New Solutions to address Qualified Dividend Income Concerns

[junkanoo]

The genesis of this thread has been other posts through the years basically stating ... 'wouldn't it be great if there was an ETF that didn't generate qualified dividends.'

The need for that depends on the poster. Some might be singles who are bombing through IRMAA brackets now that RMDs have started. Others might have ACA concerns. Others may wish to control taxes on SS benefits. Others are dealing with pesky Net Investment Income Tax (NIIT) penalties.

For some in the 0% LTCG bracket, untaxed qualified dividends may be a godsend. However, once they start taking SS and perhaps a pension kicks in, they may find that that QDI becomes less appreciated due to how it may interact with other taxable income or through other important calculations. For example, that QDI income counts as much against IRMAA calculations as Ordinary Income.

In the past, investors could invest in Berkshire Hathaway to get dividend free growth or individual stocks. However, investors are somewhat reluctant to put too much of their money in Berskshire (even though the underlying company is pretty diversified) others don't like the risk of growth stocks or Small Cap companies (which combined are the bulk of stocks that don't distribute a dividend).

Enter XDIV (XDIV S&P 500® No Dividend Target ETF), which AFAIK is the first to offer no dividends on a tried and true portfolio (S&P 500). The underlying asset to this ETF is the IVV ETF (iShares Core S&P 500 ETF).

Below are the first results since I purchased XDIV and IVV paid its dividend. I plan on updating this quarterly to see how it does over time.

ETF	# of Shares Purchased	EOD 9/19/2025	Total Investment	EOD 12/19/2025	Gain/Loss per Share	Dividend	Total Gain per share	Total Gain
IVV	100	666.87	66,687.00	683.49	16.62	2.41	19.03	1,903.00
XDIV	2481.839	26.87	66,687.01	27.61	0.74	0	0.74	1,836.56
							Before Tax Difference	66.44
							Total Dividend	241
							Dividend Tax Rate	0.15
							Dividend Taxes	36.15
							After Tax Difference	30.29
							Yearly Difference (Projected)	121.16
							Percent difference based on Total Investment	0.18%
							Difference in Basis Points	18

Early after-tax results (i.e., one quarter's return) show that XDIV underperformed its underlying asset (IVV) by 18 basis points. Viewed another way, XDIV delivered over 99% of IVV's return during the quarter.

The results will depend on the viewer. For someone that wishes to be in the market and knows that they will be paying NIIT of 3.8% on their qualified dividends, it's a no-brainer. However, for someone who's not sure whether they will be crossing into an IRMAA penalty or not, perhaps it would just be better to purchase IVV (which is already pretty darn tax-efficient). Others might think it's better to pay the 18 basis points to not risk the chance of paying thousands in IRMAA penalties. After all, even though IVV is tax-efficient, the investment above still produces $965 in qualified dividends per year. We all take our chances.

Only time will tell more about the underlying 18 basis points. After all, with only one data point, it's unclear whether if I selected two different days the results would be better or worse, after all, the last trade of the day in XDIV could have gone either way (given the current spread in bid/ask) or what future results will be. The only thing that is clear is that IVV charges 3 basis points and XDIV charges 8.5 basis points, so even if entering and exiting the market (before and after ex-div date) worked neutrally/perfectly, there would still be a 5.5 basis point difference in favor of IVV.

 

[RunningBum]

It's a little confusing that you talk about SDIV, XDIV and QDIV interchangeable.

EDIT to add: More than a little confusing when I find that XDIV is the zero div ETF, while the other 2 seem to be geared toward higher dividends.

 

[junkanoo]

It's a little confusing that you talk about SDIV, XDIV and QDIV interchangeable.

EDIT to add: More than a little confusing when I find that XDIV is the zero div ETF, while the other 2 seem to be geared toward higher dividends.

Agreed and Corrected. Thanks!

 

[Telly]

I'm feeling more dense than usual this evening.
I'm understanding all of this idea, except for one critical point. The magic that goes on to make it happen.

If IVV has dividends, and XDIV is based on IVV, how are the dividends "removed" for XDIV?
Instead of XDIV giving dividends, does the XDIV share price increase instead?

I don't understand how the dividends "disappear", and yet XDIV is tracking IVV more or less? Doesn't somebody get taxed for the dividends? I don't understand it. There's some important algorithm I'm missing.

 

[RetiredHappy]

I'm feeling more dense than usual this evening.
I'm understanding all of this idea, except for one critical point. The magic that goes on to make it happen.

If IVV has dividends, and XDIV is based on IVV, how are the dividends "removed" for XDIV?
Instead of XDIV giving dividends, does the XDIV share price increase instead?

I don't understand how the dividends "disappear", and yet XDIV is tracking IVV more or less? Doesn't somebody get taxed for the dividends? I don't understand it. There's some important algorithm I'm missing.

Mutual fund reinvests dividends back into XDIV?

 

[imjustawarrior]

Google says XDIV moves between other S&P500 funds and swaps to avoid dividends.

 

[imjustawarrior]

For 2025 VOO paid 1.1% in dividends, which almost all qualified. 15% tax times 1.1% is 0.165%. VOO ER is 0.03%. XDIV ER is 0.215%. Seems like VOO wins by 0.02%. Cap gains will be higher on XDIV if you sell. It may work out for XDIV if you pay more than 15% taxes on qualified dividends, especially if you never pay cap gains.

 

[Semi-Retyrd]

Please allow me to propose a tax efficient and potentially higher performing alternative to XDIV and for that matter a full replacement to all S&P 500 index funds like IVV, SPY, VOO, etc. This fund QLFNX is based on research from AQR using what they term as "Fusion". For a detailed explanation of how this works see - Understanding Fusion

Like XDIV QLFNX is very new opening June 25 of this year. However the idea behind it is based on earlier research at AQR validated with real life experience in their separately managed accounts for institutions and high net worth individuals using "Tax Aware" strategies.

Simply put QLFNX marries S&P 500 exposure with a global market-neutral long-short strategy while also making use of tax loss harvesting and other tax aware strategies. The beta of the fund is tuned to match the S&P 500, so it has the same volatility as IVV. However the returns are from both the S&P exposure and the global long-short exposure. So it is expected to beat the total return of IVV under all market conditions with the same risk and with better tax efficiency.

How has it done so far? According to M* since inception on June 25 to Dec 25 the total return of QLFNX is 21.87% vs IVV of 14.46% beating IVV by almost 50%.

How about tax efficiency? The once yearly distribution of QLFNX on Dec 17 of $.0166 on a NAV of $11.88 represents about .14% vs the 1.18% for IVV for less than 1/8th of the tax hit. A comparison chart of QLFNX with IVV shows that both have similar volatility.

So after six months QLFNX has performed (or maybe outperformed) as expected. I have purchased this as a small portion of my taxable portfolio and intend to slowly increase allocation to this in the coming year.

Finally I expect some folks will comment that the expense ratio is much higher for QLFNX than either XDIV or IVV. This is because this fund is FAR more actively managed than the other funds and furthermore the results quoted are after expenses. So I believe these expenses are justified.

Finally finally some will ask what will happen when the S&P 500 corrects given its high concentration on tech stocks? My expectation is the long-short strategy will cushion but not avoid a loss during a correction. The global diversification of the long-short strategy will aid in this cushion. So I expect QLFNX to continue to outperform IVV or XDIV during a correction or a crash by losing less.

 

[junkanoo]

Please allow me to propose a tax efficient and potentially higher performing alternative to XDIV and for that matter a full replacement to all S&P 500 index funds like IVV, SPY, VOO, etc. This fund QLFNX is based on research from AQR using what they term as "Fusion". For a detailed explanation of how this works see - Understanding Fusion

Like XDIV QLFNX is very new opening June 25 of this year. However the idea behind it is based on earlier research at AQR validated with real life experience in their separately managed accounts for institutions and high net worth individuals using "Tax Aware" strategies.

Simply put QLFNX marries S&P 500 exposure with a global market-neutral long-short strategy while also making use of tax loss harvesting and other tax aware strategies. The beta of the fund is tuned to match the S&P 500, so it has the same volatility as IVV. However the returns are from both the S&P exposure and the global long-short exposure. So it is expected to beat the total return of IVV under all market conditions with the same risk and with better tax efficiency.

How has it done so far? According to M* since inception on June 25 to Dec 25 the total return of QLFNX is 21.87% vs IVV of 14.46% beating IVV by almost 50%.

How about tax efficiency? The once yearly distribution of QLFNX on Dec 17 of $.0166 on a NAV of $11.88 represents about .14% vs the 1.18% for IVV for less than 1/8th of the tax hit. A comparison chart of QLFNX with IVV shows that both have similar volatility.

So after six months QLFNX has performed (or maybe outperformed) as expected. I have purchased this as a small portion of my taxable portfolio and intend to slowly increase allocation to this in the coming year.

Finally I expect some folks will comment that the expense ratio is much higher for QLFNX than either XDIV or IVV. This is because this fund is FAR more actively managed than the other funds and furthermore the results quoted are after expenses. So I believe these expenses are justified.

Finally finally some will ask what will happen when the S&P 500 corrects given its high concentration on tech stocks? My expectation is the long-short strategy will cushion but not avoid a loss during a correction. The global diversification of the long-short strategy will aid in this cushion. So I expect QLFNX to continue to outperform IVV or XDIV during a correction or a crash by losing less.

Thanks for the well-considered post.

I also own QLFNX along with its Fusion cousin QCFNX, but in a Roth account. I also agree that these strategies deliver a better Sortino Ratio allowing QLFNX to produce a better result in a down market than IVV.

Both funds say that they are tax-aware strategies ... but what does that really mean? Per AQR, the answer would seem to be "The Funds seek to maximize investors’ returns through a tax-aware investment process that aims to maximize investors’ after-tax wealth, leveraging AQR’s nine years’ experience managing long-short tax-aware strategies."

Source: AQR Launches the AQR Fusion Mutual Fund Series

A great goal to be sure, but that might not help someone that is trying to avoid a tax-cliff.

So, while, both Fusion funds I own say they are tax-aware, QLFNX distributed .14% (as you reported) versus QCFNX which distributed 7.18% of its value in taxable income in 2025. So, only time will tell what QLFNX will deliver over the long-term.

I know someone that meets with AQR as part of his job. He thinks a reasonable understanding is that Fusion funds will produce mostly LTCG. Which can be tax-efficient if you have losses to offset them. If not, it can lead to problems this thread is discussing.

 

[TheWizard]

...I know someone that meets with AQR as part of his job. He thinks a reasonable understanding is that Fusion funds will produce mostly LTCG. Which can be tax-efficient if you have losses to offset them. If not, it can lead to problems this thread is discussing.

I think one goal of QLFNX is to reduce annual dividends compared to a fund like VOO with 1.2% dividends per year.
VOO has no CGDs, so it would be bad news if QLFNX ever had any.

As far as long-term capital appreciation, that's going to happen with all stock index funds and most non index funds.
In my taxable account, practically everything I've held for more than three years has large unrealized gains and will likely never be sold during my lifetime as I see it...

 

[Semi-Retyrd]

Thanks for the well-considered post.

I also own QLFNX along with its Fusion cousin QCFNX, but in a Roth account. I also agree that these strategies deliver a better Sortino Ratio allowing QLFNX to produce a better result in a down market than IVV.

Both funds say that they are tax-aware strategies ... but what does that really mean? Per AQR, the answer would seem to be "The Funds seek to maximize investors’ returns through a tax-aware investment process that aims to maximize investors’ after-tax wealth, leveraging AQR’s nine years’ experience managing long-short tax-aware strategies."

Source: AQR Launches the AQR Fusion Mutual Fund Series

A great goal to be sure, but that might not help someone that is trying to avoid a tax-cliff.

So, while, both Fusion funds I own say they are tax-aware, QLFNX distributed .14% (as you reported) versus QCFNX which distributed 7.18% of its value in taxable income in 2025. So, only time will tell what QLFNX will deliver over the long-term.

I know someone that meets with AQR as part of his job. He thinks a reasonable understanding is that Fusion funds will produce mostly LTCG. Which can be tax-efficient if you have losses to offset them. If not, it can lead to problems this thread is discussing.

The reason I chose QLFNX instead of QCFNX is that QLFNX employs a simpler long-short strategy while QCFNX is a multi-strategy fund with additional emphasis on commodities and currencies. IMO AQR has done more tax-aware research on the benefits of long-short than on multi-strategy.

See - Our Research into Tax-Aware Long-Short Investing

Based on their research I concluded that QLFNX would be the most tax efficient. Long-short fused with client's long only portfolios is also the strategy that AQR uses in their separately managed accounts for institutions and high net worth individuals. This for me is validation that this strategy will continue to work year after year.

 

[indiajust]

Hmm. I might have to revisit this post tax filing and see if I understand it correctly. I adjusted my accounts this year, I put the majority of my income generation into the IRA. The various taxable accounts either got indexed or pushed into the wilds seeking uncorrelated stuff.

My income strategies are now a Catastrophe bond fund, MSTR preferreds, JEPI (one of the options income trading funds, and an EAFE robo direct indexed exUS account (since international pays much more in dividends).

The idea was to get income from concentrated sources. Then use robo direct index funds to capture total market returns in an anchor position. That leaves a bigger proportion of the portfolio for non index bets on LTCG like small caps, country funds, sector bets, micro caps, miners, crypto.... all the uncorrelated tiny things that are interesting and might do very well.

But the ideas you raise have intrigued me. mental note to revisit.

 

[Semi-Retyrd]

Please allow me to introduce an additional option to address qualified dividend concerns in taxable accounts. The fund, ORR, is as far as I know the first long-short strategy to be packaged in an ETF wrapper. For more background on this ETF see my post -

Why I like certain alternative investments

These funds aren’t trading vehicles so I am not sure why a ST fee would be a concern. The long/short positions should cover you in all markets, that’s why you buy them.

www.early-retirement.org

The fund is about one year old and has crushed the S&P 500 total return with similar volatility and NO distributions for perfect tax efficiency. It uses a very different strategy than QLFNX; so the two funds appear to be uncorrelated over the six month period since QLFNX's inception but with similar total return.

My current thinking is to own equal positions in both funds in a taxable account for better diversification and hopefully lower volatility.

Cheers, Dennis