Author Topic: Sell Energy Index fund now or wait until 2/17 to avoid short-term cap gains tax?  (Read 1964 times)

spud1987

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I bought about 12.5k worth of the Vanguard energy index fund back in February when oil was at 25/bbl. Now that oil is pushing 50/bbl the fund is up about 35-40%. Taking tax out of the equation I would sell now because I think there isn't much more upside in the fund (at least in the short/medium term). However, I would then be hit with about 4-5k in short-term capital gains taxes, which is about 33% (ordinary income rates). If I wait until February 2017 I would be able to sell and pay a lower long-term capital gains rate of about 20%.

So, my question is whether 13% in tax differential is worth waiting until February or whether I should lock in my gains now?

forummm

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You could lock in the gain using options. Buy an ATM put and sell an ATM call for expiration over one year from purchase. If it drops then you can exercise the put after the year's up. Otherwise, just wait for it to be called away. There's a small risk that you get called away before a year's up, but then that's no different from selling now. The put premium should be less than the sum of the expected dividends and call premium. The extra amount is interest to compensate for holding your cash in the position.

I don't know how liquid the options market is for that ETF.

Keith123

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I own the same index, VDE.  I bought in at $76.  I actually believe its going quite higher for the next year or so.  I'm not selling.  While we have had a great run up in oil prices, I suspect there will be a fast spike when demand outpaces supply.  It's not there yet.  Probably going to happen near the end of this year or mid-2017 at the latest.  I'd say wait for several weeks in a row of draw downs on existing oil inventories.  That's a decent signal when the demand outstrips supply, with the exception of random supply disruptions.  Additional production will take time to come online.  It's not gonna happen overnight.  Just my opinion.  I don't have a crystal ball.  My money is where my mouth is though.  13K of it.  I think the biggest risk is the global demand.   

 
« Last Edit: May 16, 2016, 02:48:00 PM by Keith123 »

spud1987

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I own the same index, VDE.  I bought in at $76.  I actually believe its going quite higher for the next year or so.  I'm not selling.  While we have had a great run up in oil prices, I suspect there will be a fast spike when demand outpaces supply.  It's not there yet.  Probably going to happen near the end of this year or mid-2017 at the latest.  I'd say wait for several weeks in a row of draw downs on existing oil inventories.  That's a decent signal when the demand outstrips supply, with the exception of random supply disruptions.  Additional production will take time to come online.  It's not gonna happen overnight.  Just my opinion.  I don't have a crystal ball.  My money is where my mouth is though.  13K of it.  I think the biggest risk is the global demand.   



I agree that there is still room to grow, but I'm just not sure whether I want to take that risk since I've already made 30% in three short months and my preferred investing approach is broad based index funds. In addition to oil demand I also worry about US producers locking in 50/bbl oil via hedges, which will allow US production to increase (or at least slow the decline in US production).


brotatochip

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I bought VDE in early February...what a sale!  I'm longing this ETF...they pay dividends and are up substantially this quarter.  I believe the huge price drop in oil this year was an attempt to squeeze out financial growth and stability of ISIL (you can't take away my tinfoil hat). 

spud1987

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I bought VDE in early February...what a sale!  I'm longing this ETF...they pay dividends and are up substantially this quarter.  I believe the huge price drop in oil this year was an attempt to squeeze out financial growth and stability of ISIL (you can't take away my tinfoil hat).

I'm quite proud of my VDE investment in late Jan/early Feb. I also harvested some capital losses in VTSAX to pay for VDE, so double win! One word of caution re: dividends, a lot of oil & gas companies (especially upstream and integrateds) cut/eliminated their dividends this year so the payout is likely to be smaller this year compared to previous years.

Proud Foot

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Starting at $12.5k and being up 40% would give you a capital gain of approximately $5k. if ST the tax would be approximately $1,650 while if LT the tax would be approximately $1,000.   To me that is not a big enough difference to be a big part of my decision to sell/hold. 

spud1987

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Just an update: I exchanged my VDE shares for VTSAX/CA muni bond/VTIAX on Thursday. I'll eat about 4k of short term cap gains.

An added bonus is that I was able to buy VTSAX and VTIAX on a big 1% drop (and VDE did not have a corresponding large drop), so I inadvertently engaged in some beneficial market timing!