Just reviewed the tax-efficiency of most of the funds I use as its now about 5 years of IPS implementation. I thought it may be useful to share the results and have also added the tax efficiency of several DFA funds for comparison (as a benchmark). Here are some observations (see table below):
1. It was interesting that some of the most tax efficient funds over the last 5 years have been in asset classes often viewed as tax-inefficient. The Bridgeway ultra-small company market fund and ishare S&P600 small value were the most tax efficient, while US TSM and TM Intl large cap came down the list. Perhaps just a last five-year phenomena?
2. The absolute tax costs of the funds used range from 0.19 to 0.38% compared to the DFA funds, which range from 0.17 to 1.12% in absolute terms. Four of the six funds were more tax-efficient than a DFA ‘comparison/benchmark’ (exceptions were DFA TM Mkt-wide and EM although not by much).
3. Turnover of the S&P400 and 600 indexes over the last 5 years has been almost half the levels of that in yr 6-10 (see second table below), some of the funds listed may not be as tax efficient going forward if index turnover increases to earlier levels.
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Five year tax efficiency to December 2006
US LARGE MARKET Vanguard TSM DFA US Large
Before Tax 7.42 6.06
After Tax 7.10 5.70
Difference 0.32 0.64
% of return lost to taxes 4.31 10.56
US LARGE VALUE iShares 400v DFA US TM Mkt-Wide
Before tax 13.63 9.67
After Tax 13.25 9.50
Difference 0.38 0.17
% of return lost to taxes 2.79 1.76
US MICRO MARKET Bridgeway[BRSIX]* DFA Micro
Before Tax 23.88 15.16
After Tax 23.69 14.04
Difference 0.19 1.12
% of return lost to taxes 0.78 7.39
US SMALL VALUE iShares 600v DFA TM Trgtd Value
Before Tax 13.13 14.81
After Tax 12.88 14.08
Difference 0.25 0.73
% of return lost to taxes 1.90 4.93
INTL. LARGE MARKET Vgd Tax-Mgd Intl DFA Intl. Large
Before Tax 15.08 14.46
After Tax 14.75 14.02
Difference 0.33 0.44
% of return lost to taxes 2.19 3.04
EMERGING MARKET Vgd EM DFA EM
Before Tax 25.51 25.74
After Tax 25.17 25.49
Difference 0.33 0.25
Percent of return lost to taxes 1.29 0.97
* Uses 5 yr ending 2005 (latest prospectus)
Source: ishares, Vanguard, Bridgeway and DFA prospectus.
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INDEX TURNOVER
S&P 500 S&P MidCap 400 S&P SmallCap 600*
1995 5.0% 15.6% 13.7%
1996 4.6% 14.4% 16.4%
1997 4.9% 17.9% 21.8%
1998 9.5% 31.4% 24.4%
1999 6.2% 28.9% 24.4%
2000 8.9% 37.1% 36.4%
2001 4.4% 17.0% 15.6%
2002 3.8% 10.7% 11.0%
2003 1.5% 8.6% 11.0%
2004 3.1% 13.1% 13.0%
2005 5.7% 14.5% 13.8%
2006 4.5% 12.2% 12.9%
Source: S&P website
Robert
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