How to Compare Funds After Taxes?

[lust4adventure]

I'm comparing various Vanguard money market funds, tax-exempt New Jersey funds (I live in NJ), and corporate bond ETFs assuming that "dividends"/interest will be taxed at a 32% effective federal+state income tax rate. The after-tax yields (as of 2018-09-01) were easy to calculate—multiply by 0.68—but I'm wondering whether it's fair to subtract expense ratios from the after-tax yields to get net yields. I'm assuming I'll reinvest dividends/interest.

I've attached an XLS spreadsheet with my manual calculations.

If everything's right, it looks like parking my short-term funds in VMMXX (the prime money market fund), taxable bond funds in VNJTX (the long-term tax-exempt New Jersey muni fund), and tax-advantaged bond funds in a combination of VCIT and VCLT makes the most sense. VMMXX over VNJXX is a little surprising because people like Burton Malkiel, author of A Random Walk Down Wall Street, advise people in high tax brackets (me) to park money in tax-exempt funds. I guess I have to be an ultra-high income earner for that to make sense. But VNJTX for bonds is the clear winner unless I want to invest mostly in VCLT (long-term investment-grade corporates).

Thoughts?

 

[kaneohe]

Expense ratios should already be taken out when you get the customer yields so no need to do that.

 

[jazz4cash]

Are you using Taxable Equivalent Yield for the muni funds? If so, I don't see it in your spreadsheet. I also agree with Kaneohe.....expenses have already been deducted.

If you take these two items into account, the net return for VNJXX would be 2.029 instead of 1.22.

 

[lust4adventure]

Are you using Taxable Equivalent Yield for the muni funds? If so, I don't see it in your spreadsheet.

I didn't do that. The results are the same, though: The munis win.

I also agree with Kaneohe.....expenses have already been deducted.

Thanks, both of you! Hopefully others won't repeat my mistake when comparing funds.

If you take these two items into account, the net return for VNJXX would be 2.029 instead of 1.22.

Noted.

 

[LOL!]

How did you compare and account for the different risks in all the funds you are looking at?

bogleheads.org has a thread with a linked spreadsheet to look at tax costs:
https://www.bogleheads.org/forum/viewtopic.php?t=242137
but it does not look at risk, so it is mostly used to compare apples-to-apples such as one international fund to a substantially identical international fund.