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Post by roi2020 on Aug 21, 2022 21:30:10 GMT
Vanguard designed a process which eliminated capital gains distributions for select equity index mutual funds.
They essentially added an ETF share class to an existing index mutual fund and used so-called heartbeat trades.
These trades rapidly pump money into/out of the ETF to wash away taxes for mutual fund shareholders.
Vanguard is the only firm using this innovation - they were awarded a patent in 2001 which is valid until 2023.
Other firms may copy this when the patent expires.
More detailed info here.
Edit: Added "equity" before "index mutual funds".
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Post by yogibearbull on Aug 21, 2022 22:30:18 GMT
Markets also cooperated by being mostly in bullish trend leading to fund inflows. Remember, VG has been the king of fund inflows.
Flipside of the connection between VG OEFs and ETFs is that when there were large redemptions/outflows in 2020 (and in any other years), both the VG OEF and the related VG ETF had similar CG distributions. See the short table below.
Self-standing non-VG bond ETFs didn't have this issue. Much of the benefit from the ETF structure is from the combination of indexing and nontaxable in-kind trading. There are some additional benefits from the VG patented structure of having OEF and ETF classes. VG didn't license its patent to anybody else and others didn't really beg VG for that license. But things may change in/after 2023.
2020 CGs for several VG bond funds
VEDTX /EDV 3.16%
VBLAX /BLV 2.69%
VBILX /BIV 0.71%
VSIGX /VGIT 0.71%
VSBSX /VGSH 0.60%
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Post by roi2020 on Aug 22, 2022 1:06:36 GMT
Vanguard's domestic equity index mutual funds with an ETF share class are listed below ¹.
Vanguard 500 Index (VFIAX)
Vanguard Dividend Appreciation Index (VDADX)
Vanguard Extended Market Index (VEXAX)
Vanguard Growth Index Fund (VIGAX)
Vanguard High Dividend Yield Index (VHYAX)
Vanguard Large-Cap Index (VLCAX)
Vanguard Mid-Cap Growth Index (VMGMX)
Vanguard Mid-Cap Index (VIMAX)
Vanguard Mid-Cap Value Index (VMVAX)
Vanguard Small-Cap Growth Index (VSGAX)
Vanguard Small-Cap Index (VSMAX)
Vanguard Small-Cap Value Index (VSIAX)
Vanguard Total Stock Market Index (VTSAX)
Vanguard Value Index (VVIAX)
After the corresponding ETF share class was added, there were no capital gains distributions for these funds.
¹ excludes institutional funds.
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Post by anitya on Aug 22, 2022 1:55:26 GMT
Along the lines of yogibearbull post, I have gone out of my way to avoid Vanguard ETFs that are linked to their mutual funds once I realized that redemptions in the mutual funds could bite me, as the associated ETF investor. I have to respect the potential for it, given Vanguard funds' prevalence in institutional retirement accounts, the potential for the plans to change available funds, and the increase in market timing activity of equity indices by retail and institutional investors. Vanguard's zest for competing on ER can be an added factor in generating capital gains. |
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Post by roi2020 on Aug 22, 2022 2:49:54 GMT
Ben Johnson from M* examines the risks for Vanguard's unique ETFs.
Key Takeaways
1) Vanguard's ETF-as-a-share-class structure has several benefits and one key drawback: a unique source of tax risk that is absent in stand-alone ETFs.
2) I don't think this is a risk that investors should fret over, as it's unlikely that Vanguard investors will flock toward the exits en masse, the risk can be managed,
it varies across market environments, and it is diminishing as the ETFs are growing more rapidly than the mutual fund share classes.
3) Investors can assess the level of risk in a Vanguard ETF by looking at its size relative to the fund and trying to understand the nature and objectives
of shareholders in the mutual fund share classes.
Link
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Post by bizman on Aug 22, 2022 3:30:23 GMT
I apologize in advance for being a bit thick, but does this mean that VIG, VYM, VOO, & VPU should be avoided for other brands of ETFs? SPY instead of VOO, XLU instead of VPU, etc.?
My understanding was that ETFs are tax advantaged compared to open ended funds. Not true anymore?
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Post by anitya on Aug 22, 2022 5:50:13 GMT
bizman, I stopped adding to VIG and VIGI. I had been using ETFs only in taxable accounts. The tax advantage of the ETF wrapper suffers a leakage when the ETF is a class of shares of a mutual fund such as with certain Vanguard funds, as identified in the previous posts. P.S.: When Vanguard changed the index provider for VIG and VIGI in 2021, we received good size (for a passive strategy) taxable capital gain distributions.
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Post by roi2020 on Aug 22, 2022 5:54:50 GMT
I apologize in advance for being a bit thick, but does this mean that VIG, VYM, VOO, & VPU should be avoided for other brands of ETFs? SPY instead of VOO, XLU instead of VPU, etc.? My understanding was that ETFs are tax advantaged compared to open ended funds. Not true anymore?
Personally, I wouldn't avoid them.
I haven't researched Vanguard international equity ETFs, fixed-income ETFs, or sector ETFs.
If you haven't done so already, you may want to read Ben Johnson's article referenced above.
Mr. Johnson does a good job evaluating the risks.
It's true that equity index ETFs are usually more tax-efficient than equity index mutual funds due to the in-kind creation/redemption process.
anitya ,The VIG statutory prospectus indicates there were no capital gains distributions from 2018 - 2022 (year ended January 31).
The VIGI statutory prospectus indicates there were no capital gains distributions from 2017 - 2021 (year ended October 31).
All distributions were attributed to dividends.
Vanguard International Dividend Appreciation (VIGI) was estimated to pay capital gains of $5.23 (6.02% of NAV) on 12/23/21. |
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Post by chang on Aug 22, 2022 9:10:41 GMT
Along the lines of yogibearbull post, I have gone out of my way to avoid Vanguard ETFs that are linked to their mutual funds once I realized that redemptions in the mutual funds could bite me, as the associated ETF investor. I have to respect the potential for it, given Vanguard funds' prevalence in institutional retirement accounts, the potential for the plans to change available funds, and the increase in market timing activity of equity indices by retail and institutional investors. Vanguard's zest for competing on ER can be an added factor in generating capital gains. I’ve wondered about that, too. I’ve owned VIG for a long time (maybe 10 years), so I’ve got tax handcuffs and wouldn’t sell … besides, I like the fund. But I’ve wondered whether the ETF could avoid CGs if investors dumped the OEF class VDADX. Honestly, I never really looked into it very much. When I bought VIG I thought it was a good investment, the best of its type, and haven’t looked back. But I suppose an ETF like SCHD has an advantage because there is no OEF class. |
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Post by anovice on Aug 22, 2022 9:11:52 GMT
anitya , I believe you are mistaking VDIGX (Dividend Growth) fund as a corresponding mutual fund to VIG, which it is NOT. VDIGX is a stand alone actively managed mutual fund that does not have a corresponding ETF share class. The aforementioned VIG ETF has an open ended indexed mutual fund VDAIX(VDADX) (Dividend Appreciation) fund as a share class brother which as mentioned, both have not had any capital gains distributions in the time mentioned. advisors.vanguard.com/tax-center/year-end-distributionsThe reason I know is I have heard you mention this before several times. I own both. fishingrod, Why own both VDIGX and VIG (VDADX)? |
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Post by fishingrod on Aug 22, 2022 9:23:37 GMT
I really shouldn't have VDIGX in a taxable account. But I convinced myself a long time ago with help from M*, that it was a low turnover fund that would deliver low capital gains distributions. I was wrong. I was not as tax savvy back then, still aren't. I now have large capital gains in VDIGX, so I feel like I have tax handcuffs on. I invested in VDADX also a long time ago when I saw outperformance over VDIGX, especially in a taxable account. Not so much recently. I haven't added to VDIGX in a long time.
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Post by chang on Aug 22, 2022 10:27:19 GMT
I also own VIG and VDIGX. VIG in taxable (fortuitously, I chose the ETF because it’s at Fido). Recently bought VDIGX in a VG IRA. Mainly for diversification purposes - chunky enough sums in both positions; similar funds but by no means the same. Interesting to watch the divergences.
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Post by anovice on Aug 22, 2022 12:04:46 GMT
I really shouldn't have VDIGX in a taxable account. But I convinced myself a long time ago with help from M*, that it was a low turnover fund that would deliver low capital gains distributions. I was wrong. I was not as tax savvy back then, still aren't. I now have large capital gains in VDIGX, so I feel like I have tax handcuffs on. I invested in VDADX also a long time ago when I saw outperformance over VDIGX, especially in a taxable account. Not so much recently. I haven't added to VDIGX in a long time.
Fishingrod, My exact situation too but instead of redirecting dividends, capital gains, and new money to VDADX, I am using VTSAX. |
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Post by anitya on Aug 22, 2022 19:02:52 GMT
anitya , I believe you are mistaking VDIGX (Dividend Growth) fund as a corresponding mutual fund to VIG, which it is NOT. VDIGX is a stand alone actively managed mutual fund that does not have a corresponding ETF share class. The aforementioned VIG ETF has an open ended indexed mutual fund VDAIX(VDADX) (Dividend Appreciation) fund as a share class brother which as mentioned, both have not had any capital gains distributions in the time mentioned. advisors.vanguard.com/tax-center/year-end-distributionsThe reason I know is I have heard you mention this before several times. I own both. No, I am not mistaking VDIGX for the mutual fund associated with VIG. I used to own both for sometime. I sold all of VDIGX thinking I was going to switch to another dividend appreciation strategy and VIG was my target until I realized tax issues unique to ETFs associated with Mutual funds at Vanguard. I did not have room in my IRAs for ETFs at that time. VIG did not have capital gain distribution from its index change because it carried realized capital losses that it was able to offset against realized capital gains. VIGI had a capital gain distribution of 6.25% (5.18/82.88 per M*) which is large for any vehicle that is touted as tax efficient, especially when it is a passive strategy and investors are likely to carry it in their taxable account. No agenda here. I am happy to delete my posts if you guys like. |
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Post by anitya on Aug 22, 2022 19:23:47 GMT
fishingrod , As I was editing my post, you replied. I added more info to my post if it is of any value. "The reason I know is I have heard you mention this before several times." "I am just saying what I have heard from you several times." What is that you heard from me several times? I can not figure out from your posts and so I had to ask.
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Post by anitya on Aug 23, 2022 5:41:39 GMT
fishingrod , As I was editing my post, you replied. I added more info to my post if it is of any value. "The reason I know is I have heard you mention this before several times." "I am just saying what I have heard from you several times." What is that you heard from me several times? I can not figure out from your posts and so I had to ask. I heard you mention about VDIGX's ETF share class that it doesn't have. I even responded back to correct the wrong connection a couple times, but not recently. Maybe it was just a case of mis-wording, anyway no big deal.
I have no argument here either. Yes VIGI certainly wasn't tax efficient.
Please provide the links to the posts where you think I mentioned about VDIGX’s non-existing ETF share class that required you correcting me a couple of times. |
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Post by fishingrod on Aug 23, 2022 7:26:05 GMT
I don't have the time and it is not important to me or you. Other things to worry about!!!! I am deleting my posts. You can delete yours if you want. I didn't mean to start a cat fight. |
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Post by anitya on Aug 23, 2022 20:33:49 GMT
I don't have the time and it is not important to me or you. Other things to worry about!!!! I am deleting my posts. You can delete yours if you want. I didn't mean to start a cat fight. This is not about starting cat fights - it is important to a public forum to have accurate factual information. This is not about me - I take a lot of pain and effort when posting to make sure I am providing accurate facts so people relying on the info I provide are not misled / hurt. (I probably spend at least 30 minutes to draft /make a post.) When you repeatedly said I had made the same factual inaccurate statement several times in the past which you say you had to correct at least twice, I thought it is important to bring those instances to light (i.e., provide proof of those instances so everybody could see) because it would establish I am delusional and harmful to the public. If that is the case, I should withdraw from posting anywhere, like so many wise people seem to do. |
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Post by richardsok on Aug 23, 2022 21:29:39 GMT
I don't have the time and it is not important to me or you. Other things to worry about!!!! I am deleting my posts. You can delete yours if you want. I didn't mean to start a cat fight. This is not about starting cat fights - it is important to a public forum to have accurate factual information. This is not about me - I take a lot of pain and effort when posting to make sure I am providing accurate facts so people relying on the info I provide are not misled / hurt. (I probably spend at least 30 minutes to draft /make a post.) When you repeatedly said I had made the same factual inaccurate statement several times in the past which you say you had to correct at least twice, I thought it is important to bring those instances to light (i.e., provide proof of those instances so everybody could see) because it would establish I am delusional and harmful to the public. If that is the case, I should withdraw from posting anywhere, like so many wise people seem to do. I earnestly hope you both stick around. |
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Post by fishingrod on Aug 23, 2022 22:06:09 GMT
I don't have the time and it is not important to me or you. Other things to worry about!!!! I am deleting my posts. You can delete yours if you want. I didn't mean to start a cat fight. This is not about starting cat fights - it is important to a public forum to have accurate factual information. This is not about me - I take a lot of pain and effort when posting to make sure I am providing accurate facts so people relying on the info I provide are not misled / hurt. (I probably spend at least 30 minutes to draft /make a post.) When you repeatedly said I had made the same factual inaccurate statement several times in the past which you say you had to correct at least twice, I thought it is important to bring those instances to light (i.e., provide proof of those instances so everybody could see) because it would establish I am delusional and harmful to the public. If that is the case, I should withdraw from posting anywhere, like so many wise people seem to do.
You are not delusional or any harm to anyone. If anyone is, it would be me. It was a mistake on my part and I apologize. You provide great information and are an asset to this forum. Please stay around and help others. You are a keeper!! I mean this from my heart.
Fishingrod
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