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SP500 Index fund tax efficiency
Old 04-13-2008, 04:29 PM   #1
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SP500 Index fund tax efficiency

Hello all,

I'm taking a look at index funds that attempt to track the SP500 today for a taxable account, particularly Vanguard VFINX and T. Rowe Price PREIX (I have accounts with both companies already). Most of the advice online I've read says stick with the index fund with the lowest fees. In this case that's Vanguard (0.18% vs 0.35%) and for $10k invested for 10 years, Vanguard comes out about $230 cheaper.

However, since it's a taxable account I thought it'd be a good idea to compare the quarterly dividend and capital gains payouts from the two funds. It appears that neither has paid a capital gain (according to Yahoo! Finance) since 1999/2000. The interesting part is the quarterly dividend payments.

the NAV of the Vanguard fund was $122.17 at Fridays close while the NAV of the T. Rowe Price fund was 35.76 - a 1:3.41 ratio. Using that as a factor, I was curious to see how dividend payouts of these two funds looked annualized over time since 2000 - trying to compare them as close as reasonable possible using the factor:

2007: Vanguard $2.49, Price $2.22 ($0.27 less/share for Price)
2006: Vanguard $2.14, Price $2.15 ($0.01 more/share for Price)
2005: Vanguard $1.98, Price $1.71 ($0.28 less/share for Price)
2004: Vanguard $1.95, Price $1.74 ($0.21 less/share for Price)
2003: Vanguard $1.43, Price $1.26 ($0.17 less/share for Price)
2002: Vanguard $1.36, Price $1.16 ($0.20 less/share for Price)
2001: Vanguard $1.28, Price $1.13 ($0.15 less/share for Price)
2000: Vanguard $1.30, Price $1.40 ($0.10 more/share for Price)

Vanguard quarterly dividend payout history:
VFINX: Historical Prices for VANGUARD INDEX TRUST 500 INDEX - Yahoo! Finance

T. Rowe Price quarterly dividend payout history:
PREIX: Historical Prices for T. ROWE PRICE EQUITY INDEX FUND - Yahoo! Finance

So I guess I'm wondering out loud if this is meaningful or not I know I only did one price ratio and extrapolated it back over time, but I does look like the Price fund is slightly more tax efficient. But I can't explain why as they attempt to track the same index...

Anyone have any ideas or thoughts? I'm leaning towards the T. Rowe Price fund at this point as I'm a big fan of their automatic asset builder and use that for both mine and my wife's Roths and a separate taxable account.


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Old 04-13-2008, 05:10 PM   #2
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It's possible the indexing method used by each company is different. Maybe one company buys something other than the shares of the stocks (maybe using options or futures to acquire the shares).

I don't know, just offering thoughts.

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Old 04-13-2008, 05:19 PM   #3
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The automatic asset builder or automatic investment program is also available at Vanguard once you have purchased the initial minimum. Once over $100K (or $50K and 10 years), then you qualify for an even lower expense ratio of about 0.07%.

If you can't meet the VG initial minimum, then TRP is a good way to go.

I would recommend VTSMX (total stock market) over VFINX (S&P500 index) though for the long term.
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Old 04-13-2008, 07:30 PM   #4
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Thanks for the tip, I'll take a look at VTSMX.

Also Thanks for the information regarding the reduction in expense ratio. Now that I am re-reading the prospectus it does say investor shares can be converted to Admiral shares if you meet eligibility requirements. That's great as it cuts them by more than 1/2. Very tough to beat...
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Old 04-13-2008, 07:46 PM   #5
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Compare the total returns for the two. It looks like TRP expenses are reducing the dividend paid?

From M*:
10-year pretax return
vfinx 3.43% preix 3.22%

10-year after tax return
vfinx 3.01% preix 2.68%

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