Flicker wrote: Sat Jun 03, 2023 6:31 pm Most fund of funds would not harvest tax losses at the included fund granularity. The underlying funds would consider cost basis when deciding on shares to sell, trying to minimize gains or offset gains with losses.
Ah, so you're suggesting they attempt more tax minimisation strategies when selling, rather than actively booking losses to lower the cost basis for tax purposes to be used to offset capital gains later?
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Re: Do fund-of-funds TLH internally?

Post by alex_686 »

CarefullyCarele$$ wrote: Sat Jun 03, 2023 7:09 pm
alex_686 wrote: Sat Jun 03, 2023 6:23 pm I used to work in fund accounting. Ask me anything.

Funds do not do “tax loss harvesting” as you think about it. Portfolio managers are almost always paid on pre-tax performance.

Managing the taxes and thus selecting the tax lots to be sold fall in accounting’s domain, which I should note is located in a completely separate company.

We tried to minimize taxes by we were in a reactive mode, not a proactive mode.
Super helpful to get an insider's perspective. So no TLH (or associated benefits from it) as one would conventionally think of it. I wonder then if losses are not booked in this sense, why do some fund-of-funds state a negative number on "unrealised capital gains"?
Well, what do you think Tax Lost Harvesting is? In the conventional sense you are strategically selling one set of assets to generate losses. Not exactly market timing but timing is involved.

Funds don’t do this. The portfolio managers don’t care about this.

So this stuff just gets dumped in the accountants lap. They have zero control over the timing or the asset allocation or anything like that. They will do anything reasonable to minimize taxable distributions. i.e. some thought is put into the best uses for the 7 year loss cary over provisions.

Does this help?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

alex_686 wrote: Sat Jun 03, 2023 7:46 pm
CarefullyCarele$$ wrote: Sat Jun 03, 2023 7:09 pm
alex_686 wrote: Sat Jun 03, 2023 6:23 pm I used to work in fund accounting. Ask me anything.

Funds do not do “tax loss harvesting” as you think about it. Portfolio managers are almost always paid on pre-tax performance.

Managing the taxes and thus selecting the tax lots to be sold fall in accounting’s domain, which I should note is located in a completely separate company.

We tried to minimize taxes by we were in a reactive mode, not a proactive mode.
Super helpful to get an insider's perspective. So no TLH (or associated benefits from it) as one would conventionally think of it. I wonder then if losses are not booked in this sense, why do some fund-of-funds state a negative number on "unrealised capital gains"?
Well, what do you think Tax Lost Harvesting is? In the conventional sense you are strategically selling one set of assets to generate losses. Not exactly market timing but timing is involved.

Funds don’t do this. The portfolio managers don’t care about this.

So this stuff just gets dumped in the accountants lap. They have zero control over the timing or the asset allocation or anything like that. They will do anything reasonable to minimize taxable distributions. i.e. some thought is put into the best uses for the 7 year loss cary over provisions.

Does this help?
Appreciate you taking the time to explain this, definitely helpful.

If I may ask, could you elaborate on this part, and how it might generate net negative "unrealised capital gains" for example: "They will do anything reasonable to minimize taxable distributions. i.e. some thought is put into the best uses for the 7 year loss cary over provisions."

What is the "7 year loss carry over provisions"?

I'm not super savvy with this stuff, so I might need some spoon feeding.
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Re: Do fund-of-funds TLH internally?

Post by Hacksawdave »

CarefullyCarele$$ wrote: Sat Jun 03, 2023 5:54 pm
Hacksawdave wrote: Sat Jun 03, 2023 5:46 pm
CarefullyCarele$$ wrote: Sat Jun 03, 2023 5:20 pm
Hacksawdave wrote: Sat Jun 03, 2023 4:58 pm
CarefullyCarele$$ wrote: Sat Jun 03, 2023 4:14 pm I was just reading @longinvest's thread on the one-fund portfolio as a default. And came across this post: viewtopic.php?p=4796720#p4796720

He makes a point about how these funds supposedly tax-loss harvest internally. Could someone please explain this and if this is cost consequentially different from TLH-ing oneself? (especially when used to offset potential capital gains from other sources)

One of the reasons I decided to not go the one-fund route in taxable is to take advantage of the potential for TLH and municipal bonds, which makes sense at my bracket.

Would love to get people's thoughts.
Well, a fund-of-fund is subject to the management of the underlying funds. Much like a single fund, I would think that losses would be rolled over as the fund-of-fund would have to distribute the gains to the shareholder like an individual fund or have the parent fund be subject to taxation instead of the shareholder.

I own Vanguard’s STAR fund in taxable, and as far as I have seen the distributions and carryovers are based upon the underlying funds, not something STAR gets to control. STAR controls the underlying fund’s allocation percentages to the overall picture. Yes, it makes my bookkeeping easy tracking a single fund set of distributions versus the 10 underlying funds.

I too would love to hear other thoughts.
I see.

I would assume rebalancing (in fixed allocation funds) and reallocating (in target date index funds) gives off capital gains that could be offset by losses booked along the journey: since fund-of-funds don't generally pass on tax losses to shareholders. But does the fund's on-book capital losses apply when individual shareholders withdraw? I'm not sure.

I wonder how this is different from tax-loss harvesting oneself in terms of benefits — except of course when using tax-loss harvesting to offset capital gains from other sources, or up to $3,000 in ordinary income.
STAR does not have a glide path like TDF fund do. In the past I have just seen STAR underlying funds basically evaporate or (in the case of the Morgan Growth portion) merge. STAR decided to begin accumulation of international funds in 2013 but did so over time.
I understand, but since it's a stocks/bonds balanced fund — I would assume internal rebalancing events between stocks & bonds would generate capital gains that could be offset by losses that have been booked in the past.
That is an “It depends” answer on the fund objectives and manager style. STAR ‘rebalanced’ by ceasing purchases of one fund while starting or increasing another. It has no set allocation percentage of stocks, bonds, and short-term investments to maintain in its objectives, just a general range.

I have performed similar actions in my taxable account in the past to not incur taxes from selling to rebalance. Increase monthly contributions, stop them, or have distribution income from one fund reinvested in a different one. I have not incurred one cent of generated tax by using this rebalance method. Now that I am retired, I do the same thing in my tax-deferred accounts as I am not in the accumulative stage.
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Re: Do fund-of-funds TLH internally?

Post by stan1 »

I would not put a "fund of funds" or a balanced fund or target retirement fund that holds corporate and government bonds in taxable.

The only possible exception is Vanguard Tax Managed Balanced which could be appropriate in specific situations.

There is seldom one size fits all advice for large taxable accounts. Answer is always "it depends". There is no way to optimize since we can't predict the future. If you are evaluating options or making a decision you'd want to provide more specific data so we can help figure out what would work best for your situation.
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Re: Do fund-of-funds TLH internally?

Post by aristotelian »

Most have net gains that are distributed periodically. I don't see how an investor would benefit regardless. Say you are invested in STAR. Commodities go down. Why would the manager sell X commodities at loss and buy Y commodities? There is no way to distribute a negative capital gains to investors. It would be up to the investor to sell the fund and buy something else.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

Hacksawdave wrote: Sun Jun 04, 2023 9:54 am That is an “It depends” answer on the fund objectives and manager style. STAR ‘rebalanced’ by ceasing purchases of one fund while starting or increasing another. It has no set allocation percentage of stocks, bonds, and short-term investments to maintain in its objectives, just a general range.

I have performed similar actions in my taxable account in the past to not incur taxes from selling to rebalance. Increase monthly contributions, stop them, or have distribution income from one fund reinvested in a different one. I have not incurred one cent of generated tax by using this rebalance method. Now that I am retired, I do the same thing in my tax-deferred accounts as I am not in the accumulative stage.
That's a helpful perspective.

@alex_686 (who's worked internally in fund accounting) seems to suggest that fund managers don't really care about actively maximising tax efficiency in the same way an individual investor could, and that at best it's a secondary concern handled by the fund accountant.

I suppose then we could conclude that: one would always have (at least a slight) tax edge when managing the component 3/4 index funds individually, rather than leaving it to a fund-of-funds' discretion. I personally use the low-cost Vanguard Digital Advisor to do handle all this for me as I appreciate the TDIF-like set-it-and-forget-it approach and I know I'm prone to behavioral pitfalls if I do it myself, but those who are otherwise inclined could definitely DIY for a small potential benefit.
stan1 wrote: Sun Jun 04, 2023 9:58 am I would not put a "fund of funds" or a balanced fund or target retirement fund that holds corporate and government bonds in taxable.

The only possible exception is Vanguard Tax Managed Balanced which could be appropriate in specific situations.

There is seldom one size fits all advice for large taxable accounts. Answer is always "it depends". There is no way to optimize since we can't predict the future. If you are evaluating options or making a decision you'd want to provide more specific data so we can help figure out what would work best for your situation.
Absolutely agree, the potential benefits of TLH and tax-exempt municipal bonds is the reason I decided against a TDIF in my taxable account — even though I love their simplicity and set-it-and-forget-it approach. I do prefer a mirrored AA across accounts though, and agree with longinvest's reasoning on that.

I myself have been using Vanguard Digital Advisor to employ both TLH and tax-exempt municipal bonds, as this allows me to retain the simplicity and behavioral discipline (this is a big issue for me and I recognise that) of a TDIF while taking care of its concerns, at a very low cost of just 0.2% inclusive of fund fees (which at just 0.12% more than a TDIF, I'm okay with paying).

I found longinvest's comment on fund-of-funds' TLH interesting, so wanted to get the community's opinion on it. And so far, I think we're inching towards the conclusion that individually managing funds is at least marginally better for TLH (and other tax reasons) than a fund-of-funds.

Once again, thank you everyone!
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

aristotelian wrote: Sun Jun 04, 2023 10:33 am Most have net gains that are distributed periodically. I don't see how an investor would benefit regardless. Say you are invested in STAR. Commodities go down. Why would the manager sell X commodities at loss and buy Y commodities? There is no way to distribute a negative capital gains to investors. It would be up to the investor to sell the fund and buy something else.
Hi there, appreciate your input. You're right — and that does make things clearer in my muddled head, so thank you. :)
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Re: Do fund-of-funds TLH internally?

Post by stan1 »

Tax loss harvesting is icing on the cake, not the cake itself. It is not going to make a difference in the success or failure of a retirement plan. I'd venture that someone could count the number of people in the US who have EVER gone to a Medicaid nursing home because they didn't tax loss harvest on one hand if not one finger.

I'd like to say it has never happened, but given this is the internet someone is going to post that it did happen to a friend of a friend and we won't have all the facts to argue there were other circumstances involved. :-) So I'm leaving myself an out.

This is a forum of do it yourselfers who want to be hands on. Tax loss harvesting is a way for someone who wants to tinker and "do something" in a way that isn't harmful. I realize there are extreme outlier cases. Again, being Bogleheads, we have a few people who actually are extreme outliers but feel they are just typical Americans who happen to have a multi-million dollar house, stock options, and millions in a taxable account so they can stop working at 50. This is why I say specifics matter.
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Re: Do fund-of-funds TLH internally?

Post by alex_686 »

CarefullyCarele$$ wrote: Sun Jun 04, 2023 10:41 am
aristotelian wrote: Sun Jun 04, 2023 10:33 am Most have net gains that are distributed periodically. I don't see how an investor would benefit regardless. Say you are invested in STAR. Commodities go down. Why would the manager sell X commodities at loss and buy Y commodities? There is no way to distribute a negative capital gains to investors. It would be up to the investor to sell the fund and buy something else.
Hi there, appreciate your input. You're right — and that does make things clearer in my muddled head, so thank you. :)
This is where the 7 year loss carry over provision kicks in. If a fund gas a realized loss at the end of a calendar year it can carry those losses for up to 7 years. Just line you or me, it can then uses those losses to offset (and thus reduce) future realized capital gains.

For a broader context, the portfolio manager must manage the fund for the benefit of all shareholders. e.g., for the IRA and other tax exempt holders. A manager is not going to churn the account, moving away from what they think is the optimal asset allocation, to generate some tax advantage of unknown value.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Do fund-of-funds TLH internally?

Post by Hacksawdave »

stan1 wrote: Sun Jun 04, 2023 10:52 am Tax loss harvesting is icing on the cake, not the cake itself. It is not going to make a difference in the success or failure of a retirement plan. I'd venture that someone could count the number of people in the US who have EVER gone to a Medicaid nursing home because they didn't tax loss harvest on one hand if not one finger.

I'd like to say it has never happened, but given this is the internet someone is going to post that it did happen to a friend of a friend and we won't have all the facts to argue there were other circumstances involved. :-) So I'm leaving myself an out.

This is a forum of do it yourselfers who want to be hands on. Tax loss harvesting is a way for someone who wants to tinker and "do something" in a way that isn't harmful. I realize there are extreme outlier cases. Again, being Bogleheads, we have a few people who actually are extreme outliers but feel they are just typical Americans who happen to have a multi-million dollar house, stock options, and millions in a taxable account so they can stop working at 50. This is why I say specifics matter.
Yes, TLH is merely a tool to be used for the right job. TLH does not work for me and would be counterproductive as I am already in the zero percent QD/LTCG tax bracket. Selling something for a realized loss would merely cancel out a tax-free realized CG distribution somewhere else without any tax benefit.
bradinsky
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Re: Do fund-of-funds TLH internally?

Post by bradinsky »

You can also use up to $3K per year against regular income.
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CarefullyCarele$$
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

stan1 wrote: Sun Jun 04, 2023 10:52 am Tax loss harvesting is icing on the cake, not the cake itself. It is not going to make a difference in the success or failure of a retirement plan. I'd venture that someone could count the number of people in the US who have EVER gone to a Medicaid nursing home because they didn't tax loss harvest on one hand if not one finger.

I'd like to say it has never happened, but given this is the internet someone is going to post that it did happen to a friend of a friend and we won't have all the facts to argue there were other circumstances involved. :-) So I'm leaving myself an out.

This is a forum of do it yourselfers who want to be hands on. Tax loss harvesting is a way for someone who wants to tinker and "do something" in a way that isn't harmful. I realize there are extreme outlier cases. Again, being Bogleheads, we have a few people who actually are extreme outliers but feel they are just typical Americans who happen to have a multi-million dollar house, stock options, and millions in a taxable account so they can stop working at 50. This is why I say specifics matter.
Absolutely agree, I'm sure that for the vast majority of investors (including maybe even myself), the tax drag from a TDIF or similar index fund-of-funds is negligible compared to their simplicity and behavioral advantages.

In fact, if a super low-cost, all-index robo like Vanguard's that handles all this for you didn't exist — I'd gladly throw it all in a TDIF and call it a day.
alex_686 wrote: Sun Jun 04, 2023 10:56 am This is where the 7 year loss carry over provision kicks in. If a fund gas a realized loss at the end of a calendar year it can carry those losses for up to 7 years. Just line you or me, it can then uses those losses to offset (and thus reduce) future realized capital gains.

For a broader context, the portfolio manager must manage the fund for the benefit of all shareholders. e.g., for the IRA and other tax exempt holders. A manager is not going to churn the account, moving away from what they think is the optimal asset allocation, to generate some tax advantage of unknown value.
bradinsky wrote: Sun Jun 04, 2023 11:46 am You can also use up to $3K per year against regular income.
Thank you, this is helping make the decision crystal clear.

So in sum: fund-of-funds' managers don't actively try to maximise tax efficiency. Fund accountants might try to minimise taxable distributions as much as possible, but this has nowhere near the advantages of traditional individual level TLH: which would seem to actively maximise TLH opportunities, giving more room to offset gains along the journey, offsetting ordinary income up to $3k/yr and perhaps even get a boost from possible tax bracket arbitrage based on an investor's circumstances. Am I capturing this accurately?
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Re: Do fund-of-funds TLH internally?

Post by Northern Flicker »

CarefullyCarele$$ wrote: Sat Jun 03, 2023 7:10 pm
Northern Flicker wrote: Sat Jun 03, 2023 6:31 pm Most fund of funds would not harvest tax losses at the included fund granularity. The underlying funds would consider cost basis when deciding on shares to sell, trying to minimize gains or offset gains with losses.
Ah, so you're suggesting they attempt more tax minimisation strategies when selling, rather than actively booking losses to lower the cost basis for tax purposes to be used to offset capital gains later?
Correct. Direct indexing is a newer type of product that does TLH by holding different index samples, but this increases tracking error risk by not always holding the sample predicted to minimize tracking error. Investors in direct indexing should understand this when they invest, and may decide it is a tradeoff worth making.

An index fund will focus on minimizing tracking error. That's the only way it can satisfy the needs of all investors. It is the core design of an index fund. So an all-in-one fund that holds index funds is unlikely to have active TLH going on at the individual security level.

And most or all all-in-one or target date funds are not shuffling around the funds they hold to do TLH that I've seen. Maybe there are some that do that, perhaps actively managed ones that hold a large number of funds, but it is problematic. I'm not an expert on investment fund laws and regulations, but I don't know that there is even a legal basis for a fund to carry a gain or loss across tax year boundaries. It also would create a fairness issue.
Last edited by Northern Flicker on Sun Jun 04, 2023 3:38 pm, edited 1 time in total.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

Northern Flicker wrote: Sun Jun 04, 2023 1:02 pm
CarefullyCarele$$ wrote: Sat Jun 03, 2023 7:10 pm
Northern Flicker wrote: Sat Jun 03, 2023 6:31 pm Most fund of funds would not harvest tax losses at the included fund granularity. The underlying funds would consider cost basis when deciding on shares to sell, trying to minimize gains or offset gains with losses.
Ah, so you're suggesting they attempt more tax minimisation strategies when selling, rather than actively booking losses to lower the cost basis for tax purposes to be used to offset capital gains later?
Correct. Direct indexing is a newer type of product that does TLH by holding different index samples, but this increases tracking error risk by not always holding the sample predicted to minimize tracking error. Investors in direct indexing should understand this when they invest, and may decide it is a tradeoff worth making.

An index fund will focus on minimizing tracking error. That's the only way it can satisfy the needs of all investors. It is the core design of an index fund. So an all-in-one fund that holds index funds is unlikely to have active TLH going on at the individual security level.

And most or all all-in-one or target date funds are not shuffling around the funds they hold to do TLH that I've seen. Maybe there are some do that, perhaps actively managed ones that hold a large number of funds, but it is problematic. I'm not an expert on investment fund laws and regulations, but I don't know that there is even a legal basis for a fund to carry a gain or loss across tax year boundaries. It also would create a fairness issue.
That's a very good point, thank you! This thread seems to have successfully consolidated a lot of interesting viewpoints on this issue — which I'm sure will be useful to others.
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grabiner
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Re: Do fund-of-funds TLH internally?

Post by grabiner »

A fund-of-funds is unlikely to tax loss harvest internally. To TLH, you sell one fund, and buy a different fund in the same asset class, then wait at least 31 days before buying it back. If the US market declines in June and a fund holds Vanguard Total Stock Market Index, the fund would have to sell shares with losses on June 30, and all shares purchased since May 31, and hold some other US stock fund through the month of July. This is not consistent with the fund's announced strategy. It would also be disruptive to the underlying funds; if the Vanguard Target Retirement funds all sold Total Stock Market Index during the June crash, they would force Total Stock Market Index to make large sales itself.

Even funds holding individual securities rarely tax loss harvest, as their goal is usually to optimize total return, not after-tax return. Tax loss harvesting requires extra work and thus extra expenses, and increases transaction costs, with no expected benefit to pre-tax return.

At Vanguard, the Tax-Managed funds do tax loss harvest internally, and the prospectus says that they will do this. The funds target a stock index, but they are willing to deviate from the index to reduce tax costs, and tax loss harvesting is one of the ways they do this. Vanguard Tax-Managed Small-Cap, even though it is not an ETF (it predates ETFs), has never distributed a capital gain; non-ETF small-cap indexes frequently distribute gains when small-cap stocks become large-cap and leave the small-cap index.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

grabiner wrote: Sun Jun 04, 2023 4:16 pm A fund-of-funds is unlikely to tax loss harvest internally. To TLH, you sell one fund, and buy a different fund in the same asset class, then wait at least 31 days before buying it back. If the US market declines in June and a fund holds Vanguard Total Stock Market Index, the fund would have to sell shares with losses on June 30, and all shares purchased since May 31, and hold some other US stock fund through the month of July. This is not consistent with the fund's announced strategy. It would also be disruptive to the underlying funds; if the Vanguard Target Retirement funds all sold Total Stock Market Index during the June crash, they would force Total Stock Market Index to make large sales itself.

Even funds holding individual securities rarely tax loss harvest, as their goal is usually to optimize total return, not after-tax return. Tax loss harvesting requires extra work and thus extra expenses, and increases transaction costs, with no expected benefit to pre-tax return.

At Vanguard, the Tax-Managed funds do tax loss harvest internally, and the prospectus says that they will do this. The funds target a stock index, but they are willing to deviate from the index to reduce tax costs, and tax loss harvesting is one of the ways they do this. Vanguard Tax-Managed Small-Cap, even though it is not an ETF (it predates ETFs), has never distributed a capital gain; non-ETF small-cap indexes frequently distribute gains when small-cap stocks become large-cap and leave the small-cap index.
Appreciate the detailed response. I do have one follow-up though. Looking at this particular fund for example, how does the negative distribution numbers come into play if there's no tax-loss harvesting or equivalent?
https://investor.vanguard.com/investmen ... tributions

I mean these numbers specifically:
Realized gain
-$0.03

% of NAV
-0.07%
How was a negative gain realised?
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Re: Do fund-of-funds TLH internally?

Post by grabiner »

A negative gain can be realized without deliberate harvesting. If the stock market falls, the fund will have to sell bonds to rebalance. And if interest rates have risen in the last few years, all shares of the bond fund will have a capital loss, so the sale will be for a loss.

In addition, if a fund has net withdrawals, it will have to sell its holdings, and might realize a gain or loss depending on what has happened to the market. (This is not likely for a target-date fund before the retirement date, as most investors in this fund are still adding to it. However, it does happen for post-retirement funds such as TR 2020; these funds often realize capital gains if investors withdraw in a rising market.)
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

grabiner wrote: Sun Jun 04, 2023 4:37 pm A negative gain can be realized without deliberate harvesting. If the stock market falls, the fund will have to sell bonds to rebalance. And if interest rates have risen in the last few years, all shares of the bond fund will have a capital loss, so the sale will be for a loss.

In addition, if a fund has net withdrawals, it will have to sell its holdings, and might realize a gain or loss depending on what has happened to the market. (This is not likely for a target-date fund before the retirement date, as most investors in this fund are still adding to it. However, it does happen for post-retirement funds such as TR 2020; these funds often realize capital gains if investors withdraw in a rising market.)
Ah, I see — that makes sense. How does this affect the individual investors? Is this "realised" negative gain distributed (meaning they can utilise it to potentially reduce their taxes)?

And how do you think this correlates with the 7 year loss provision that @alex_686 has referred to earlier in this thread?

Does it have to do with the specific lots that the funds decide to sell to minimise taxes? Is that why you say fund withdrawals might lead to a net loss depending on the market (since the overall value of the fund itself is bound to be positive for a post retirement fund that has been active for a long time, but specific lots might be negative)?

Thanks a ton again, really appreciate your insights!
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Re: Do fund-of-funds TLH internally?

Post by grabiner »

CarefullyCarele$$ wrote: Sun Jun 04, 2023 4:46 pm
grabiner wrote: Sun Jun 04, 2023 4:37 pm A negative gain can be realized without deliberate harvesting. If the stock market falls, the fund will have to sell bonds to rebalance. And if interest rates have risen in the last few years, all shares of the bond fund will have a capital loss, so the sale will be for a loss.

In addition, if a fund has net withdrawals, it will have to sell its holdings, and might realize a gain or loss depending on what has happened to the market. (This is not likely for a target-date fund before the retirement date, as most investors in this fund are still adding to it. However, it does happen for post-retirement funds such as TR 2020; these funds often realize capital gains if investors withdraw in a rising market.)
Ah, I see — that makes sense. How does this affect the individual investors? Is this "realised" negative gain distributed (meaning they can utilise it to potentially reduce their taxes)?

And how do you think this correlates with the 7 year loss provision that @alex_686 has referred to earlier in this thread?
Realized losses are not passed through to investors, but they offset realized gains, reducing future taxable distributions. I believe the 7-year limitation for future offsets has been repealed.
Does it have to do with the specific lots that the funds decide to sell to minimise taxes? Is that why you say fund withdrawals might lead to a net loss depending on the market (since the overall value of the fund itself is bound to be positive for a post retirement fund that has been active for a long time, but specific lots might be negative)?
Yes, this is what is going on. When a fund needs to sell part of a holding, it costs the fund nothing to select the shares with the highest cost basis. This will either minimize gains, or maximize losses to offset any other gains. Both of these are break-even for tax-exempt investors, and a net benefit for taxable investors.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

@grabiner: That makes so much sense, thank you so much for taking the time to explain this. I'm sure this will be of huge help to other amateur investors like myself.

I suppose then it could be said that the losses booked by fund-of-funds' (if at all) are always just a side effect, and never a primary intention — as compared to active TLH and tax minimisation strategies at the individual level which would seek to boost after tax returns as one of the primary objectives.
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Re: Do fund-of-funds TLH internally?

Post by Northern Flicker »

grabiner wrote: At Vanguard, the Tax-Managed funds do tax loss harvest internally, and the prospectus says that they will do this. The funds target a stock index, but they are willing to deviate from the index to reduce tax costs, and tax loss harvesting is one of the ways they do this.
They do it to offset gains but not to book losses to carry forward or distribute.
grabiner wrote: Tax loss harvesting requires extra work and thus extra expenses...
That also is true of ETFs executing heartbeat trades to manage capital gains.
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Re: Do fund-of-funds TLH internally?

Post by Northern Flicker »

CarefullyCarele$$ wrote: Sun Jun 04, 2023 4:58 pm I suppose then it could be said that the losses booked by fund-of-funds' (if at all) are always just a side effect, and never a primary intention — as compared to active TLH and tax minimisation strategies at the individual level which would seek to boost after tax returns as one of the primary objectives.
I believe the claim in another thread about TLH activities for ETFs that hold target date or other fund of funds portfolios likely was based on an assumption that if they don't distribute capital gains then they must be harvesting losses. But ETFs have other mechanisms to manage capital gains, and most likely that is what such products are doing.

ETF managers can include shares with the highest cost basis in redemption baskets when authorized participants arbitrage discounts to NAV that materialize. This involves authorized participants redeeming ETF shares for the underlying securities if the ETF is trading at a sufficiently large discount to NAV. This increases the demand for and reduces the supply of the ETF shares, improving their liquidity.

ETF managers also use a technique called heartbeat trades to manage capital gains. This is a neutral trading strategy that exploits an old law that says a fund can redeem shares via an in-kind distribution of assets held without triggering capital gains. A mutual fund also can do this in theory, but it is not practical to implement a strategy for it because there are not market makers redeeming fund shares or supplying creation baskets like the authorized participants do for ETFs.

Most Vanguard index ETFs have an additional mechanism due to the dual share class structure--the highest basis shares across all share classes can be identified with newly spun up ETF shares.
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

Northern Flicker wrote: Mon Jun 05, 2023 4:40 pm
CarefullyCarele$$ wrote: Sun Jun 04, 2023 4:58 pm I suppose then it could be said that the losses booked by fund-of-funds' (if at all) are always just a side effect, and never a primary intention — as compared to active TLH and tax minimisation strategies at the individual level which would seek to boost after tax returns as one of the primary objectives.
I believe the claim in another thread about TLH activities for ETFs that hold target date or other fund of funds portfolios likely was based on an assumption that if they don't distribute capital gains then they must be harvesting losses. But ETFs have other mechanisms to manage capital gains, and most likely that is what such products are doing.

ETF managers can include shares with the highest cost basis in redemption baskets when authorized participants arbitrage discounts to NAV that materialize. This involves authorized participants redeeming ETF shares for the underlying securities if the ETF is trading at a sufficiently large discount to NAV. This increases the demand for and reduces the supply of the ETF shares, improving their liquidity.

ETF managers also use a technique called heartbeat trades to manage capital gains. This is a neutral trading strategy that exploits an old law that says a fund can redeem shares via an in-kind distribution of assets held without triggering capital gains. A mutual fund also can do this in theory, but it is not practical to implement a strategy for it because there are not market makers redeeming fund shares or supplying creation baskets like the authorized participants do for ETFs.

Most Vanguard index ETFs have an additional mechanism due to the dual share class structure--the highest basis shares across all share classes can be identified with newly spun up ETF shares.
Thanks for contextualising this, this is very meaningful information. But there are ETFs for target date index funds? I don't remember seeing any in the US at least.

All said and done though, I'm sure for most investors target date index funds are still a viable option (even in taxable). Except for one-off events like Vanguard's mismanaged TDIF LTCG distributions, the tax drag for most major TDIF providers (Schwab/Fidelity/Vanguard) is quite small in the larger scheme of things. If one is happy with the AA glide path and the simplicity of being locked in, I don't see too many significant cons.

Of course, now with the rise of low-cost robo advisors like Vanguard Digital Advisor that are basically just TDIFs minus their tax concerns (since robos largely utilise tax-exempt bonds, tax-loss harvesting and leave room for future flexibility) - the case for TDIFs in taxable does seem weaker. I can see a low-cost robo like VDA (even with a slightly higher fee) breaking even with TDIFs, and potentially even providing a slight boost in after-tax returns.
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Re: Do fund-of-funds TLH internally?

Post by Northern Flicker »

I'm not aware of target date ETFs currently available in the US market, but I think iShares has offered them in Canada for example. There are fixed allocation fund of funds ETFs in the US such as:

https://www.ishares.com/us/products/239 ... cation-etf
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

Northern Flicker wrote: Mon Jun 05, 2023 6:38 pm I'm not aware of target date ETFs currently available in the US market, but I think iShares has offered them in Canada for example. There are fixed allocation fund of funds ETFs in the US such as:

https://www.ishares.com/us/products/239 ... cation-etf
That's pretty cool, hoping target date index ETFs come to the US soon too, would solve the unwarranted cap gains distributions worry for good.
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Re: Do fund-of-funds TLH internally?

Post by Northern Flicker »

Target Date ETFs were/are part of the Deutsche Wealth Services Xtrackers ETFs (ie not iShares) and are/were available in Europe and apparently the US (but not Canada). It appears that US offerings were shut down and liquidated.

https://www.bloomberg.com/quote/TDN:US
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Re: Do fund-of-funds TLH internally?

Post by CarefullyCarele$$ »

Northern Flicker wrote: Tue Jun 06, 2023 12:13 am Target Date ETFs were/are part of the Deutsche Wealth Services Xtrackers ETFs (ie not iShares) and are/were available in Europe and apparently the US (but not Canada). It appears that US offerings were shut down and liquidated.

https://www.bloomberg.com/quote/TDN:US
Intriguing. Though low cost robo advisors basically being tax-efficient TDIFs, I doubt there's any incentive to experiment with them further, especially since ETF TDIFs won't really have any advantage in tax-deferred accounts (which is where the primary customer for them is).
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