Vanguard Small Cap Growth Index Fund tax distributions
Small Cap Growth Index |
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The Vanguard Small Cap Growth Index Fund is a suitable candidate for placement in taxable accounts. The fund tracks the CRSP US Small Cap Index and is one of three passively managed Vanguard small cap funds. The fund has been recommended for the following situations:
- An investor who is employed by a value company may wish to diversify away the risk to his human capital by allocating investment capital to growth companies.
- John Bogle has stated that Vanguard created style index funds with tax consequences as the paramount factor that should guide investors.[notes 1]
The table below summarizes the fund's relation to a number of tax factors.
The following tables provide long term data on the fund's history of both dividend and capital gains distributions. The first table also provides the historical distribution of qualified dividends.
The second table provides a database of the fund's accounting figures: the annual level of realized and distributed gains; its level of unrealized gains and loss carryforwards; as well as the annual in-kind redemption gains the fund has realized. These figures highlight the level of a fund's tax liabilities.
Because both manager turnover of securities inside the portfolio and investor turnover of fund shares can affect the level of gains realization, a third table provides historical turnover ratios.
Distributions
Fund distributions |
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Data sources |
The following table provides a view of the fund's historical distributions expressed in terms of yields. We can see that the fund has made one capital gains distribution (2000) since its inception in 1998. The fund has distributed an average of 76% qualified dividends, which under the current tax regime, are taxed at lower capital gains tax rates.
The fund has changed tracking indexes twice in its history. The transition years of benchmark changes are marked in red shading.
Year | Dividend Investor shares, [1] |
Dividend ETF shares [1] |
Short-term Capital Gains [2] |
Long-term Capital Gains [2] [notes 2] |
Qualified Dividends [3] |
(FY) Annual Return - Investor [4] |
2019 | 0.35% | 0.65% | 0.64% | 0.00% | 72.59% | 32.60% |
2018 | 0.58% | 0.70% | 0.70% | 0.00% | 67.43% | -5.80% |
2017 | 0.78% | 0.90% | 0.90% | 0.00% | 52.98% | 21.78% |
2016 | 1.03% | 1.15% | 1.15% | 0.00% | 50.55% | 10.61% |
2015 | 0.82% | 0.94% | 0.00% | 0.00% | 55.50% | -2.64% |
2014 | 0.87% | 1.01% | 0.00% | 0.00% | 51.50% | 3.88% |
2013 | 0.63% | 0.78% | 0.00% | 0.00% | 53.56% | 37.98% |
2012 | 0.97% | 1.11% | 0.00% | 0.00% | 81.75% | 17.52% |
2011 | 0.37% | 0.51% | 0.00% | 0.00% | 85.83% | -1.58% |
2010 | 0.43% | 0.57% | 0.00% | 0.00% | 78.89% | 30.69% |
2009 | 0.33% | 0.47% | 0.00% | 0.00% | 78.89% | 41.85% |
2008 | 0.60% | 0.72% | 0.00% | 0.00% | 70.11% | -40.00% |
2007 | 0.52% | 0.63% | 0.00% | 0.00% | 83.16% | 9.63% |
2006 | 0.30% | 0.41% | 0.00% | 0.00% | 93.56% | 11.94% |
2005 | 0.27% | 0.37% | 0.00% | 0.00% | 100.00% | 8.64% |
2004 | 0.13% | 0.15% | 0.00% | 0.00% | 100.00% | 16.06% |
2003 | 0.21% | n/a | 0.00% | 0.00% | n/a | 42.88% |
2002 | 0.24% | n/a | 0.00% | 0.00% | n/a | -15.41% |
2001 | 0.11% | n/a | 2.53% | 3.56% | n/a | -0.78% |
2000 | 0.03% | n/a | 0.00% | 0.00% | n/a | 1.59% |
1999 | 0.33% | n/a | 0.00% | 0.00% | n/a | 19.80% |
1998 | 0.63% | n/a | 0.00% | 0.00% | n/a | -4.77% |
- FY 2013- The fund changed benchmarks for the MSCI US Small Growth Index to the CRSP US Small Growth Index on 4/16/2013.
- FY 2011- The fund introduced admiral shares on 09/28/2011.
- FY 2004- The fund introduced ETF shares on 01/26/200
- FY 2003- The fund made a change of benchmark on 05/16/2003, moving from the S&P Small Cap 600/Barra Growth Index to the MSCI US Small Cap Growth Index.
Accounting data
The accounting figures and associated ratios (tables 3 and 4) can help one visualize some of the major determinants of a fund’s tendency to distribute taxable gains. These determining features include:
Turnover: The rate at which a fund manager sells securities within the fund has a major effect on potential gains realization. Single digit annual fund turnover percentages result in a low rate of realized gains. Similarly, fund shareholders' sales flows have major effects on a fund’s distribution tendencies. Net flows into the fund have the following effects:
- Constant inflows allow a fund manager to purchase a wide range of price lots for shares. The manager can select high basis shares when forced to sell a stock (this may realize a loss). The manager can also select low basis shares when redeeming a stock in-kind (a non-taxable transaction that can remove an unrealized gain out of the portfolio.)
- A large and growing net asset base serves to diffuse any realized capital gains across a large base of shareholders and reduces the per share gain distribution. Large outflows have the opposite effect; any gains realized are spread across a smaller asset base and result in higher per share distributed gains. [5]
The level of unrealized gains and carryover realized losses in a fund: A fund which defers gains realization accumulates unrealized appreciation, which when distributed, will be taxed; thus the unrealized gain/loss figure shows the potential gain (or loss) that would be realized if the portfolio was to be entirely liquidated. Any loss carryovers a fund possesses can be used to offset future realized gains. The second tab on the Table 3. spreadsheet shows the data in percentage of total assets form.
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Turnover
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Tax rates
Mutual fund distributions will be taxed according to the tax laws governing the investment over the holding period of the investment, which are subject to change. The actual tax imposed will depend upon each individual's tax rate and the timing of purchases and sales. The federal tax rates applicable to mutual fund distributions and investor sales of securities for the period 2013 onward are outlined below. Keep in mind that investment income may also be subject to state and local taxation.
- Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates up to 37%. Mutual fund short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
- Long-term capital gains distributions are made from realized gains on securities held for more than one year. Long-term gains are taxed at 0% for taxpayers in the 10% and 12% tax brackets, at 15% for taxpayers in the middle tax brackets, and at 20% between the 35% and 37% tax brackets. They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
- Qualified dividends are the ordinary dividends [notes 3] that are subject to the same tax rate that applies to long-term capital gains. They should be shown in box 1b of the Form 1099-DIV you receive.
- When you sell at a loss you will either offset capital gains which would have otherwise been taxed at your capital gains rate or you will offset income (up to $3,000 maximum per year) which would have otherwise been taxed at your marginal income tax rate, or both. If you offset capital gains that would have otherwise not been taxed at all (because your capital gains tax rate is 0%) then this part of the tax loss harvest may be an outright loss.
- The Affordable Care Act imposes a Medicare surcharge of 3.8% on all net investment income (NII) once the taxpayer's adjusted gross income exceeds $200,000 (single) or $250,000 (married); while this tax is not part of the income tax, it has the same effect on investors as a higher tax rate. The NII tax begins to apply to individuals falling in the 33% tax bracket. Thus the top effective marginal tax rate is 23.8% on qualified dividends and long-term gains, 43.4% on ordinary investment income.
Filing status and annual taxable income - 2024 | Ordinary income tax rate | ||||
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Single | Married Filing Jointly or Qualified Widow(er) | Married Filing Separately | Head of Household | Trusts and Estates | |
$0-$11,600 | $0-$23,200 | $0-$11,600 | $0-$16,550 | $0-3,100 | 10% |
$11,601-$47,150 | $23,201-$94,300 | $11,601-$47,150 | $16,551-$63,100 | n/a | 12% |
$47,151-$100,525 | $94,301-$201,050 | $47,151-$100,525 | $63,101-$100,500 | n/a | 22% |
$100,526-$191,950 | $201,051-$383,900 | $100,526-$191,950 | $100,501-$191,950 | $3,101-$11,150 | 24% |
$191,951-$243,725 | $383,901-$487,450 | $191,951-$243,725 | $191,951-$243,700 | n/a | 32% |
$243,726-$609,350 | $487,450-$731,200 | $243,726-$365,600 | $243,701-$603,950 | $11,151-$15,200 | 35% |
$609,351+ | $731,201+ | $365,600+ | $603,951+ | $15,201+ | 37% |
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Filing status and annual taxable income - 2024 | Long-term capital gain rate | ||||
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Single | Married Filing Jointly or Qualified Widow(er) | Married Filing Separately | Head of Household | Trusts and Estates | Qualified dividends and other investments |
$0-$47,025 | $0-$94,050 | $0-$47,025 | $0-$63,000 | $0-$3,100 | 0% |
$47,026-$518,900 | $94,041-$583,750 | $47,026-$291,850 | $63,001-$551,350 | $3,101-$15,450 | 15% |
$518,901+ | $583,751+ | $291,851+ | $551,351+ | $15,451+ | 20% |
Filing status and annual taxable income - 2023 | Ordinary income tax rate | ||||
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Single | Married Filing Jointly or Qualified Widow(er) | Married Filing Separately | Head of Household | Trusts and Estates | |
$0-$11,000 | $0-$22,000 | $0-$11,000 | $0-$15,700 | $0-$2,900 | 10% |
$11,001-$44,725 | $22,001-$89,450 | $11,001-$44,725 | $15,701-$59,850 | n/a | 12% |
$44,726-$95,375 | $89,451-$190,750 | $44,726-$95,375 | $59,851-$95,350 | n/a | 22% |
$95,376-$182,100 | $190,751-$364,200 | $95,376-$182,100 | $95,351-$182,100 | $2,901-$10,550 | 24% |
$182,101-$231,250 | $364,201-$462,500 | $182,101-$231,250 | $182,101-$231,250 | n/a | 32% |
$231,251-$578,125 | $462,501-$693,750 | $231,251-$346,875 | $231,251-$578,100 | $10,551-$14,450 | 35% |
$578,126+ | $693,751+ | $346,876+ | $578,001+ | $14,451+ | 37% |
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Filing status and annual taxable income - 2023 | Long-term capital gain rate | ||||
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Single | Married Filing Jointly or Qualified Widow(er) | Married Filing Separately | Head of Household | Trusts and Estates | Qualified dividends and other investments |
$0-$44,625 | $0-$89,250 | $0-$44,625 | $0-$59,750 | $0-$3,000 | 0% |
$44,626-$492,300 | $89,251-$553,850 | $44,626-$276,900 | $59,751-$492,300 | $3,001-$14,650 | 15% |
$492,301+ | $553,851+ | $276,901+ | $492,301+ | $14,651+ | 20% |
Tax analysis
The annual fund accounting figures show that the Vanguard Small Cap Growth Index fund, while benchmarked to the MSCI small growth index, provided turnover ratios ranging between 30% to 40%. Since changing to the CRSP benchmark, the fund turnover ratio has ranged between 19% to 26%. This moderately high turnover can be attributed to the fact that stock migration out of a mid cap growth index can come in the following dimensions:
- An individual company becomes relatively larger and migrates to a mid cap index;
- An individual company becomes relatively smaller and migrates to a micro cap index;
- An individual company migrates to a value index;
- An individual company is bought out or merged with a second company.
Shareholder turnover, revealed in the Redemptions/Average Net Assets (R/ANA) metric, shows that shareholders have gravitated towards a shareholder turnover range of between 20% to 40%, suggesting, on average a three to five year holding period. [notes 4]
A look at realized net gains/losses shows that the fund has realized net losses in eight of the past ten years (see the second tab, tax attributes in Table 3 above for net loss data). These losses produce loss carryforwards. These carryforward losses have been used to offset realized gains during the period of market recovery after the 2008 bear market, and remain available to offset future realized gains.
The following table presents the federal tax cost on the fund's historical distributions (see second tab, table 6.) under the current tax regime (with dividends taxed and long term capital gains taxed at 0%, 15%, or 20% depending on marginal tax rates, and an additional 3.8% ACA Net Investment Income tax tax assessed at the higher tax brackets). Keep in mind that distributions can also be subject to state and local taxation, with marginal rates ranging from 0% to 13% (an average 5% state tax rate will add an approximate 0.02% to the annual tax cost of holding the fund.) The average is based on the results from qualified dividend tax regime period 2004-2018.
The table does not include the capital gains cost associated with selling the fund at a gain.[notes 5]
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John Bogle's original insight into the relative tax efficiency of growth indices is evidenced in the following table of relative yields. The third tab provides the results for small cap value and growth indices.
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Notes
- ↑
I expect that the new style indexes will greatly assist investors in meeting their particular investment objectives. In the accumulation phase of your life, you might be well served by a relatively low dividend yield to minimize your taxes. At retirement and in the distribution phase of your life, you would presumably be better served by a higher yield.
— John Bogle, Bogle On Mutual Funds: New Perspectives for the Intelligent Investor, ISBN 978-1556238604, p. 184. - ↑
Table 8. Capital gains
(View Google Spreadsheet in browser, then File --> Download as to download the file.)
Note: If the spreadsheet is blank, select a different sheet, then back to that sheet. The image will be refreshed. - ↑ Fairmark says:
A portion of your ordinary dividend may be nonqualified because it can include items like these:
- Taxable interest. When a mutual fund receives taxable interest, the income gets paid out as a dividend. It's a dividend when it goes out of the mutual fund, but it wasn't a dividend when it came into the mutual fund, so it can't be a qualified dividend.
- Nonqualified dividends. Your mutual fund may receive dividends that are nonqualified. For example, the mutual fund may sell shares just 35 days after buying them, but after receiving a dividend. The mutual fund has to hold the shares at least 61 days to have a qualified dividend. Any amount the mutual fund receives as a nonqualified dividend gets paid to you as a nonqualified dividend.
- Short-term capital gain. When a mutual fund has a short-term capital gain, it pays this amount to the mutual fund shareholders as an ordinary dividend.
- Holding mutual fund shares less than 61 days. You should also be aware that any dividend you receive on mutual fund shares held less than 61 days is a nonqualified dividend, even if the mutual fund reports that amount to you as a qualified dividend. You don't have to buy the shares 61 days before the dividend is paid, but the total amount of time you hold the shares (including time before and after the dividend) has to be at least 61 days.
- ↑ One should also note that Vanguard includes share class conversions (investor/admiral) in the sales and redemptions totals for the fund. Vanguard does not quantify conversions. These non-transaction conversions inflate the reported shareholder ratios. The fund has experienced steady growth of the ETF share class, which makes up a growing portion of fund total assets:
Chart: ETF ratio to total fund assets
(View Google Spreadsheet in browser, then File --> Download as to download the file.)
Note: If the spreadsheet is blank, select a different sheet, then back to that sheet. The image will be refreshed.
- ↑ This table indicates the additional cost for the capital-gains tax when you sell, assuming that you pay taxes on the distribution and reinvest the after-tax portion of the distribution; since it is a one-time cost, the effect is annualized. For example, if you hold an investment for 30 years and lose 10% to taxes when you sell, that is equivalent to losing 0.35% every year. Thus, if you sell the fund, your cost will be the sum of the Table 6 and Table 9 costs. However, you would not pay the Table 9 cost on any stock which you either leave to your heirs or donate to charity, and thus may not pay that cost on your full investment. In particular, you might estimate your total tax cost by using the low-return line in Table 9; if stock returns are high, you will have a large taxable account and will reduce the tax cost by taking longer to deplete it or by not spending it all during your lifetime.
Taxes are computed at a tax rate of 15% on long-term gains (except in the "rate rises to 20% column", which applies if that tax reduction is allowed to expire), and on qualified dividends (except in the "no QDI" column, which applies if the tax reduction on qualified dividends expires and the rate is 35%). Although not tabulated, keep in mind that investors in the lower tax brackets (15% or lower) pay lower federal tax rates on investment income for the period 2003 - 2019, and reap higher after-tax returns, outside of tax-exempt municipal bonds, in all asset classes.
Table 9. Additional hypothetical tax costs (after taxable funds are sold) Fund Pre-tax Returns Distributions Tax Cost Annualized cost over 10 years Annualized cost over 20 years Annualized cost over 30 years 30-year cost if CG tax rate rises to 20% Any bond any all any 0.00% 0.00% 0.00% 0.00% Tax-efficient stock, low returns 5.00% 2.00% 0.30% 0.36% 0.30% 0.25% 0.33% Tax-efficient stock, medium returns 8.00% 2.00% 0.30% 0.63% 0.47% 0.37% 0.50% Tax-efficient stock, high returns 11.00% 2.00% 0.30% 0.84% 0.58% 0.43% 0.58% Tax-inefficient stock, low returns 5.00% 4.00% 1.00% 0.12% 0.10% 0.09% 0.12% Tax-inefficient stock, medium returns 8.00% 4.00% 1.00% 0.43% 0.33% 0.26% 0.35% Tax-inefficient stock, high returns 11.00% 4.00% 1.00% 0.66% 0.47% 0.35% 0.47%
Almost all of the dividends distributed by Equity REITS come in the form of non-qualified dividends. Non-qualified dividends are taxed at marginal income tax rates.
See also
- FAQ small cap funds
- Small caps
- US small cap index returns
- Vanguard statistical data spreadsheets
- Vanguard small cap index fund tracking error
- Vanguard ETF/fund ratios
References
- ↑ 1.0 1.1 Dividend data is derived from the Complete filings: N-CSR reports back to 2003; N-30D reports back to 1994
- ↑ 2.0 2.1 Capital Gains are derived from annual reports, and are calculated by dividing the dollar amount capital gain distribution by the average net assets of the fund, derived from NSAR reports
- ↑ Data derived from Vanguard site.
- ↑ Data derived from annual reports.
- ↑ Larry E. Swedroe, What Wall Street Doesn’t Want You To Know, 2001, pp.227-28. ISBN 0312335725
External links
- Current tax attributes and distributions: Vanguard
- State Individual Income Tax Rates, 2019, The Tax Foundation
- Tax information-Vanguard funds, qualified dividends, see also past years data tab.