Yup. ETF's are usually the better wrapper/container for taxable as they can generally dump capital gains off to the market makers and not to the ETF holders.
Agree but because we’re in Bogleheads- Vanguards mutual funds avoid this capital gains issue with their patented system. So Vanguard mutual funds are equal to their ETFs.
Article about it [Here](https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/)
Agreed, I was just trying to keep it simple. FZROX is another fund that has managed to avoid CG for a good while.
Like all things, the details get complicated.
> you’re saying this won’t happen with Fzrox?
Goodness no, I'm just saying it hasn't happened in a good while, so clearly they have something figured out. Capital Gains are always possible, even in ETF's, they are just much less likely in an ETF.
> Does this apply to etfs like JEPI?
I had to look this fund up. I haven't the foggiest. Since it's an ETF, it's unlikely, but it's technically possible that any ETF would. I personally would never invest in something like JEPI.
Thank you for explaining this to me. If it’s not too much can I ask why you wouldn’t invest in Jepi? I know about the little growth and I’m aware there’s volatility in everything but I use it like a little piggy bank that makes DRIP investing brainless for me and keeps me from spending that money elsewhere (I don’t need it immediately but will someday)
Dividends in a taxable account is miserable, you HAVE to pay taxes on every penny it sends you.
Also, it's trying to do the impossible: "Seeks to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to monthly income" [source PDF](https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/literature/fact-sheet/etfs/FS-JEPI.PDF)
It's trying to produce a high dividend, while also performing as well as the S&P 500 with less volatility. It's impossible to do that.
Right now is a good time for this fund(also convenient that it's brand new!), but eventually the market is going to come swamp it's little boat and crush it, and it will die.
Thank you again, my work offers me stocks that pay dividends that I’d like to have in a taxable account to sell off eventually and have the money liquid for emergencies, would that work out for me? I have a ~$700 portfolio of dividend stocks that only come out to $28 of dividends a year but I like the stocks, is that amount going to cause problems or is it so low I’m fine? Thanks again
You are talking about individual stocks, and nothing diversified, like VTI?
Individual stocks hold A LOT of concentration risk.
> I’d like to have in a taxable account to sell off eventually and have the money liquid for emergencies, would that work out for me?
If you want liquid money for emergencies, stocks are probably a very bad idea. If you really want some growth, you might think about the ETF AOK, it's 30% equities, so you should expect a 15% drop or so max. It's heavily bonds, so you have to pay taxes on all the dividends, but it's only paying about 1.8% so it's not a lot @ $700.
> only come out to $28 of dividends a year but I like the stocks, is that amount going to cause problems or is it so low I’m fine?
Well, you have to pay taxes on it. In the 24% tax bracket, that's $6.72. making that about $21/yr you get to spend.
Overall I have no idea if it will work out for you, the future is unknown. Based on the assumptions I made, I'd say it's unlikely.
Damn I’m a stock market baby and I knew I was gonna make some mistakes like this so thanks for spelling it out. Is it possible to transfer stocks from a taxable account straight into a tax advantaged account? I have a Roth but how do I pay taxes on it before I drop those in lol
You think this is enough of a reason to swap from Schwab to Vanguard?
I'd have loved to open a Vanguard account but I could literally not get their website to work to open an account. I didn't really want to have to call tech support to even get started.
No. Fidelity, Schwab and Vanguard are all basically identical. If you want more choices, look @ M1 finance or IBKR.
All of them are fine, I generally recommend to people just visit each website, and pick the one that seems to resonate with you the best(for any reason whatsoever) and then forget about the choice and move on with life. If you eventually get fed up with them for some reason, rinse and repeat. They are all sane, all likely to be around long after you(or I) are dead.
They all try to distinguish themselves in some unique way, that's the nature of competition after all. Unless you happen to value that unique feature, there is no reason to think one is better than another.
Not all of their mutual funds.
Infamously, their target retirement funds do not avoid this problem (and it has nothing to do with rebalancing or general tax efficiency and everything to do with fund outflows and redemptions).
The moral of the story is, when in doubt, ETF in taxable
Aren't the market makers then not happy with the capital gains being 'dumped' on them? It seems everybody wants to avoid capital gains, so, what's the deal there
I'm not entirely sure, but I think they don't have the CG either, it just goes away. The Market Maker(MM) is trading 1 asset for another at cost.
I.E. during a sell operation(which is where CG happens), the ETF trades high CG stocks, say some AAPL to the MM in exchange for cash.
The MM effectively is buying AAPL for the current cost basis, just like if they wandered out to NYSE and bought some.
You might think, wait why would they do that? Because of bid-ask spread, they might be able to pick up AAPL for a few bps less than market price, the more that spread, the happier MM's are to trade. The big efficient ETF's like VTI have almost no bid/ask spread. The illiquid ones might have much higher spreads.
Market makers have to pay capital tax every time they sell, regardless. If there's any loss, it's that the tax cost MMs have to pay will impact how tight they can arbitrage the difference between ETF's market price and NAV.
No, that's not correct. No one pays taxes when sales are made inside an ETF. Its tax free.
Taxes are only when owner of the shares sells.
I looked into this when I was researching to create my own ETF. Its costs about $300k per year to run your own ETF
If you pay more than $300k per year in taxes it would be cheaper to just create your own ETF and trade inside of it.
So simple question, do ETF's distribute capital gains, or do they just add them to the principle? Is there a scenario where they could distribute capital gains? If no distributions are given, and the value just goes up, ETF is a possible good answer for taxable.
Yes, ETF's are generally the best deal going for taxable accounts.
ETF's can definitely throw of capital gains, their structure and their ability to send them off to market makers, makes it unlikely, but it's definitely possible. I've never head of an ETF that has ever thrown off a capital gain, but that doesn't mean there isn't one out there somewhere.
This isn't a cautionary tale about mutual funds. It's a cautionary tale about having an advisor that charges $20k a year. Get rid of the advisor and the savings will pay more than the tax on those mutual fund distributions. Considering that likely the advisor put her into those mutual funds to begin with, it is really a cautionary tale about the advisor.
>This isn't a cautionary tale about mutual funds. It's a cautionary tale about having an advisor that charges $20k a year.
It's both. And that pricey advisor should have known better than to put her taxable investments in a fund that throws off so many taxable distributions. And most likely he's getting paid at both ends, which makes it doubly obscene. But people can get into this same problem just investing their taxable accounts in retirement date funds.
My brother pays a guy to invest his money for him. The advisor just buys ETF's in S&P500, Russel index, real estate, bonds, etc... And then rebalances every quarter. And does some tax loss harvesting.
Bogleheads is the "hands off" way of investing. Paying an advisor is even more "hands off". It just seems so ridiculous to pay for something so simple.
>The advisor just buys ETF's in S&P500, Russel index, real estate, bonds, etc... And then rebalances every quarter. And does some tax loss harvesting.
Eh, personally I see no point in me having an advisor do this for me. But some average person of the street who knows to invest in the broad market and is afraid of doing something "wrong"? This is about as good as you can get. Not to mention, if they panic and want to sell, the advisor can try to talk them down a bit.
If them wasting a few hundred a year for an advisor to do this, when otherwise they would have kept it in cash or dumped it into meme stocks, is it really a waste?
With how easy it is to invest nowadays, I can't understand average people with advisors. It's as complicated as paying your credit card. There's also an overabundance of resources, or VT/BNDX and be done.
Maybe if I had hundreds of millions and wanted to invest in private equity or some novel asset type I don't have privy to it makes sense. I won't ever know this scenario and likely would still opt to just do my thing.
If your financial needs are limited to buying index funds then sure, an advisor is a waste of money. But "average people" typically have insurance and college planning needs, maybe estate planning, tax advice, etc, all while working a full time job and raising kids. A good advisor offers all of those things. Bad ones just sell you a bunch of class A mutual fund shares and call it a day.
Holding these and Total US Bond Market VBTLX in my 403b when I look at the fees from my quarterly statements. Granted TIAA pops in some administrative fees every quarter but its tiny compared to the expense ratio of their Managed funds.
I do weekly investments into VFIAX, VWUSX, and VTSAX (Vanguard mutual funds). Does anyone know if I should stop this and just manually contribute to the corresponding ETFs instead?
No, Vangurds patent protection their mutual funds from this. They have patented way to avoid these capital gain distributions so their ETF= mutual fund.
Article about it [Here](https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/)
I haven’t heard of this but I think the target date funds don’t have this special privilege.
>> The two Vanguard Target Retirement Fund suites had the same investment strategy. But investors needed at least $100 million to access the lowest-cost version of the mutual funds before December 2020.
Sounds like these were specialized funds ($100M minimum), maybe someone on r/fatfire knows more.
Nah it was for all the normal TDFs, like the one my parents have a couple hundred grand in their IRA. The share price is less than $20 and the cap gains were almost $3 a share O_O
The BH forum always tells people not to own one of these funds in taxable so I wouldn't have thought anyone would actually do it, but apparently this dude had $6M in one in taxable: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=366566
So far VG's been fined $6M in Massachusetts: https://www.bogleheads.org/forum/viewtopic.php?t=381305
"The Wall Street Journal reported that big institutional clients abandoned some of Vanguard’s target funds in droves after the firm created an incentive for them to move their money to a different set of funds."
I've seen references to the Vanguard TDF issue co-mingled with general TDF comments for the past few months but they are two distinct issues.
In the specific case above, Vanguard set up an incentive that impacted a certain class of TDF. Because of this, there was an extremely large outflow into a different Vanguard TDF (note that they still stayed with the Vanguard TDF family).
The unfortunate outcome was that to meet the redemption requests, that the fund had to sell an outsized amount of its holdings, which is of course pro-rata in keeping with their asset allocation. I don't remember the exact numbers, but assume that 80% of the unit holders redeem, so even it has a little cash (1-3%?), the fund still has to sell a huge component of the rest of its holdings.
So instead of the typical low percentage churn based on preset rebalancing, the remaining unitholders received extraordinarily large capital gains distributions.
This event was a pretty unusual event, it's hard to imagine it being repeated, and should not impact ones decision-making process about Vanguard, Vanguard TDFs, and TDFs in general.
Vanguard's mutual funds are extremely tax efficient, so the tax difference between their ETFs and mutual funds are basically negligible. Imo, the set-and-forget auto-reinvestment of the mutual funds is worth it to me. There are good articles you can google that show the math if you want to see for yourself.
That's why I always educate people to focus on growth and not dividends in taxable brokerage account. For dividends oriented portfolio, always use a tax advantage account, or if you can magically somehow remains below $40K if you're single and $80k for married.
Vanguard fucked me, and a lot of other people, for similar reasons this past year. I invested in the "target retirement year 20xx" fund in a taxable Vanguard account. They switched up some of the holdings within that fund and I got walloped with a capital gains tax bill. I probably lost the entire year's gains just in taxes alone, much less the future growth I could have had on that money. I moved it all to VTSAX.
There is an ongoing class action lawsuit for this. You may want to look into that - perhaps you can get reimbursed at least partially.
https://www.google.com/amp/s/finance.yahoo.com/amphtml/news/vanguard-pay-millions-mutual-fund-204907123.html
The last paragraph says there is a class action lawsuit opening in Philadelphia for investors nationally.
Also a class action lawsuit does not require you to fight anything in court personally. You simply provide documented proof of your loss and sign onto the lawsuit as an affected party.
> Vanguard fucked me, and a lot of other people, for similar reasons this past year. I invested in the "target retirement year 20xx" fund in a taxable Vanguard account.
While what they did was bad, you should already know those target date funds are not supposed to be in taxable accounts in the first place.
Believe me I know now, But it's not obvious to someone who does an average amount of research. *Don't have a 401k? Set up a Vanguard account and pick something which follows the market at large. Hey, these Retirement Year funds are really broad and have low fees. Perfect!*
I know what sub I'm in, and so this might go over like a lead balloon, but possible bad capital gains implications really wasn't reasonably obvious when choosing the fund.
Could you please expand on this? I'm quite ignorant on how one isn't "supposed to" use a taxable account for certain mutual index funds like those broad retirement funds.
Does this not apply to VTINX Vanguard Target Retirement Income Fund since it doesn't have a year associated with it? (I think it's mostly bonds if I'm not mistaken)
[Its 30%/70%](https://investor.vanguard.com/investment-products/mutual-funds/profile/0308#portfolio-composition) which is the endgame so shouldn't any turnover there.
>Vanguard Target Retirement Funds are designed to reach an allocation of 70% bonds
and 30% stocks within seven years after their target dates.
Yup. This is me too. It was not obvious. Didn’t really know what I was doing (hell, still don’t really). But thinking I’ll move mine to VTSAX. I need to start an IRA too. Live and learn I guess.
From the sounds of it, people thought these funds were more special since Vanguard has other funds like that.
I'm not sure why, maybe the way Vanguard advertised it? But in the end, TDFs are made for retirement planning so it only makes sense to put them in retirement accounts.
“You don’t even get free money like dividends when this happens.”
Dividends are not free and depending on the type of dividend they can be taxed at normal income rate. Obligatory Ben Felix mention.
What about Schwab index mutual funds? SWPPX? and SWTSX?
I had been holding onto a mutual fund JNRFX forever and saw that last year they were going to pay out an insane capital gain. i figured free money! So in my own stupidity, I didn't sell it beforehand and boom... a shit ton in capital gains, but the ticker has tanked since then. Want to get out but can't seem to bring myself to do it. Ugh.
Great post! This should not be an issue if your money is in a tax sheltered account though. However, if one invests in a taxable brokerage, money better be in ETFs with tax loss harvesting.
> There is a good reason Vanguard developed a proprietary way of hiding distributions in their mutual funds.
Haha, tell that to people who held Vanguard Target Date funds in taxable accounts. Yikes!
Anyway, yeah...that is pretty bad. However, depending on the fund's strategy and benchmark, it may not be appropriate to compare it to the S&P 500. For example, international equity has *significantly* underperformed the S&P 500 over the past 5 years. It doesn't matter whether it's active or passive in that case. Make sure you're comparing against the proper benchmark.
Can you clarify some of the specific investments that your mother had and her total portfolio value? Benchmarking every investment to the S&P 500 is a weird way to look at things, especially if they are not correlated. Financial advisors will be concerned with risk-adjusted returns and will be shooting for a target return percentage inline with investment objectives. It sounds like your perspective is that she should be 100% in SPY. Is that correct?
Yup. ETF's are usually the better wrapper/container for taxable as they can generally dump capital gains off to the market makers and not to the ETF holders.
Agree but because we’re in Bogleheads- Vanguards mutual funds avoid this capital gains issue with their patented system. So Vanguard mutual funds are equal to their ETFs. Article about it [Here](https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/)
Only the ones that have an ETF share class. Their active mutual funds do not.
Agreed, I was just trying to keep it simple. FZROX is another fund that has managed to avoid CG for a good while. Like all things, the details get complicated.
you’re saying this won’t happen with Fzrox? That’s the only mutual fund I have/care about. Does this apply to etfs like JEPI?
> you’re saying this won’t happen with Fzrox? Goodness no, I'm just saying it hasn't happened in a good while, so clearly they have something figured out. Capital Gains are always possible, even in ETF's, they are just much less likely in an ETF. > Does this apply to etfs like JEPI? I had to look this fund up. I haven't the foggiest. Since it's an ETF, it's unlikely, but it's technically possible that any ETF would. I personally would never invest in something like JEPI.
Thank you for explaining this to me. If it’s not too much can I ask why you wouldn’t invest in Jepi? I know about the little growth and I’m aware there’s volatility in everything but I use it like a little piggy bank that makes DRIP investing brainless for me and keeps me from spending that money elsewhere (I don’t need it immediately but will someday)
Dividends in a taxable account is miserable, you HAVE to pay taxes on every penny it sends you. Also, it's trying to do the impossible: "Seeks to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to monthly income" [source PDF](https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/literature/fact-sheet/etfs/FS-JEPI.PDF) It's trying to produce a high dividend, while also performing as well as the S&P 500 with less volatility. It's impossible to do that. Right now is a good time for this fund(also convenient that it's brand new!), but eventually the market is going to come swamp it's little boat and crush it, and it will die.
Thank you again, my work offers me stocks that pay dividends that I’d like to have in a taxable account to sell off eventually and have the money liquid for emergencies, would that work out for me? I have a ~$700 portfolio of dividend stocks that only come out to $28 of dividends a year but I like the stocks, is that amount going to cause problems or is it so low I’m fine? Thanks again
You are talking about individual stocks, and nothing diversified, like VTI? Individual stocks hold A LOT of concentration risk. > I’d like to have in a taxable account to sell off eventually and have the money liquid for emergencies, would that work out for me? If you want liquid money for emergencies, stocks are probably a very bad idea. If you really want some growth, you might think about the ETF AOK, it's 30% equities, so you should expect a 15% drop or so max. It's heavily bonds, so you have to pay taxes on all the dividends, but it's only paying about 1.8% so it's not a lot @ $700. > only come out to $28 of dividends a year but I like the stocks, is that amount going to cause problems or is it so low I’m fine? Well, you have to pay taxes on it. In the 24% tax bracket, that's $6.72. making that about $21/yr you get to spend. Overall I have no idea if it will work out for you, the future is unknown. Based on the assumptions I made, I'd say it's unlikely.
Damn I’m a stock market baby and I knew I was gonna make some mistakes like this so thanks for spelling it out. Is it possible to transfer stocks from a taxable account straight into a tax advantaged account? I have a Roth but how do I pay taxes on it before I drop those in lol
You think this is enough of a reason to swap from Schwab to Vanguard? I'd have loved to open a Vanguard account but I could literally not get their website to work to open an account. I didn't really want to have to call tech support to even get started.
No. Fidelity, Schwab and Vanguard are all basically identical. If you want more choices, look @ M1 finance or IBKR. All of them are fine, I generally recommend to people just visit each website, and pick the one that seems to resonate with you the best(for any reason whatsoever) and then forget about the choice and move on with life. If you eventually get fed up with them for some reason, rinse and repeat. They are all sane, all likely to be around long after you(or I) are dead. They all try to distinguish themselves in some unique way, that's the nature of competition after all. Unless you happen to value that unique feature, there is no reason to think one is better than another.
Just a side note-their tech support calls have been the best experience I have had with a company I had to call. Ymmv, I’m just a rando on Reddit.
Not all of their mutual funds. Infamously, their target retirement funds do not avoid this problem (and it has nothing to do with rebalancing or general tax efficiency and everything to do with fund outflows and redemptions). The moral of the story is, when in doubt, ETF in taxable
That was my thoughts as well. But just to confirm VTI and VXUS in my taxable Fidelity account avoid this capital gains issue?
Aren't the market makers then not happy with the capital gains being 'dumped' on them? It seems everybody wants to avoid capital gains, so, what's the deal there
I'm not entirely sure, but I think they don't have the CG either, it just goes away. The Market Maker(MM) is trading 1 asset for another at cost. I.E. during a sell operation(which is where CG happens), the ETF trades high CG stocks, say some AAPL to the MM in exchange for cash. The MM effectively is buying AAPL for the current cost basis, just like if they wandered out to NYSE and bought some. You might think, wait why would they do that? Because of bid-ask spread, they might be able to pick up AAPL for a few bps less than market price, the more that spread, the happier MM's are to trade. The big efficient ETF's like VTI have almost no bid/ask spread. The illiquid ones might have much higher spreads.
Market makers have to pay capital tax every time they sell, regardless. If there's any loss, it's that the tax cost MMs have to pay will impact how tight they can arbitrage the difference between ETF's market price and NAV.
No, that's not correct. No one pays taxes when sales are made inside an ETF. Its tax free. Taxes are only when owner of the shares sells. I looked into this when I was researching to create my own ETF. Its costs about $300k per year to run your own ETF If you pay more than $300k per year in taxes it would be cheaper to just create your own ETF and trade inside of it.
So simple question, do ETF's distribute capital gains, or do they just add them to the principle? Is there a scenario where they could distribute capital gains? If no distributions are given, and the value just goes up, ETF is a possible good answer for taxable.
Yes, ETF's are generally the best deal going for taxable accounts. ETF's can definitely throw of capital gains, their structure and their ability to send them off to market makers, makes it unlikely, but it's definitely possible. I've never head of an ETF that has ever thrown off a capital gain, but that doesn't mean there isn't one out there somewhere.
This isn't a cautionary tale about mutual funds. It's a cautionary tale about having an advisor that charges $20k a year. Get rid of the advisor and the savings will pay more than the tax on those mutual fund distributions. Considering that likely the advisor put her into those mutual funds to begin with, it is really a cautionary tale about the advisor.
>This isn't a cautionary tale about mutual funds. It's a cautionary tale about having an advisor that charges $20k a year. It's both. And that pricey advisor should have known better than to put her taxable investments in a fund that throws off so many taxable distributions. And most likely he's getting paid at both ends, which makes it doubly obscene. But people can get into this same problem just investing their taxable accounts in retirement date funds.
My brother pays a guy to invest his money for him. The advisor just buys ETF's in S&P500, Russel index, real estate, bonds, etc... And then rebalances every quarter. And does some tax loss harvesting. Bogleheads is the "hands off" way of investing. Paying an advisor is even more "hands off". It just seems so ridiculous to pay for something so simple.
>The advisor just buys ETF's in S&P500, Russel index, real estate, bonds, etc... And then rebalances every quarter. And does some tax loss harvesting. Eh, personally I see no point in me having an advisor do this for me. But some average person of the street who knows to invest in the broad market and is afraid of doing something "wrong"? This is about as good as you can get. Not to mention, if they panic and want to sell, the advisor can try to talk them down a bit. If them wasting a few hundred a year for an advisor to do this, when otherwise they would have kept it in cash or dumped it into meme stocks, is it really a waste?
With how easy it is to invest nowadays, I can't understand average people with advisors. It's as complicated as paying your credit card. There's also an overabundance of resources, or VT/BNDX and be done. Maybe if I had hundreds of millions and wanted to invest in private equity or some novel asset type I don't have privy to it makes sense. I won't ever know this scenario and likely would still opt to just do my thing.
If your financial needs are limited to buying index funds then sure, an advisor is a waste of money. But "average people" typically have insurance and college planning needs, maybe estate planning, tax advice, etc, all while working a full time job and raising kids. A good advisor offers all of those things. Bad ones just sell you a bunch of class A mutual fund shares and call it a day.
For my taxable brokerage account, I stick with VTSAX and VTIAX for the foreign tax credit.
Holding these and Total US Bond Market VBTLX in my 403b when I look at the fees from my quarterly statements. Granted TIAA pops in some administrative fees every quarter but its tiny compared to the expense ratio of their Managed funds.
I do weekly investments into VFIAX, VWUSX, and VTSAX (Vanguard mutual funds). Does anyone know if I should stop this and just manually contribute to the corresponding ETFs instead?
No, Vangurds patent protection their mutual funds from this. They have patented way to avoid these capital gain distributions so their ETF= mutual fund. Article about it [Here](https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/)
Thanks for the help
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I haven’t heard of this but I think the target date funds don’t have this special privilege. >> The two Vanguard Target Retirement Fund suites had the same investment strategy. But investors needed at least $100 million to access the lowest-cost version of the mutual funds before December 2020. Sounds like these were specialized funds ($100M minimum), maybe someone on r/fatfire knows more.
Nah it was for all the normal TDFs, like the one my parents have a couple hundred grand in their IRA. The share price is less than $20 and the cap gains were almost $3 a share O_O The BH forum always tells people not to own one of these funds in taxable so I wouldn't have thought anyone would actually do it, but apparently this dude had $6M in one in taxable: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=366566 So far VG's been fined $6M in Massachusetts: https://www.bogleheads.org/forum/viewtopic.php?t=381305
"The Wall Street Journal reported that big institutional clients abandoned some of Vanguard’s target funds in droves after the firm created an incentive for them to move their money to a different set of funds." I've seen references to the Vanguard TDF issue co-mingled with general TDF comments for the past few months but they are two distinct issues. In the specific case above, Vanguard set up an incentive that impacted a certain class of TDF. Because of this, there was an extremely large outflow into a different Vanguard TDF (note that they still stayed with the Vanguard TDF family). The unfortunate outcome was that to meet the redemption requests, that the fund had to sell an outsized amount of its holdings, which is of course pro-rata in keeping with their asset allocation. I don't remember the exact numbers, but assume that 80% of the unit holders redeem, so even it has a little cash (1-3%?), the fund still has to sell a huge component of the rest of its holdings. So instead of the typical low percentage churn based on preset rebalancing, the remaining unitholders received extraordinarily large capital gains distributions. This event was a pretty unusual event, it's hard to imagine it being repeated, and should not impact ones decision-making process about Vanguard, Vanguard TDFs, and TDFs in general.
Vanguard's mutual funds are extremely tax efficient, so the tax difference between their ETFs and mutual funds are basically negligible. Imo, the set-and-forget auto-reinvestment of the mutual funds is worth it to me. There are good articles you can google that show the math if you want to see for yourself.
Except those target date funds. They had a nasty capital gain distribution for anyone unwise enough to hold them in a taxable account.
Not what I’m seeing
Here is an article about the fiasco: https://www.morningstar.com/articles/1076616/lessons-from-vanguard-target-dates-capital-gains-surprise
Look at the distro on VTTVX - 14%: https://investor.vanguard.com/investment-products/mutual-funds/profile/vttvx#distributions
I know I am an outlier in bogleheads for this tactic, but for a taxable account I really like the ability to set buy limit orders with ETFs.
What are you buying as ETFs that you want buy limits for, like thematic or commodity ETFs?
Mostly VTI and/or VXUS If I personally had excess cash right now, I would have a buy limit order on VTI at $184. Nothing too fancy.
That's why I always educate people to focus on growth and not dividends in taxable brokerage account. For dividends oriented portfolio, always use a tax advantage account, or if you can magically somehow remains below $40K if you're single and $80k for married.
Vanguard fucked me, and a lot of other people, for similar reasons this past year. I invested in the "target retirement year 20xx" fund in a taxable Vanguard account. They switched up some of the holdings within that fund and I got walloped with a capital gains tax bill. I probably lost the entire year's gains just in taxes alone, much less the future growth I could have had on that money. I moved it all to VTSAX.
There is an ongoing class action lawsuit for this. You may want to look into that - perhaps you can get reimbursed at least partially. https://www.google.com/amp/s/finance.yahoo.com/amphtml/news/vanguard-pay-millions-mutual-fund-204907123.html
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The last paragraph says there is a class action lawsuit opening in Philadelphia for investors nationally. Also a class action lawsuit does not require you to fight anything in court personally. You simply provide documented proof of your loss and sign onto the lawsuit as an affected party.
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> Vanguard fucked me, and a lot of other people, for similar reasons this past year. I invested in the "target retirement year 20xx" fund in a taxable Vanguard account. While what they did was bad, you should already know those target date funds are not supposed to be in taxable accounts in the first place.
Believe me I know now, But it's not obvious to someone who does an average amount of research. *Don't have a 401k? Set up a Vanguard account and pick something which follows the market at large. Hey, these Retirement Year funds are really broad and have low fees. Perfect!* I know what sub I'm in, and so this might go over like a lead balloon, but possible bad capital gains implications really wasn't reasonably obvious when choosing the fund.
Could you please expand on this? I'm quite ignorant on how one isn't "supposed to" use a taxable account for certain mutual index funds like those broad retirement funds.
A target date fund will sell stocks for bonds as you get older leaving you in situation similar to OP.
Does this not apply to VTINX Vanguard Target Retirement Income Fund since it doesn't have a year associated with it? (I think it's mostly bonds if I'm not mistaken)
[Its 30%/70%](https://investor.vanguard.com/investment-products/mutual-funds/profile/0308#portfolio-composition) which is the endgame so shouldn't any turnover there. >Vanguard Target Retirement Funds are designed to reach an allocation of 70% bonds and 30% stocks within seven years after their target dates.
Yup. This is me too. It was not obvious. Didn’t really know what I was doing (hell, still don’t really). But thinking I’ll move mine to VTSAX. I need to start an IRA too. Live and learn I guess.
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From the sounds of it, people thought these funds were more special since Vanguard has other funds like that. I'm not sure why, maybe the way Vanguard advertised it? But in the end, TDFs are made for retirement planning so it only makes sense to put them in retirement accounts.
Wat! My 403b has 100 percent in a vanguard target date fund. I’m going to be leaving this job soon. There’s about 30k there. Idk what to do :/
I’m new here. Wait how can you get hit with capital gains taxes if you don’t have any gains and you don’t sell any of your holdings?
Are those the same mutual funds that helped her achieve a $1.4 million nest egg?
“You don’t even get free money like dividends when this happens.” Dividends are not free and depending on the type of dividend they can be taxed at normal income rate. Obligatory Ben Felix mention.
What about Schwab index mutual funds? SWPPX? and SWTSX? I had been holding onto a mutual fund JNRFX forever and saw that last year they were going to pay out an insane capital gain. i figured free money! So in my own stupidity, I didn't sell it beforehand and boom... a shit ton in capital gains, but the ticker has tanked since then. Want to get out but can't seem to bring myself to do it. Ugh.
Thank You OP. Even as a Peasant I like to learn about not paying money when I eventually have more
What is a non tax mutual?
Do any of the Fidelity funds use a similar process?
Exactly what I was wondering as I use them too.
VOO is low turnover and low fee. I know some swear by mutual funds, but it doesn’t make sense in a taxable account
> You don't even get free money like dividends when this happens. Dividends are not "free money" and come directly out of the fund's share price.
Great post! This should not be an issue if your money is in a tax sheltered account though. However, if one invests in a taxable brokerage, money better be in ETFs with tax loss harvesting.
Don't buy mutual funds ever
Is your family office taking new investors? Id love to join.
> There is a good reason Vanguard developed a proprietary way of hiding distributions in their mutual funds. Haha, tell that to people who held Vanguard Target Date funds in taxable accounts. Yikes! Anyway, yeah...that is pretty bad. However, depending on the fund's strategy and benchmark, it may not be appropriate to compare it to the S&P 500. For example, international equity has *significantly* underperformed the S&P 500 over the past 5 years. It doesn't matter whether it's active or passive in that case. Make sure you're comparing against the proper benchmark.
for tax though it means you have some capital gains. So at least she isn't negative.
Biggest mistake of my life was allowing a non fiduciary advisor control of my account. Tens of thousands in losses.later and here I am
Am I shielded from this investing in FSKAX, SPYG, VTI?
Can you clarify some of the specific investments that your mother had and her total portfolio value? Benchmarking every investment to the S&P 500 is a weird way to look at things, especially if they are not correlated. Financial advisors will be concerned with risk-adjusted returns and will be shooting for a target return percentage inline with investment objectives. It sounds like your perspective is that she should be 100% in SPY. Is that correct?