Vanguard - preliminary cap gains estimates are out

[Looking4Ward]

I'm thinking I should have put my after-tax funds in ETF's (65% VTI/35% BND) instead of Wellesley/Wellington.

The predicted CG Distribution is going to cause me a $9K tax hit. I would have withdrawn about the same amount as the distribution, but not this year when I already have significant income. I would have waited until after the first of the year and then only a portion of the withdrawal would have been capital gains and my tax liability would have been $0 for the year under the 15% ceiling.

I can't trade the existing W's into the ETF's now without incurring a six-figure capital gain.

[walkinwood]

+1
Different funds, same regret.
I should have made the switch when I did tax loss harvesting in late 2008 & early 2009. C'est la vie.

[eta2020]

I don't see anything I own on the list.

I guess that is one of the advantages of owning index equity only ETFs. But index funds do have same tax advantage.

[Texas Proud]

I looked and the amount is way lower than the amount I got last year...

[kaneohe]

Quote:

Originally Posted by MichaelB All three of the funds you referenced have mutual fund and ETF asset classes. An ETF is able to exchange shares without recognizing capital gains, so most ETFs never realize capital gains, which is one of their key attractions. Vanguard is the only company that has ETFs that are also mutual funds, so the mutual fund doesn't register cap gains because the ETF class was able to eliminate them. You get the same increase in NAV and fund value but only record capital gains when you sell, not when the fund transacts.

Thanks, Michael B, for that info. Didn't know any of it even tho I occasionally wonder about funds vs ETF and read articles about them. Do you by chance have a link to a VG (or other) article about that? Do you have a brief explanation of how ETF funds can exchange shares w/o recognizing CGs?

Before you mentioned that, I thought that it was because those 3 funds that pb4uski mentioned are passive index funds and I thought one of their attributes is that they have minimal CG distributions.

[MichaelB]

Quote:

Originally Posted by kaneohe Thanks, Michael B, for that info. Didn't know any of it even tho I occasionally wonder about funds vs ETF and read articles about them. Do you by chance have a link to a VG (or other) article about that? Do you have a brief explanation of how ETF funds can exchange shares w/o recognizing CGs? Before you mentioned that, I thought that it was because those 3 funds that pb4uski mentioned are passive index funds and I thought one of their attributes is that they have minimal CG distributions.

Here are a couple of links you may find helpful. A google of "ETF redemption units" or "ETF creation units" will bring up many more links.

http://www.ici.org/viewpoints/view_1...sics_cremation

An Inside Look At ETF Construction

Basically, during the day, the market price of the ETF diverges slightly from the price of the basket of securities it represents. Securities law allows an authorized investor to buy (or sell) the ETF but actually take delivery (or provide) the underlying stocks, so when, during a market sell off the price of the ETF falls, say, 0.5% below the asset value (NAV), an institutional investor buys the ETF but actually takes delivery of the basket of individual stocks. They turn around and immediately sell the stocks, and pocket that 0.5% difference, minus transaction cost. This is how the market keeps the price of the ETF close to the net asset value of the stocks. This transaction is carried out directly with the ETF creator, in this case, Vanguard.

The critical aspect is that, when Vanguard carries out this transaction, the IRS allows them to give the institutional investor any specific share of stock in their inventory but not record it as a capital gain or loss. Vanguard, of course, will therefore transfer the shares with the lowest cost basis, which are also the highest unrealized profit. That way, Vanguard is constantly exchanging equities for cash or ETF units, and always transferring out the stocks with profit.

Contrast this to a regular mutual fund, when it sells individual stocks it must record the transaction as a gain or loss, and the mutual fund holder now has a taxable gain, even if they didn't sell.

Vanguard us the only company that has some mutual funds that are also ETFs. This is a real advantage for the fund holder.

A poor explanation for sure. For this to work well, the ETF needs a good amount of volume, this is why it's important to avoid ETFs that don't trade a lot.

[kaneohe]

MichaelB, thanks for that "short" explanation. Appreciate the time and thought that went into it. Still digesting it............so who is that authorized investor and are they obligated to accept both the gains and losses?

[MichaelB]

Quote:

Originally Posted by kaneohe MichaelB, thanks for that "short" explanation. Appreciate the time and thought that went into it. Still digesting it............so who is that authorized investor and are they obligated to accept both the gains and losses?

I know. Sorry about that.

Here's another article that explains this process. The ETF Creation/Redemption Process Made Simple | Seeking Alpha

When shares are transferred between the ETF creator (Vanguard) and the authorized participants in creation or redemption units, the gain or loss disappears. There is no gain. That's the beauty of an ETF.

Edit to add: the investor (us) still has capital gain or loss when selling shares. The difference is with the ETF you only have the gain when you sell, while with the mutual fund you record part of that gain when the fund sells.

[CountryBoy]

I have a question, maybe one you can answer? A few of here in the office have ONE fund in our 401K (managed by Aon Hewitt), the Vanguard Wellington Fund. For myself, it's around 230K. I was just wondering why it shows on my account as VWELX (Investor Share)? I have a taxable portfolio of 4 other funds, all Admiral.

I thought Vanguard Wellington switched to Admiral once you reached a 50K balance? Does the same thing not apply to 401Ks?

[Amethyst]

Other than not liking to pay taxes, is there any other reason to dislike receiving capital gains income?

Amethyst

[Amethyst]

I asked my VG rep a similar question a while ago. The response was that your accounts get converted to Admiral when VG decides to convert them. My husband's tiny 401K did get converted, at a much lower balance than yours, so my advice would be to call VG and ask them directly.

Amethyst

Quote:

Originally Posted by CountryBoy I have a question, maybe one you can answer? A few of here in the office have ONE fund in our 401K (managed by Aon Hewitt), the Vanguard Wellington Fund. For myself, it's around 230K. I was just wondering why it shows on my account as VWELX (Investor Share)? I have a taxable portfolio of 4 other funds, all Admiral. I thought Vanguard Wellington switched to Admiral once you reached a 50K balance? Does the same thing not apply to 401Ks?

[FUEGO]

Darn, no "gains" for me either!

[kramer]

Quote:

Originally Posted by Amethyst Other than not liking to pay taxes, is there any other reason to dislike receiving capital gains income? Amethyst

Funds that consistently produce capital gains tend to have higher turnover. Turnover has some costs and the costs vary by asset class and country. These costs are not part of the expense ratio.

Generally, the costs are the transaction fees themselves and market impact costs. These costs can be very high in emerging markets, less so for, say, big liquid stocks in the USA.

[MichaelB]

Quote:

Originally Posted by Amethyst Other than not liking to pay taxes, is there any other reason to dislike receiving capital gains income? Amethyst

Aside from Kramer's observation, this is all about taxes, having a tax liability even though you didn't sell. The fund distribution may have some short term taxable gain, which can be taxed at a higher rate, but overall, it is about paying now vs paying later.

[nun]

The only capital gains for me are inside retirement accounts.

[Amethyst]

Thanks. I deal with that by taking the gains in cash, versus reinvesting them. I just wondered if there were some other catch (in addition to what Kramer said, which I hadn't realized and which makes sense), such as the gains reducing the value of your investment.

Amethyst

Quote:

Originally Posted by MichaelB Aside from Kramer's observation, this is all about taxes, having a tax liability even though you didn't sell. The fund distribution may have some short term taxable gain, which can be taxed at a higher rate, but overall, it is about paying now vs paying later.

[grasshopper]

I have been known to sell before the EOY, just so I will know to the penny my LTCG. Sometimes it is important for taxes to know what a gain is rather than wait for income, short-term and long-term gains, to be distributed.

[Looking4Ward]

The CG distribution for my Wellington alone is going to be in the mid-5 figure range.

Learning a lesson about tax consequences of equity MF's in a taxable account from all of this, I can see the advantages of instead having those funds in VTI (65%) and BND (35%).

But if I exchange (sell) Wellington for those two funds, I'll incur a six-figure capital gain.

Am I stuck in Wellington? Is there a way to exchange to those two ETF's without the tax consequences on the capital gain?

[MichaelB]

Quote:

Originally Posted by Looking4Ward The CG distribution for my Wellington alone is going to be in the mid-5 figure range. Learning a lesson about tax consequences of equity MF's in a taxable account from all of this, I can see the advantages of instead having those funds in VTI (65%) and BND (35%). But if I exchange (sell) Wellington for those two funds, I'll incur a six-figure capital gain. Am I stuck in Wellington? Is there a way to exchange to those two ETF's without the tax consequences on the capital gain?

It's possible that with a 65/35 allocation to the two ETFs your capital gain might have been larger. If you keep the allocation at that same percentage split, as Vanguard Wellington does, your equity portion would have risen much higher, you would have to shift $$ from equity to FI, and in doing so, incurred a large gain.

[Looking4Ward]

Quote:

Originally Posted by MichaelB It's possible that with a 65/35 allocation to the two ETFs your capital gain might have been larger. If you keep the allocation at that same percentage split, as Vanguard Wellington does, your equity portion would have risen much higher, you would have to shift $$ from equity to FI, and in doing so, incurred a large gain.

Ahh, yes - I would need to rebalance to keep the AA in check and that would cause CG events. Got it.