Is there a broad stock market index fund that doesn't pay dividends?

[economicsjunkie]

I'm asking for tax optimization purposes. Currently I'm using VTI and VEU split 50/50 but they both pay dividends so I owe taxes on those every year =(

[KevinW]

Yes, Vanguard for one has a series of tax-managed funds including Vanguard Tax-Managed Capital Appreciation Fund Admiral Shares (VTCLX). Google is your friend. 

[D1984]

VTCLX is more "tax-managed" in the sense that they try to sell shares as seldom as possible and thus minimize realized long-term and short-term capital gains. They do in fact distribute dividends; see http://finance.yahoo.com/q/hp?s=VTCLX&a ... f=2015&g=v

Also, VTCLX is more akin to the market-cap weighted S&P 500 (i.e. is mostly large cap and large/mid cap focused) than to a TSM or borad stock market index; see https://www.bogleheads.org/forum/viewto ... 7#p2225498 and http://www.bogleheads.org/wiki/Tax-mana ... ock_Market .

What you are looking for basically doesn't exist at the present; if a fund (ETF or mutual fund) receives dividends it has to distribute them (or at least roughly 90% of them) to fund shareholders or face tax consequences. With that said, I don't know why some enterprising fund sponsor couldn't set up an S&P 500 ETN that was due to mature at say, 100 years in the future and have the ETN as a totally separate corporate and legal structure from the fund sponsor (Fido, Vanguard, Ishares, Barclays, etc) itself so the issuer-specific risk of the ETN was basically gone (in other words, unless all the companies in the S&P 500 all go to zero, then the ETN would still have value...the creditors of the issuer itself could not get at the assets since it would be in a legally separate and firewalled entity). An ETN by its nature doesn't pay dividends (it merely adds accrued dividends to the redemption price which is due whenever the ETN matures) and so the only way you'd pay taxes on it was if you sold the ETN shares...which you yourself can control (by choosing whether and when to sell).

Now, perhaps the S&P 500 or TSM are already pretty tax-efficient as is (even with the dividends they throw off) so the major fund shops have decided that the expense ratio in an ETN would make the tax savings not worthwhile; OTOH, for someone who lived in a state like California or New York (and in NYC too so they were paying NYC income tax as well) and was in the top state/local tax bracket (and thus was paying 10% or more of their income in state/local income tax) and who was already paying the 23.8% top Federal dividend tax rate, the expense ratio would have to be pretty darn high to offset any gains from deferring all those taxes.

[craigr]

Like D1984 said, there are tax-managed funds. But the thing is they aren't that much better than a really broadly based index fund like VTI in terms of taxes. Again for reasons he stated that the stocks they own are paying dividends and those proceeds need to flow out to shareholders to avoid other consequences.

I strongly recommend checking Morningstart's Tax Analysis tab for any fund you want to buy for taxable accounts. For instance for VTCLX it is here:

http://performance.morningstar.com/fund ... ture=en_US

For VTSMX (Total Stock Market) it is here:

http://performance.morningstar.com/fund ... ture=en_US

After tax returns for 10 years:

VTCLX: 8.14%
VTSMX: 8.08%

You can see 0.06% difference which basically is meaningless noise between the two. However VTSMX has lower potential capital gains exposure which could be important in a big market panic if lots of redemptions come in and what it means for capital gains for other shareholders.

Longer term VTSMX is probably going to be the winner due to the larger basket of stocks covering all sectors of the market (including high dividend stocks which means generally more profitable). No promises, just a gut view on the markets and what they've historically done.

Disclosure: I have taxable investments and use broadly based funds and avoid tax-managed funds as I don't see much benefit to them and some drawbacks (like higher redemption lock-in periods, fees, etc.).

[economicsjunkie]

Yes, Vanguard for one has a series of tax-managed funds including Vanguard Tax-Managed Capital Appreciation Fund Admiral Shares (VTCLX). Google is your friend. 

Great, thanks, I'll check that out.

[economicsjunkie]

Like D1984 said, there are tax-managed funds. But the thing is they aren't that much better than a really broadly based index fund like VTI in terms of taxes. Again for reasons he stated that the stocks they own are paying dividends and those proceeds need to flow out to shareholders to avoid other consequences.

I strongly recommend checking Morningstart's Tax Analysis tab for any fund you want to buy for taxable accounts. For instance for VTCLX it is here:

http://performance.morningstar.com/fund ... ture=en_US

For VTSMX (Total Stock Market) it is here:

http://performance.morningstar.com/fund ... ture=en_US

After tax returns for 10 years:

VTCLX: 8.14%
VTSMX: 8.08%

You can see 0.06% difference which basically is meaningless noise between the two. However VTSMX has lower potential capital gains exposure which could be important in a big market panic if lots of redemptions come in and what it means for capital gains for other shareholders.

Longer term VTSMX is probably going to be the winner due to the larger basket of stocks covering all sectors of the market (including high dividend stocks which means generally more profitable). No promises, just a gut view on the markets and what they've historically done.

Disclosure: I have taxable investments and use broadly based funds and avoid tax-managed funds as I don't see much benefit to them and some drawbacks (like higher redemption lock-in periods, fees, etc.).

Yes, that seems to make sense. The VTI doesn't pay much higher dividends either than the tax managed option it seems. I guess I should ditch VEU though since that one is paying 2.8% in dividends currently!

[KevinW]

Like D1984 said, there are tax-managed funds.

My bad, I should've been more precise about the distinction between minimizing capital gain events and minimizing dividends.

Though, my understanding is that Vanguard has "deprecated" the tax-managed funds and is downplaying them, because as craigr explained, the plain-vanilla total stock market fund is practically equivalent in terms of tax efficiency, and is superior on some other counts.

While we're on the subject, growth stocks tend to have lower dividends, so some people tilt toward growth to minimize dividend tax exposure. This doesn't seem to work very well in practice either, and again a total market fund is probably a better choice. Just thought I'd mention it.

[economicsjunkie]

Like D1984 said, there are tax-managed funds.

My bad, I should've been more precise about the distinction between minimizing capital gain events and minimizing dividends.

Though, my understanding is that Vanguard has "deprecated" the tax-managed funds and is downplaying them, because as craigr explained, the plain-vanilla total stock market fund is practically equivalent in terms of tax efficiency, and is superior on some other counts.

While we're on the subject, growth stocks tend to have lower dividends, so some people tilt toward growth to minimize dividend tax exposure. This doesn't seem to work very well in practice either, and again a total market fund is probably a better choice. Just thought I'd mention it.

The fund description on https://finance.yahoo.com/q?s=VTCLX says:

"The fund purchases stocks that pay lower dividends and are included in the Russell 1000 Index-an index that is made up of the stocks of large- and mid-capitalization U.S. companies. It uses statistical methods to "sample" the index, aiming to minimize taxable dividends while approximating the other characteristics of the index."

So it seems like they do try to minimize dividends by avoiding certain stocks, although doesn't seem to amount to much.

[craigr]

Like D1984 said, there are tax-managed funds.

My bad, I should've been more precise about the distinction between minimizing capital gain events and minimizing dividends.

Though, my understanding is that Vanguard has "deprecated" the tax-managed funds and is downplaying them, because as craigr explained, the plain-vanilla total stock market fund is practically equivalent in terms of tax efficiency, and is superior on some other counts.

While we're on the subject, growth stocks tend to have lower dividends, so some people tilt toward growth to minimize dividend tax exposure. This doesn't seem to work very well in practice either, and again a total market fund is probably a better choice. Just thought I'd mention it.

The fund description on https://finance.yahoo.com/q?s=VTCLX says:

"The fund purchases stocks that pay lower dividends and are included in the Russell 1000 Index-an index that is made up of the stocks of large- and mid-capitalization U.S. companies. It uses statistical methods to "sample" the index, aiming to minimize taxable dividends while approximating the other characteristics of the index."

So it seems like they do try to minimize dividends by avoiding certain stocks, although doesn't seem to amount to much.

Understand that internally they can do things to balance losses/gains to minimize taxes as well, but that's above my pay grade. Also the hybrid fund/ETF that Vanguard uses also allows them to transact shares on the open market to also make the fund internally more tax efficient and this option is not open to pure tax-managed funds which don't have that feature.

Mostly today with ETFs and very broad index funds the tax-managed ones have lost most of their purpose compared to years gone by. Even if a fund tries to avoid dividends, they could also be missing out on higher returns as a consequence. So you save some taxes but maybe get lower returns. This is the balance of taxes vs. returns. Often it pays to be very mindful of taxes, but there is an invisible crossing point where it can cost you money as well and that's different for each person.

It's like the tax-free muni debate. Yes you can save some taxes with munis, but in a bad market they are going to radically underperform Treasuries. The supposed tax savings is overwhelmed by the loss of protection when you need them. The tax savings was not worth the other risks involved.

The above is why I advise generally to use broadly diversified stock funds and simple allocations. Long-term they require a lot less fiddling which is bound to save more tax money than chasing returns here and there with more complicated approaches or specialty funds.

[economicsjunkie]

Yes, I think at least it's a good idea to be mindful of these things. I've talked to a staunch dividend growth investor who was touting the importance considering small impacts on monthly returns when constructing a portfolio since they can compound significantly, but when I asked him about the potentially significant tax impact of high dividend payments during the growth phase of the portfolio, it didn't even register with him.

[dualstow]

On another forum someone suggested holding Vanguard growth in taxable and Vanguard value in tax-deferred. Not perfect, of course.

[economicsjunkie]

On another forum someone suggested holding Vanguard growth in taxable and Vanguard value in tax-deferred. Not perfect, of course.

Nothing is

[dualstow]

On another forum someone suggested holding Vanguard growth in taxable and Vanguard value in tax-deferred. Not perfect, of course.

Nothing is

Except Gemma Chan.

[economicsjunkie]

I did have to look her up but won't disagree with you on that!

[mathjak107]

the best results when investing long term  are generally going to be  from keeping equities in the deferred accounts and bonds and cash in the taxable accounts.

even the slightest stock turnover in a fund can destroy any tax benefit to be had by doing the reverse .

depending on the length of time you will be invested and the funds turnover rate  you can do more tax damage having the equities in the taxable account even with those special capital gains rates.

as little as a 1% spin off a year can negate any tax benefit over the long term.

for a long time the industry never looked under the hood and just assumed because you get a lower tax rate that equities should be advantaged in a taxable account.

but  once michael kitces looked under the hood that certainly was not the case . having those equity's in the deferred accounts won almost every time . especially because with rates so low what are you really going to compound tax deferred anyway ?

near zero real return is what you are compounding by following the old wives tale. while even at a 1% distribution rate in dividends and capital gains you can kiss a lot of money good bye in taxes  that is no longer their for compounding over the long term growing more money in the taxable account . .


the financial industry has lots of what amounts to old wives tales that no one ever looked at under the hood in detail that are turning out to be more myth and mis-information  than fact

[MachineGhost]

So how about a solution for those that can't use a Roth or retirement accounts?  I haven't come up with anything better than a discounted variable annuity yet.  And the fees on that still aren't that cheap.

[mathjak107]

only choices are index funds or tax managed funds unless you turn to insurance products.

but keep in mind tax efficiency is double edged.

making portfolio changes down the road and having to deal with 30 years of pent up capital gains can make for some horrible tax situations later.

I toned down my growth model to go more conservative about 7 years before I retired. 

I used all  managed funds so I was paying some taxes yearly for decades.

I was able to do it quickly and painlessly.

had they been all index funds I would have had to do the selling over multiple tax years.

if I did I would have run right in to 2008-2009 and lost 30% or so  in the process.

[Sam Brazil]

Use an index ETN...there are several. But of course then you're taking on counter party risk because it's essentially like a loan product, from what I understand. But you could minimize the risk with several ETNs or maybe just reduce taxes by mixing in an ETN.

[4x4]

So is there a group consensus on specific funds that would be superior to VTI? And if so, superior in what way/for what reason?
Thank you

[mathjak107]

i like VIG

[l82start]

i like VIG

who doesn't..  it pays back with high interest..... or we will break your legs.

[Reub]

One could always use baby Berkshire Hathaway class B shares. I believe that they are very tax efficient and you also get Warren's expertise.

[4x4]

i like VIG

who doesn't..  it pays back with high interest..... or we will break your legs.

"if you put up a three to four thousand dollar investment, you can make fifty thousand distributing, ...?"

One could always use baby Berkshire Hathaway class B shares. I believe that they are very tax efficient and you also get Warren's expertise.

Interesting alternative to an index fund although WB with his Cheeseburger and Cherry Coke habit, can't live forever....

Thanks for the thoughts and suggestions!

[MachineGhost]

Buffett has already delegated his "expertise" to two new Berkshire CEO's.  I don't expect Berkshire to do as well going forward and it is better to invest in Merkel which has a much younger CEO and a lot less capital, but similar philosophy.  A lot of Berkshire's initial capital growth was during the time they were a hedge fund and trading as such.  That can't be repeated.

[economicsjunkie]

the best results when investing long term  are generally going to be  from keeping equities in the deferred accounts and bonds and cash in the taxable accounts.

This is interesting, I was thinking along the same lines, although I thought the order should be bonds first, then stocks, then cash, because the interest on bonds is higher than the dividends on stocks usually, no?