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  • Tax efficiency of several funds/classes?

    I'm looking at the tax efficiency of various asset classes in order to determine most appropriate placement of assets. For example, I know roughly that US total stock index funds are very tax efficient, followed by int'l total stock index funds, with US small cap as well as value index funds in the middle on the higher end, total bond funds are somewhere in middle on the lower end, and REITs are at the bottom.

    My question is where would the following funds/classes fall in such a spectrum?:

    1. DFA Target Value (DFFVX) (since it's not an index fund, but not a typical active fund)

    2. Emerging market fund (eg VEIEX)

    3. Int'l small cap fund (eg VFSVX)


     

  • #2
    Turnover is one of the biggest factors as it pertains to tax efficiency. Payment of dividends is another. Actively-managed and non-indexed funds will often sell to create taxable gains, which may be less than a year and subject to higher STCG tax, and may contain many dividend-paying stocks which increase the tax burden.

    As far as bonds go, many municipal bonds are tax-exempt.

    Look at rating organizations' evaluation of a fund's tax efficiency, such as Morningstar or Lipper. Your brokerage website should have that built into the UI.

    Here's a decent guide: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

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    • #3
      Its not necessarily the style of index that matters but rather the underlying assets and the legal structure of the product, eg, mutual fund vs. etf. Two SP500 funds can have vastly different tax consequences based on that structure. Then you have dividend rates, etc....There are special situations as well, such as REITs where it may be possible to be taxed at income levels but not really ever happen due to how the distributions come out in reality, DMFA discussed the exception of muni bonds.

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      • #4
        That bogleheads' link is where I got the list that I wrote out in my post...they have some graphics showing a spectrum of tax efficiency and where certain classes fall as a rough guide. Just wondering where in that graphic these other classes/assets would fall in order to make sure I place them in the most appropriate location.

        For instance, I know the DFA fund doesn't track an index despite being rather passive funds and can mitigate turnover by having a flexible trading approach instead of hard & fast rules for selling funds, etc., and I don't know how to judge/compare that to more bonafide index funds. I'm just curious about the DFA fund as it's a moot point because it's only accessible in my tax-deferred account.

        However, I have the availability to place EM and Int'l SC index funds in any type of account (tax-free, tax-deferred, or taxable), so I was just trying to get a sense of most ideal placement based on relative tax-efficiency. I understand that funds are constructed differently, so maybe consider the example Vanguard index fund options I listed for those classes, if that helps inform an answer?

        I know there are other factors for fund placement other than tax efficiency, but I'm just asking about it specifically. I'm not asking in which type of account I should put certain funds--I have a good idea about that, just want to make sure I'm thinking through the tax efficiency part.

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        • #5
          When I've done calculations, VSS turns out to be relatively tax inefficient.  Crappy QDI ratio (~53%) and not much of a foreign tax credit last year.  Personally, of all the stuff I have this would be the next thing I'd put in my Roth IRA after bonds and REITs.

          https://advisors.vanguard.com/VGApp/iip/advisor/csa/investments/taxcenter/articles?file=TaxFTSEAllWorldSmCap2015

          https://advisors.vanguard.com/VGApp/iip/advisor/csa/investments/taxcenter/yeartodate
          I sometimes have trouble reading private messages on the forum. I can also be contacted at [email protected]

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          • #6
            ETFs are in general better tax vehicles than mutual funds, whatever asset class you're considering, just look for the ETF version as a shortcut. When you start considering foreign taxes and other nuance, it gets more difficult and you have to judge whether its the diversification or income thats really important to you.

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