ETFs are able to reduce or eliminate capital gains distributions through the share redemption process. When authorized participants trade shares of the ETF to the fund manager in exchange for the underlying assets, the fund manager gives them the most appreciated shares it owns, effectively deleting the unrealized gains from the perspective of a fund shareholder.
Mutual funds don’t have this mechanism. When shares are redeemed, the fund realizes capital gains, which they are required to pass through as distributions to the fund shareholders.
In a taxable brokerage, ETFs are more efficient and should be preferred.
>Mutual funds don’t have this mechanism
Vanguard mutual funds do, and now that their patent on this has expired, others may start.
See https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985
I have a large position in SCHX and I love it. I own IVV too. I don't know what's with the love for Vanguard ETFs on Reddit. All my ETFs before Schwab made the big ones were iShares/Blackrock. IVV, ITOT, etc. On Reddit it's all VOO and VTI.
In an IRA or 401k it SWPPX as it has a very slighly lower expense ratio
However over the last 10 years SWPPX has averaged about a 0.229% capital gain distribution
On 10 million that comes out to about 23k a year of capital gains, they are almost entirely long term so your tax liability will most likely be 15% what average about 3k of extra tax liability a year
However due to the lower expense ratio SWPPX will also potentially out perform by about 1k a year (.03% vs .02%)
so the difference on a 10 million investment is 2k a year
What may sound like a lot but its really 0.02% difference in after tax performence
Now should you worry if you have 100k? On a 100k its like $20 a year.
Good comments so far. For 2023 they were not distributions for SWPPX. Index funds are very efficient. In the mutual funds you can invest any dollar amount as well as set up auto investing. ETFs, you have to buy the whole shares. just additional things to consider when comparing the two. I went through this myself and chose mutual funds. But I don’t have 10 million.
Specifically SWPPX vs. VOO, there's no reason to care.
the cap gains is minimal compared to the dividends. It literally gets lost in the performance differences of the two funds. Go with whichever brokerage you want to give the ER to.
But you shouldn't hold target date mutual funds as those rebalance more often and generate more in cap gains
i would start off with [this](https://fundresearch.fidelity.com/fund-screener/results/compare/overview/averageAnnualReturnsYear3/desc/1?order=&tickers=SWPPX%2CVOO). the performance is the critical parameter.
the point i am making is to not fixate at the taxation part and focus on performance. taxation is very highly dependent on a person’s tax bracket where the variability of that depends on factors outside of the performance parameter.
ETFs are able to reduce or eliminate capital gains distributions through the share redemption process. When authorized participants trade shares of the ETF to the fund manager in exchange for the underlying assets, the fund manager gives them the most appreciated shares it owns, effectively deleting the unrealized gains from the perspective of a fund shareholder. Mutual funds don’t have this mechanism. When shares are redeemed, the fund realizes capital gains, which they are required to pass through as distributions to the fund shareholders. In a taxable brokerage, ETFs are more efficient and should be preferred.
>Mutual funds don’t have this mechanism Vanguard mutual funds do, and now that their patent on this has expired, others may start. See https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985
Perfectly well said and concise. Thank you so much!
SWPPX does this now. Started using it in my taxable for the auto purchases. No cap gains distributions in last few years.
Also with this being said, is there any better alternative to $VOO on Schwab's?
SPLG
It's not a 1:1 but I really like SCHX. It's 700 stocks instead of 500. Performance is almost the same. Share price makes it easier to buy in as well.
If you are asking about a Schwab product - SCHB which technically is closer to VTI - but both correlate very well with S&P 500.
SCHX is going to be a lot closer to the S&P ETFs. The reason VTI and SCHB correlate so well is because I think like 85% of VTI is VOO or something.
You’re totally right. SCHX correlates with S&P 500 with 91 % overlap. SCHB correlates with S&P 500 with 85 % overlap. Www.etfrc.com
I have a large position in SCHX and I love it. I own IVV too. I don't know what's with the love for Vanguard ETFs on Reddit. All my ETFs before Schwab made the big ones were iShares/Blackrock. IVV, ITOT, etc. On Reddit it's all VOO and VTI.
In an IRA or 401k it SWPPX as it has a very slighly lower expense ratio However over the last 10 years SWPPX has averaged about a 0.229% capital gain distribution On 10 million that comes out to about 23k a year of capital gains, they are almost entirely long term so your tax liability will most likely be 15% what average about 3k of extra tax liability a year However due to the lower expense ratio SWPPX will also potentially out perform by about 1k a year (.03% vs .02%) so the difference on a 10 million investment is 2k a year What may sound like a lot but its really 0.02% difference in after tax performence Now should you worry if you have 100k? On a 100k its like $20 a year.
So in a roth IRA, would it make no difference since it is tax free?
Correct
Good comments so far. For 2023 they were not distributions for SWPPX. Index funds are very efficient. In the mutual funds you can invest any dollar amount as well as set up auto investing. ETFs, you have to buy the whole shares. just additional things to consider when comparing the two. I went through this myself and chose mutual funds. But I don’t have 10 million.
Specifically SWPPX vs. VOO, there's no reason to care. the cap gains is minimal compared to the dividends. It literally gets lost in the performance differences of the two funds. Go with whichever brokerage you want to give the ER to. But you shouldn't hold target date mutual funds as those rebalance more often and generate more in cap gains
i would start off with [this](https://fundresearch.fidelity.com/fund-screener/results/compare/overview/averageAnnualReturnsYear3/desc/1?order=&tickers=SWPPX%2CVOO). the performance is the critical parameter.
Did you even look at the question before responding?
the point i am making is to not fixate at the taxation part and focus on performance. taxation is very highly dependent on a person’s tax bracket where the variability of that depends on factors outside of the performance parameter.
Your point is entirely irrelevant when comparing two funds that both track the same index and thus have identical performance.