muni funds - TLH and converting to ETF's options

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skeptical
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muni funds - TLH and converting to ETF's options

Post by skeptical »

Hi,

Looking for a sanity check and maybe some wisdom on tax loss harvesting my bond funds, while at the same time moving them to ETF's so I can move them out of Vanguard. Some pretty significant losses to optimize, and bonds are slightly more than half my portfolio.

Currently have:
1/2 in VMLUX (Vanguard Limited National Muni) ~2 year duration
1/3 in VBTLX (Vanguard Total Bond)
1/12 in VWLUX (Vanguard Long Muni) ~10 year duration
1/12 in VWIUX (Vanguard National Muni) ~6 year duration

Got here by tax loss harvesting VWIUX into VWLUX/VMLUX (to keep duration the same) several years ago and then last summer moving more into VMLUX/VWIUX to shorten duration. 1/2 of my VBTLX is in IRA, so only looking at TLH the other half. Used to be all VWIUX in taxable, so much for a 1-2 fund bond portfolio.

Options:
- Go back to my years ago allocation 2/3 VWIUX and 1/3 VBTLX, and do this by moving into MUB/VTEB and a 50/50 mix of VCIT/VGIT for the total bond (1/2 corporate 1/2 treasury). This leaves me all ETF at my older bond AA, but need to worry about the VWIUX part in terms of TLH

- Try to keep my current AA (a shorter overall duration since last summer), but I cannot find any reasonable 2-3 year term muni ETF's to match VMLUX. So, I could choose a very short duration (like SUB) or just cash to tone down the duration of VTEB/MUB

- VTEB/MUB seem the best choices out there for national muni, I don't see much difference between them, but looking for opinions

- Reconsider using state muni (MA), but there does not seem to be much of an option I am comfortable with outside of VMATX, which is not an ETF, but if superior I can make it work.

Thanks in advance
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Electron
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Re: muni funds - TLH and converting to ETF's options

Post by Electron »

skeptical wrote: Mon Jun 27, 2022 2:20 pm Looking for a sanity check and maybe some wisdom on tax loss harvesting my bond funds, while at the same time moving them to ETF's so I can move them out of Vanguard.
I don't have any specific recommendations, but wanted to mention two tools I have used to identify TLH partner funds.

The two tools are Morningstar Interactive charts and Portfolio Visualizer. In either case, it is possible to compare two or more funds over different time periods and see the relative performance.

Portfolio Visualizer allows comparison of open ended mutual funds and ETFs. The Morningstar Interactive chart only allows comparison of an open ended fund with other open ended funds, or a comparison of an ETF with other ETFs.

Here is an example in Portfolio Visualizer showing a comparison of Vanguard Intermediate Term Tax Exempt, a 30/70 combination of Vanguard Limited Term Tax Exempt and Vanguard Long Term Tax Exempt, and iShares National Muni Bond ETF with symbol MUB.

https://www.portfoliovisualizer.com/bac ... ion4_3=100

In this time period, the ETF did not perform as well as the other two comparisons.

Note also that a 30/70 weighting was required for the Limited Term and Long Term fund combination to match the performance of the Intermediate Term fund. The weightings can easily be changed to see the effect.
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skeptical
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Re: muni funds - TLH and converting to ETF's options

Post by skeptical »

Electron wrote: Wed Jul 20, 2022 3:22 pm
skeptical wrote: Mon Jun 27, 2022 2:20 pm Looking for a sanity check and maybe some wisdom on tax loss harvesting my bond funds, while at the same time moving them to ETF's so I can move them out of Vanguard.
I don't have any specific recommendations, but wanted to mention two tools I have used to identify TLH partner funds.

The two tools are Morningstar Interactive charts and Portfolio Visualizer. In either case, it is possible to compare two or more funds over different time periods and see the relative performance.

Portfolio Visualizer allows comparison of open ended mutual funds and ETFs. The Morningstar Interactive chart only allows comparison of an open ended fund with other open ended funds, or a comparison of an ETF with other ETFs.

Here is an example in Portfolio Visualizer showing a comparison of Vanguard Intermediate Term Tax Exempt, a 30/70 combination of Vanguard Limited Term Tax Exempt and Vanguard Long Term Tax Exempt, and iShares National Muni Bond ETF with symbol MUB.

https://www.portfoliovisualizer.com/bac ... ion4_3=100

In this time period, the ETF did not perform as well as the other two comparisons.

Note also that a 30/70 weighting was required for the Limited Term and Long Term fund combination to match the performance of the Intermediate Term fund. The weightings can easily be changed to see the effect.
There is also VTEB, which is Vanguards ETF equivalent. MUB is different than VWIUX/VTEB as it has longer duration (6.25 vs 4.25) and also better quality (more AAA/AA). These two roughly/probably cancel each other out, but it is an interesting difference. You can compare performance by looking at total return in different morningstar windows

I actually have/had my munis mostly in VMLUX/VWLUX (though different percentages than you have in PV), due to some tax loss harvesting some years ago.

I decided to first TLH to VWIUX, and wait 30 days to decide what ETF to go with, probably VTEB. I did this because I did not want to go through two ETF transactions with the possible bid/ask issues each time. With the mutual fund exchange, it seems you cannot win or lose, but that might be only psychological.
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Re: muni funds - TLH and converting to ETF's options

Post by anon_investor »

skeptical wrote: Wed Jul 20, 2022 6:25 pm
Electron wrote: Wed Jul 20, 2022 3:22 pm
skeptical wrote: Mon Jun 27, 2022 2:20 pm Looking for a sanity check and maybe some wisdom on tax loss harvesting my bond funds, while at the same time moving them to ETF's so I can move them out of Vanguard.
I don't have any specific recommendations, but wanted to mention two tools I have used to identify TLH partner funds.

The two tools are Morningstar Interactive charts and Portfolio Visualizer. In either case, it is possible to compare two or more funds over different time periods and see the relative performance.

Portfolio Visualizer allows comparison of open ended mutual funds and ETFs. The Morningstar Interactive chart only allows comparison of an open ended fund with other open ended funds, or a comparison of an ETF with other ETFs.

Here is an example in Portfolio Visualizer showing a comparison of Vanguard Intermediate Term Tax Exempt, a 30/70 combination of Vanguard Limited Term Tax Exempt and Vanguard Long Term Tax Exempt, and iShares National Muni Bond ETF with symbol MUB.

https://www.portfoliovisualizer.com/bac ... ion4_3=100

In this time period, the ETF did not perform as well as the other two comparisons.

Note also that a 30/70 weighting was required for the Limited Term and Long Term fund combination to match the performance of the Intermediate Term fund. The weightings can easily be changed to see the effect.
There is also VTEB, which is Vanguards ETF equivalent. MUB is different than VWIUX/VTEB as it has longer duration (6.25 vs 4.25) and also better quality (more AAA/AA). These two roughly/probably cancel each other out, but it is an interesting difference. You can compare performance by looking at total return in different morningstar windows

I actually have/had my munis mostly in VMLUX/VWLUX (though different percentages than you have in PV), due to some tax loss harvesting some years ago.

I decided to first TLH to VWIUX, and wait 30 days to decide what ETF to go with, probably VTEB. I did this because I did not want to go through two ETF transactions with the possible bid/ask issues each time. With the mutual fund exchange, it seems you cannot win or lose, but that might be only psychological.
Why make it hard on yourself. TLH everything into VTEAX (the mutual fund share class version of VTEB). You can do an exchange of your mutual funds, so no bid/ask spread issues.
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Electron
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Re: muni funds - TLH and converting to ETF's options

Post by Electron »

skeptical wrote: Wed Jul 20, 2022 6:25 pm I decided to first TLH to VWIUX, and wait 30 days to decide what ETF to go with, probably VTEB. I did this because I did not want to go through two ETF transactions with the possible bid/ask issues each time. With the mutual fund exchange, it seems you cannot win or lose, but that might be only psychological.
Exchanging one Vanguard open ended fund into another does work very well. You can gain or lose a very small percentage due to NAV rounding. One cent would be 0.1% for a fund with NAV of $10.00.

One issue in selling a fund and buying an ETF is whether you are out of the market for a day or more. The settlement times should work in our favor if Vanguard allows selling and buying on the same day. If that is allowed, it should be possible to buy perhaps 98% of the estimated proceeds on a quiet day in the municipal bond markets. I've noticed that Vanguard Tax Exempt funds generally move in the same direction as MUB on a given day. Maintaining a balance in the settlement fund can also help. A cleaner solution might be tolerating one day out of the market and buying the next day. The small differences can average out over multiple transactions.

Portfolio Visualizer can also show income in a bar chart at the bottom of the screen. Here is the same comparison posted earlier with the income chart added. I was surprised at the differences in income.

https://www.portfoliovisualizer.com/bac ... ion4_3=100
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Re: muni funds - TLH and converting to ETF's options

Post by SnowBog »

If you haven't yet, read the muni bond section of the "finer points" in the wiki: https://www.bogleheads.org/wiki/Tax_loss_harvesting

My recollection is that if the fund doesn't handle things in a specific way (daily accrual if I remember) and you hold the fund for < 6 months, some of your loss is offset by the interest you earned.

While I didn't look super hard, the last time I looked I couldn't find any muni bond ETF that didn't run into this rule... As such, I've stuck with mutual funds (most of which seem to handle this in a way to not be impacted by the rule).

As for moving them out of Vanguard, you might be surprised that you can move them "in kind". At least most of my funds - including bond funds I thought - were able to be moved... (Money Market type funds cinch be moved...)

If that's the main driver, I'd ask the receiving brokerage to confirm what can be moved. Once moved, you can sell and replace with a no fee fund at the new brokerage.
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skeptical
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Re: muni funds - TLH and converting to ETF's options

Post by skeptical »

anon_investor wrote: Wed Jul 20, 2022 7:28 pm Why make it hard on yourself. TLH everything into VTEAX (the mutual fund share class version of VTEB). You can do an exchange of your mutual funds, so no bid/ask spread issues.
Well, I wish you said this a few days ago :-)

Not a big deal, I can exchange VWIUX->VTEAX in 30 days and then convert, avoiding the whole sell/buy situation if I go with VTEB
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skeptical
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Re: muni funds - TLH and converting to ETF's options

Post by skeptical »

SnowBog wrote: Wed Jul 20, 2022 10:07 pm If you haven't yet, read the muni bond section of the "finer points" in the wiki: https://www.bogleheads.org/wiki/Tax_loss_harvesting

My recollection is that if the fund doesn't handle things in a specific way (daily accrual if I remember) and you hold the fund for < 6 months, some of your loss is offset by the interest you earned.

While I didn't look super hard, the last time I looked I couldn't find any muni bond ETF that didn't run into this rule... As such, I've stuck with mutual funds (most of which seem to handle this in a way to not be impacted by the rule).

As for moving them out of Vanguard, you might be surprised that you can move them "in kind". At least most of my funds - including bond funds I thought - were able to be moved... (Money Market type funds cinch be moved...)

If that's the main driver, I'd ask the receiving brokerage to confirm what can be moved. Once moved, you can sell and replace with a no fee fund at the new brokerage.
Thanks for the reminder about daily accrual, I am used to mutual funds, seems like ETFs are monthly. It is relatively small compared to the losses I can realize, but might be worth holding onto the mutual fund for some time.

You can move VWIUX in kind, but there are restrictions (for example, you cannot buy anymore), and need fee waivers for transactions.
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Re: muni funds - TLH and converting to ETF's options

Post by Kookaburra »

skeptical wrote: Thu Jul 21, 2022 6:44 am
SnowBog wrote: Wed Jul 20, 2022 10:07 pm If you haven't yet, read the muni bond section of the "finer points" in the wiki: https://www.bogleheads.org/wiki/Tax_loss_harvesting

My recollection is that if the fund doesn't handle things in a specific way (daily accrual if I remember) and you hold the fund for < 6 months, some of your loss is offset by the interest you earned.

While I didn't look super hard, the last time I looked I couldn't find any muni bond ETF that didn't run into this rule... As such, I've stuck with mutual funds (most of which seem to handle this in a way to not be impacted by the rule).

As for moving them out of Vanguard, you might be surprised that you can move them "in kind". At least most of my funds - including bond funds I thought - were able to be moved... (Money Market type funds cinch be moved...)

If that's the main driver, I'd ask the receiving brokerage to confirm what can be moved. Once moved, you can sell and replace with a no fee fund at the new brokerage.
Thanks for the reminder about daily accrual, I am used to mutual funds, seems like ETFs are monthly. It is relatively small compared to the losses I can realize, but might be worth holding onto the mutual fund for some time.

You can move VWIUX in kind, but there are restrictions (for example, you cannot buy anymore), and need fee waivers for transactions.
Where can VWIUX be moved in-kind? When I check the fund research page on Fidelity's website, it doesn't show the detailed page for VWIUX (or other Vanguard muni bond mutual funds), which I understand to mean that it cannot be held at (or transferred to) Fidelity. Am I mistaken?
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Re: muni funds - TLH and converting to ETF's options

Post by skeptical »

Kookaburra wrote: Thu Jul 21, 2022 10:08 am
skeptical wrote: Thu Jul 21, 2022 6:44 am
SnowBog wrote: Wed Jul 20, 2022 10:07 pm If you haven't yet, read the muni bond section of the "finer points" in the wiki: https://www.bogleheads.org/wiki/Tax_loss_harvesting

My recollection is that if the fund doesn't handle things in a specific way (daily accrual if I remember) and you hold the fund for < 6 months, some of your loss is offset by the interest you earned.

While I didn't look super hard, the last time I looked I couldn't find any muni bond ETF that didn't run into this rule... As such, I've stuck with mutual funds (most of which seem to handle this in a way to not be impacted by the rule).

As for moving them out of Vanguard, you might be surprised that you can move them "in kind". At least most of my funds - including bond funds I thought - were able to be moved... (Money Market type funds cinch be moved...)

If that's the main driver, I'd ask the receiving brokerage to confirm what can be moved. Once moved, you can sell and replace with a no fee fund at the new brokerage.
Thanks for the reminder about daily accrual, I am used to mutual funds, seems like ETFs are monthly. It is relatively small compared to the losses I can realize, but might be worth holding onto the mutual fund for some time.

You can move VWIUX in kind, but there are restrictions (for example, you cannot buy anymore), and need fee waivers for transactions.
Where can VWIUX be moved in-kind? When I check the fund research page on Fidelity's website, it doesn't show the detailed page for VWIUX (or other Vanguard muni bond mutual funds), which I understand to mean that it cannot be held at (or transferred to) Fidelity. Am I mistaken?
Schwab told me I can move in-kind, but could not purchase additional shares. I need to double check, as it does seem odd that you can move admiral shares. I have not heard back from Fidelity on this.

This is a lot more complicated than I thought. Looking into this more, VTEAX seemed to be a better move than VWIUX, but it does monthly accrual as it is based on an ETF so a good part of the TLH gets lost (or maybe not, as I am buying into it), and it has had a purchase fee in the past, but (I think) not anymore.
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Re: muni funds - TLH and converting to ETF's options

Post by SnowBog »

The ETF version, VTEB of I recall correctly, didn't have a purchase fee - but it did not do daily accrual...

My recommendation is to separate out what you are trying to do...

If the primary goal is to move funds "in kind" into a new brokerage so as to not be out of the market, then focus on that. Maybe your existing fund are fine - for the move at least. Maybe doing a TLH inside Vanguard and moving to an ETF temporarily for the move works better for you. Maybe since muni bonds don't move much over the hopefully few days a transfer should take, you are comfortable liquidating those positions to cash for the move. But the first order of business is getting the funds where you want them...

Once the funds/shares/etc. are in your new broker, then you can switch to what you want to keep long term. As you noted, keeping the Vanguard mutual funds long term is probably a bad option, as you can't buy (or not without a transaction fee) more shares when at a different brokerage. Maybe you decide you are fine with ETFs, as with the exception of these past several months, it's very rare to TLH muni bonds (so the 6-month/daily accrual doesn't matter much to you). Or maybe Schwab has good no transaction fee options that you'll switch to long term.
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Re: muni funds - TLH and converting to ETF's options

Post by Electron »

Tax Loss Harvesting into VTEAX does look like a great option with the ability to convert directly to VTEB.

Most Vanguard Open Ended Tax Exempt bond funds have no issue with TLH in regards to the tax exempt income. They accrue dividends on the side and do not include tax exempt income in NAV. The problem occurs when a fund includes tax exempt income in NAV and later goes ex-dividend and pays out the tax exempt income.

It looks like VTEAX is one exception with tax exempt income included in NAV.

However, the Vanguard Open Ended Tax Exempt funds can have the issue with Long Term Capital Gains distributions. Many of the Vanguard Tax Exempt funds did pay Capital Gains distributions in December but fortunately six months have now passed.

If the six month rule is not met, the impact is relatively minor. Here is the text from the Wiki.

"Second, if those shares were held while the fund distributed (long term) capital gains, then the loss is treated as a long term loss up to the dollar amount of the distribution those shares produced."
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Re: muni funds - TLH and converting to ETF's options

Post by SnowBog »

Electron wrote: Thu Jul 21, 2022 2:40 pm If the six month rule is not met, the impact is relatively minor. Here is the text from the Wiki.

"Second, if those shares were held while the fund distributed (long term) capital gains, then the loss is treated as a long term loss up to the dollar amount of the distribution those shares produced."
Just to call it out - for me - the impact is really "how in the world am I supposed to track and remember this?" As I don't think the brokers do it for you...

Which again - for me - really becomes "I'd rather not deal with it - so I'll just stick with mutual funds that have daily accrual, so I don't have to worry about forgetting or calculating incorrectly."
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Re: muni funds - TLH and converting to ETF's options

Post by Electron »

SnowBog wrote: Thu Jul 21, 2022 4:12 pm Just to call it out - for me - the impact is really "how in the world am I supposed to track and remember this?" As I don't think the brokers do it for you...

Which again - for me - really becomes "I'd rather not deal with it - so I'll just stick with mutual funds that have daily accrual, so I don't have to worry about forgetting or calculating incorrectly."
Tracking is definitely a problem along with making the necessary adjustments on the tax return.

Unfortunately, the capital gains distribution problem remains for both mutual funds and ETFs. Note that those distributions are included in NAV until the fund goes ex-dividend and pays them out. The Wiki is not entirely clear on this point. However, the paragraph below does mention only interest.

"Note that most Vanguard Tax Exempt funds (and others like them) are not subject to the preceding 6 month rule because of the way they accrue and pay out interest (dividends). The 6 month rule for tax exempt interest comes from 26 U.S. Code § 852(b)(4)(B), but there is an exception in 852(b)(4)(E) for funds that declare dividends daily and pay them monthly or more frequently."
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