Which Vanguard funds are most tax efficient?
- Vanguard Total Stock Market Index (VTSAX)
- Vanguard Tax-Managed Capital Appreciation Fund (VTCLX)
- Vanguard Tax-Managed Balanced Fund (VTMFX)
- Vanguard Intermediate-Term Tax-Exempt Fund (VWITX)
- Vanguard Tax-Exempt Bond Index (VTEAX)
Traditional Index Funds: Traditional index funds benefit from the chief factor that makes equity ETFs tax-efficient, and that's very low turnover. Thus, most of Morningstar's favorite core index funds are fine tax-efficient picks, especially Vanguard Total Stock Market Index (VTSAX) and Vanguard 500 Index (VFIAX).
Is the Vanguard Wellesley Fund Tax Efficient? Because it is mainly an income fund, and because it mostly holds taxable bonds and dividend-paying stocks, with only around 1/3 of the equity holdings pay qualified dividends,7 it is unlikely to be incredibly tax efficient.
Both of these options carry low-cost expense ratios that are almost identical. VTSAX's expense ratio is 0.04% and VTI's expense ratio is 0.03%, which essentially means that investors will pay $1 more in management fees for every $10,000 that they invest.
VFIAX and VOO provide the same tax efficiency for long-term investors. Therefore, it doesn't matter which one you consider, VOO or VFIAX; the tax efficiency is the same. Important: Switching from VFIAX to VOO is not a taxable event.
ETFs carry more flexibility; they trade like stocks and can be bought and sold throughout the day. Mutual fund shares price only once per day, at the end of the trading day, but may benefit from economies of scale. While Vanguard fees are low in many of its products, ETFs tend to be more tax-efficient.
One of the quickest ways to understand a fund's tax implications is to compare its pretax return with its tax-adjusted return. The tax-adjusted return accounts for a fund's capital gains, dividends, and interest during the period, but it doesn't include tax consequences from selling the fund in the future.
The primary difference between the funds is the amount of bonds held. Wellington is around 40% bonds while Wellesley is 60%. There has been discussions over which is the better fund for retirees who are making withdrawals from their portfolios.
He said that in his will, he directed how he wants the money he leaves for his wife to be invested: "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.)"
Investment Performance
31, 2020, Vanguard's VWELX showed an average annual return of 10.51%, For the five-year period, it had an average annual return of 8.74%. Over 10 years, the Vanguard Wellington fund returned 10.12% and averaged about 8.33% in returns since its inception in 1929.
Should I buy VTI or VOO?
The investor who for some reason is only seeking lower volatility large-cap stocks will want to go with VOO, tracking the S&P 500 Index. Those desiring greater diversification and greater expected returns, at the cost of slightly greater volatility, will want to go with VTI to capture the entire U.S. stock market.
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VTSAX vs. VTI at a Glance.
| Fund / Feature | VTSAX | VTI |
|---|---|---|
| 5-Year Performance | 12.67% | 12.68% |
| 10-Year Performance | 13.94% | 13.95% |
The main difference between VTSAX and VTI is that VTSAX is an index fund while VTI is an ETF. Another significant difference is their expense ratio. VTSAX has an expense ratio of 0.04%, while VTI has an expense ratio of 0.03%. VTSAX also has a minimum investment of $3,000, while VTI has no minimum investment.
You really can't go wrong by investing in either VFIAX or VOO since the investments are virtually identical (although you may wish to consider the more diversified Total Stock Market Fund, with tickers VTSAX or VTI).
VTSAX is a little more flexible: VTSAX offers a higher level of flexibility than VFIAX. The VTSAX tends to a more affordable price per share with more flexibility and price purchasing power. Long-term investing can favor VTSAX: Over time, VTSAX has the potential to benefit the long-term investor.
Investing in the S&P 500 through VOO is a proven way to build wealth over time. That trend should continue in the future as long as the USA continues to have leading companies and growing GDP. Building this wealth requires patience, sometimes decades of patience.
Exchange traded notes (ETNs)
The most tax efficient ETF structure are exchange traded notes. ETNs are debt securities guaranteed by an issuing bank and linked to an index. Because ETNs do not hold any securities, there are no dividend or interest rate payments paid to investors while the investor owns the ETN.
Funds distribute their taxable gains to investors, who pay income taxes on them in the same year. By avoiding tax events within the fund, investors get to delay taxes until they sell the fund, which could be years or decades later. It's akin to a zero-interest loan from the IRS.
Contribute to a 401(k) or traditional IRA
One of the easiest, and potentially most beneficial ways to reduce your taxable income, is to contribute to a pre-tax retirement account such as an employer-sponsored 401(k) or traditional IRA.
In a nutshell, ETFs have fewer "taxable events" than mutual funds—which can make them more tax efficient.
Is Vanguard VTI a good investment?
The Vanguard Total Stock Market ETF (VTI)
VTI is a balanced fund, with a healthy mix of small-cap, midcap, and blue-chip stocks. VTI is a highly efficient fund with a low expense ratio. AUM are also impressive at more than $289 billion.
The Vanguard Total Stock Market Fund has not distributed capital gains, either short-term or long-term, since 2000!
VTI Dividend Information
VTI has a dividend yield of 1.44% and paid $3.04 per share in the past year. The dividend is paid every three months and the last ex-dividend date was Jun 23, 2022.
In many cases, you won't owe taxes on earnings until you take the money out of the account—or, depending on the type of account, ever. But for general investing accounts, taxes are due at the time you earn the money. The tax rate you pay on your investment income depends on how you earn the money.
ETFs are tax-efficient but not tax-free
Investors should keep in mind that, although ETFs are highly tax-efficient, they may occasionally distribute capital gains. The primary goal of index-based ETFs is to track the target index as closely as possible.
The main difference between these two shares classes is that VFIAX is a mutual fund and VOO is an ETF. That means VOO provides pricing in real-time, so you can see it change throughout the day during trading hours. In comparison, VFIAX is a mutual fund which means it isn't priced until the trading day is over.
