Crazy high capital gains on Vanguard target date funds

[rebel_quietude]

I really feel like they should have a disclaimer on the fund page. Like, "due to tax implications, these target date funds may not be appropriate for taxable accounts."

How hard is that? Would save some headaches.

Vanguard is an investment firm which provides investments.  What you're describing is tax advice, which Vanguard does not provide but can be found from a tax professional such as a CPA.

No. It's entirely possible to lawyer-up the verbiage so as to remove accusations of providing "tax advice," while still highlighting to customers that the model used for re-balancing increases dividend and capital gains exposure in taxable accounts.

Highlighting the tax implications of how their target date funds are managed is providing transparency and clarity to customers on the nature of the product. Not tax advice.

OK, let's try this:  What is the reason you think Vanguard has not yet implemented your idea?  Perhaps they've never thought of it, or perhaps nobody has ever made the suggestion to them, or perhaps they're dumb?

I'm happy to engage in debates that don't involve sarcastic condescension. Please reconsider how you would like to continue the conversation.

[secondcor521]

I really feel like they should have a disclaimer on the fund page. Like, "due to tax implications, these target date funds may not be appropriate for taxable accounts."

How hard is that? Would save some headaches.

Vanguard is an investment firm which provides investments.  What you're describing is tax advice, which Vanguard does not provide but can be found from a tax professional such as a CPA.

No. It's entirely possible to lawyer-up the verbiage so as to remove accusations of providing "tax advice," while still highlighting to customers that the model used for re-balancing increases dividend and capital gains exposure in taxable accounts.

Highlighting the tax implications of how their target date funds are managed is providing transparency and clarity to customers on the nature of the product. Not tax advice.

OK, let's try this:  What is the reason you think Vanguard has not yet implemented your idea?  Perhaps they've never thought of it, or perhaps nobody has ever made the suggestion to them, or perhaps they're dumb?

I'm happy to engage in debates that don't involve sarcastic condescension. Please reconsider how you would like to continue the conversation.

Neither sarcasm nor condescension was intended.  While I'm not particularly interested in debates (I've had my fill of those already), I disagree with you and was sincerely interested in your answer to the posed question so I could better understand your point of view.

The second part of the question was to give examples of what my question was after.  I've found that sometimes my questions get understood in a different vein than I was trying to convey, so to try to be more efficient, I listed some reasonable examples so I would have a better chance of the thrust of my question being understood.

I'm still interested in your answer to the question.

[DaTrill]

Vanguard, Schwab, Fidelity, nearly all other brokers sell mutual funds and ETFs.  Asking why a mutual fund salesperson sells a mutual fund over an ETF is like asking why a Toyota salesman doesn't recommend a Honda when a Honda is the best vehicle for the customer.  ETFs have been around for over 20 years, my first investments were SPY, DIA and QQQ.  There is no reason to buy a mutual fund in a taxable account for any reason.  Many mutual fund holders will have capital gains despite the fund losing money this year.     

A better way to manage investments in IRA accounts is to just match equity percentage of target date fund once a year.  Most target date funds are loaded with extra fees and the glide path is meaningless in delivering excess returns.  Target date funds have no justification for existing as one can do the same allocations in 2 minutes once a year.  Go 100% index, ignore target date and when you are reading to retire, you will have much more $$$.

Some target date funds are the default in retirement accounts and horrible investments with ridiculous investment fees.  Buy the lowest cost S&P 500 index fund in all employer retirement accounts.           

[rebel_quietude]

I now have a bee in my bonnet about this, and did some googling. Apologies for the lengthy post.

To try and compare apples to apples, I went to the Vanguard Pages for VFIFX (Vanguard Target Retirement Fund 2050), VTSAX (Vanguard Total Market Index Admiral), and VTI (Vanguard Total Market ETF). I also looked up their pages on MarketWatch, Fidelity, and Morningstar.

Vanguard pages are at:
https://investor.vanguard.com/mutual-funds/profile/overview/vtsax
https://investor.vanguard.com/mutual-funds/profile/overview/vfifx
https://investor.vanguard.com/etf/profile/overview/vti

As mentioned earlier in this thread, there's no direct equivalent to the Target Date Funds in ETFs, so the VTI is something of an orange in comparison.

Going through their Vanguard page tabs, there's effectively nothing that addresses how they approach distributions and capital gains on the Overview, Price and Performance,  Fees and Minimums, or News and Reviews pages. The VTI and VTSAX  portfolio and management pages include a line on turnover (irrelevant to us, as mentioned previously in this thread), VFIFX just has a list of the funds included.

The page that's significant for this topic is Distributions. On that page, it lists the distributions for the last year, type (Dividend or Cap Gain), date, and amount per share. All of the values are given in dollars and cents. So, to begin with I have to do math, on each fund in my portfolio, without any future predictability, to see what these dividends actually mean for me tax-wise.

Below that, we have a chart for Realized / Unrealized Gains, that includes a "realized capital gains as percent of Net Asset Value," line. For VFIFX, it's 10.13% as of 30 November. For VTI and VTSAX both, it's -.90%. What's frustrating is that they don't list historic averages, and I can't find the numbers for 2020 on any of the other sites either. I looked at the summary prospectus - nothing. I looked at the statutory prospectus - only this:

"Portfolio Turnover
The Fund may pay transaction costs, such as purchase fees, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 9% of the average value of its portfolio."

In the VTI prospectus? Exact same verbiage. No historic % NAV information, no historic realized / unrealized capital gains info, and here's the main point: no information that makes it simple or logical for a retail investor to compare the probable capital gains impact of three of their own, very popular, funds.

I'm sure Vanguard has constraints on how they can communicate tax information to customers. But I also think there's a pretty big gap between the information they have available now, and what they can publicize to retail investors trying to figure this out. I don't think it's too much to ask for, say, readily available (on their fund page) information on historic Capital Gain, Loss, and % of NAV, and perhaps a written statement on how the fund handles these requirements.

[DaTrill]

I now have a bee in my bonnet about this, and did some googling. Apologies for the lengthy post.

To try and compare apples to apples, I went to the Vanguard Pages for VFIFX (Vanguard Target Retirement Fund 2050), VTSAX (Vanguard Total Market Index Admiral), and VTI (Vanguard Total Market ETF). I also looked up their pages on MarketWatch, Fidelity, and Morningstar.

Vanguard pages are at:
https://investor.vanguard.com/mutual-funds/profile/overview/vtsax
https://investor.vanguard.com/mutual-funds/profile/overview/vfifx
https://investor.vanguard.com/etf/profile/overview/vti

As mentioned earlier in this thread, there's no direct equivalent to the Target Date Funds in ETFs, so the VTI is something of an orange in comparison.

Going through their Vanguard page tabs, there's effectively nothing that addresses how they approach distributions and capital gains on the Overview, Price and Performance,  Fees and Minimums, or News and Reviews pages. The VTI and VTSAX  portfolio and management pages include a line on turnover (irrelevant to us, as mentioned previously in this thread), VFIFX just has a list of the funds included.

The page that's significant for this topic is Distributions. On that page, it lists the distributions for the last year, type (Dividend or Cap Gain), date, and amount per share. All of the values are given in dollars and cents. So, to begin with I have to do math, on each fund in my portfolio, without any future predictability, to see what these dividends actually mean for me tax-wise.

Below that, we have a chart for Realized / Unrealized Gains, that includes a "realized capital gains as percent of Net Asset Value," line. For VFIFX, it's 10.13% as of 30 November. For VTI and VTSAX both, it's -.90%. What's frustrating is that they don't list historic averages, and I can't find the numbers for 2020 on any of the other sites either. I looked at the summary prospectus - nothing. I looked at the statutory prospectus - only this:

"Portfolio Turnover
The Fund may pay transaction costs, such as purchase fees, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 9% of the average value of its portfolio."

In the VTI prospectus? Exact same verbiage. No historic % NAV information, no historic realized / unrealized capital gains info, and here's the main point: no information that makes it simple or logical for a retail investor to compare the probable capital gains impact of three of their own, very popular, funds.

I'm sure Vanguard has constraints on how they can communicate tax information to customers. But I also think there's a pretty big gap between the information they have available now, and what they can publicize to retail investors trying to figure this out. I don't think it's too much to ask for, say, readily available (on their fund page) information on historic Capital Gain, Loss, and % of NAV, and perhaps a written statement on how the fund handles these requirements.

There are no realized gains in an ETF until the owner sells the ETF, this is the tax advantage of ETFs>MFs.  Investor is in 100% control of when capital gains are realized.  An ETF sells Telsa for LT gain, no taxable event, mutual fund sells Tesla for LT gain, investor has a taxable gain.  For target date funds, one can match the equity bond mix once a year with VTI/VOO/BBUS/SCHX/IVV and any general bond index ETF and again, completely control amount and timing of capital gains.     

I know there are several retirement "gurus" who recommend mutual funds and swear to not buy ETFs but can only speculate this is because the "gurus" receive ad dollars from mutual fund offerings as ETFs typically have significantly lower expense ratios.  There is zero reason for any investor to hold any mutual fund in any taxable account, 0%, but brokers still recommend using these for clients.               

[Encinoman45]

I now have a bee in my bonnet about this, and did some googling. Apologies for the lengthy post.

To try and compare apples to apples, I went to the Vanguard Pages for VFIFX (Vanguard Target Retirement Fund 2050), VTSAX (Vanguard Total Market Index Admiral), and VTI (Vanguard Total Market ETF). I also looked up their pages on MarketWatch, Fidelity, and Morningstar.

Vanguard pages are at:
https://investor.vanguard.com/mutual-funds/profile/overview/vtsax
https://investor.vanguard.com/mutual-funds/profile/overview/vfifx
https://investor.vanguard.com/etf/profile/overview/vti

As mentioned earlier in this thread, there's no direct equivalent to the Target Date Funds in ETFs, so the VTI is something of an orange in comparison.

Going through their Vanguard page tabs, there's effectively nothing that addresses how they approach distributions and capital gains on the Overview, Price and Performance,  Fees and Minimums, or News and Reviews pages. The VTI and VTSAX  portfolio and management pages include a line on turnover (irrelevant to us, as mentioned previously in this thread), VFIFX just has a list of the funds included.

The page that's significant for this topic is Distributions. On that page, it lists the distributions for the last year, type (Dividend or Cap Gain), date, and amount per share. All of the values are given in dollars and cents. So, to begin with I have to do math, on each fund in my portfolio, without any future predictability, to see what these dividends actually mean for me tax-wise.

Below that, we have a chart for Realized / Unrealized Gains, that includes a "realized capital gains as percent of Net Asset Value," line. For VFIFX, it's 10.13% as of 30 November. For VTI and VTSAX both, it's -.90%. What's frustrating is that they don't list historic averages, and I can't find the numbers for 2020 on any of the other sites either. I looked at the summary prospectus - nothing. I looked at the statutory prospectus - only this:

"Portfolio Turnover
The Fund may pay transaction costs, such as purchase fees, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 9% of the average value of its portfolio."

In the VTI prospectus? Exact same verbiage. No historic % NAV information, no historic realized / unrealized capital gains info, and here's the main point: no information that makes it simple or logical for a retail investor to compare the probable capital gains impact of three of their own, very popular, funds.

I'm sure Vanguard has constraints on how they can communicate tax information to customers. But I also think there's a pretty big gap between the information they have available now, and what they can publicize to retail investors trying to figure this out. I don't think it's too much to ask for, say, readily available (on their fund page) information on historic Capital Gain, Loss, and % of NAV, and perhaps a written statement on how the fund handles these requirements.

There are no realized gains in an ETF until the owner sells the ETF, this is the tax advantage of ETFs>MFs.  Investor is in 100% control of when capital gains are realized.  An ETF sells Telsa for LT gain, no taxable event, mutual fund sells Tesla for LT gain, investor has a taxable gain.  For target date funds, one can match the equity bond mix once a year with VTI/VOO/BBUS/SCHX/IVV and any general bond index ETF and again, completely control amount and timing of capital gains.     

I know there are several retirement "gurus" who recommend mutual funds and swear to not buy ETFs but can only speculate this is because the "gurus" receive ad dollars from mutual fund offerings as ETFs typically have significantly lower expense ratios.  There is zero reason for any investor to hold any mutual fund in any taxable account, 0%, but brokers still recommend using these for clients.             

I now wish I held VTI ETF instead of the VTSAX index fund, but so far it appears Vanguard's capital gains reduction scheme is working. I went back 4 years of tax history in my Vanguard account, and there were ZERO capital gain distributions spit out by Vanguard for VTSAX in that time unless I actually sold some shares, so I'm hoping this will continue to be the case.

[JoePublic3.14]

I now wish I held VTI ETF instead of the VTSAX index fund, but so far it appears Vanguard's capital gains reduction scheme is working. I went back 4 years of tax history in my Vanguard account, and there were ZERO capital gain distributions spit out by Vanguard for VTSAX in that time unless I actually sold some shares, so I'm hoping this will continue to be the case.

You can exchange from VTSAX to VTI, with no tax issues. Can’t go back though.

[Encinoman45]

I now wish I held VTI ETF instead of the VTSAX index fund, but so far it appears Vanguard's capital gains reduction scheme is working. I went back 4 years of tax history in my Vanguard account, and there were ZERO capital gain distributions spit out by Vanguard for VTSAX in that time unless I actually sold some shares, so I'm hoping this will continue to be the case.

You can exchange from VTSAX to VTI, with no tax issues. Can’t go back though.

I guess as long as Vanguard keeps from spitting out capital gains distributions on VTSAX, I'll just stay put. I do like the simplicity of mutual funds and automatic dividend reinvesting but it would be a bummer if I would get large unexpected capital gains since I strategically contribute to my pretax 401k, HSA, and Roth IRA based on my expected income and tax bracket.

[less4success]

This post on Bogleheads posits a theory for why this happened:

It seems Vanguard lowered the minimum on their institutional versions of the funds, so small business "upgraded" from e.g. VFORX to VIRSX, triggering a large net outflow from VFORX, requiring distributing large capital gains (not good for anyone holding VFORX in a taxable account, as noted in this thread).

But there's more: Vanguard is apparently going to merge the funds back together, so... couldn't they have avoided all this by just merging the funds in the first place?

Edit to add relevant blog post on mymoneyblog.com (a site that I usually find to be credible): https://www.mymoneyblog.com/vanguard-target-retirement-funds-nav-drop-cap-gains-distribution.html

[DaTrill]

ETF>MF

[Loren Ver]

VWUAX distributed more than $22 per share (last year was $6).  I own a shit ton in taxable as well as retirement.  It totally blew up my health subsidy and I am sending a large check to Uncle Sam where last year I paid zero tax.  Strangely I find I am not mad about that at all.     

ETA- Post-FIRE my taxable brokerage proceeds come directly to my checking account rather than re-invested.  This means I didn't have to sell some of the stock I planned for filling the annual living expenses account this year.     

I don't own any target date funds, but VWUAX got me too.  It was, very unexpected.  I just bought them early last year, but reading through their materials it didn't seem like something they did often.  Glad to see I didn't make a horrible mistake.  Ugh STCG.  They paid out so much, I might have had a capital loss.  Still trying to figure out vanguards paper work on that.

I came here seeking knowledge and am actually learning a lot from this thread, so thank you MMM.  Though I'll need to read though it again as I got lost a few times, this is a little deeper than buy low, sell high, hold.
 
I am mostly mutual funds and mostly taxable, so the last two years and have been very interesting on what payouts can happen - considering historically I would get a pittance. 

Loren

[seattlecyclone]

I just came across an article about how someone's attempting a class-action lawsuit over this. Will be interesting to follow for anyone affected.

[shureShote]

My ERs with Vanguard, while low, should be plenty to make the law firm that represents them very rich(er).

Pretty sad that a corporation has to answer for this type of thing. But there’s a long sad history of it happening here across many many slices of our world.

[PDXTabs]

So, this happened. Reuters: Vanguard to pay millions to mutual fund investors hit with big tax bills. But I think that the settlement is only for Massachusetts residents.