Index ETF, stock selection and taxes

[shalab]

Wanted to throw this up for discussion, when one invests in an index etf or mutual fund( say IVV or VFV that mimics SP500), one gets tax benefits that remain till the money is withdrawn. (Even then, it can be mitigated if the income is below say 75K ). Custom stock picking seems problematic from tax efficiency standpoint as most of the stocks have to be sold once they reach their IV which is a taxable event. It looks like custom stocks should outperform the index significantly (atleast 5% or higher) for it to be worthwhile...

 

cheers!

 

[Tim Eriksen]

Wanted to throw this up for discussion, when one invests in an index etf or mutual fund( say IVV or VFV that mimics SP500), one gets tax benefits that remain till the money is withdrawn. (Even then, it can be mitigated if the income is below say 75K ). Custom stock picking seems problematic from tax efficiency standpoint as most of the stocks have to be sold once they reach their IV which is a taxable event. It looks like custom stocks should outperform the index significantly (atleast 5% or higher) for it to be worthwhile...

 

cheers!

 

Not sure I follow your logic.  The same tax benefits apply to both.  If your approach is the same as the fund then it too may encounter the same issues of short term gains versus long term.  You would have to look on a case by case basis - e.g. does the fund have large unrealized gains?  What is the fund's average holding period?  What often clouds the picture is that the mutual fund is growing in size thus there is less realized gains, but that can go the other way too. 

 

Are your going to sell a stock that reaches IV if it only needs one more month until it is long term gains?  What about two months? 

[shalab]

Good point about funds having hidden gains, but with index funds, generally this is not the case. Also, typically a stock reaches IV in about three years. One can hold the index fund forever and just pay taxes on the dividends..

 

 

[innerscorecard]

But then you run into the familiar structural problems of institutional money managers.

 

And then at least until recently you had the issue that ETFs had to disclose holdings daily. I think now a few have opened up that don't have to do this.

 

Still, it really probably isn't the worst thing in the world to just buy and hold something like QVAL or IVAL. It'll save you a lot of time.

[CorpRaider]

http://www.alphaarchitect.com/blog/2014/04/01/etfs-tax-efficient-mutual-funds/

[CorpRaider]

Still, it really probably isn't the worst thing in the world to just buy and hold something like QVAL or IVAL. It'll save you a lot of time.

 

I haven't gotten comfortable with IVAL yet.  Prof. Greenblatt shut down his foreign fund and I notice he hasn't launched a new one at gotham and there isn't any good data on the international application of the formula in Quantitative Value, is there?  I looked at the live results and they are underperforming, albeit over a little more than a year.  I would also prefer if they had some country limits.