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here is a summary showing how bad internal turnover can be in just some s&p 500 funds that creates taxable events . total market funds and the larger index's are even worse .
I find this thread intesting as a year ago, having read the same article, I came her asking the same question. Later I asked specifically about the internationally index fund and the corporate bond fund. As you will find you will get a variery of opinions. Mathjak is a Fidelity guy and will ofen to recommemd them as he's had such success.
But most subscribe to this method of investing, index funds just make sense. I firmly believe this general idea, or an even simpler idea the Bogglehead 3 index Portfolio https://www.bogleheads.org/wiki/Lazy_portfolios is the way to go for the majority of investors with working but limited knowledge. Not a fan of total bond market funds , as posted earlier too much ultra safe low paying government bonds. I like the corporate bond idea of the 5 fund model and because of that I have stayed in this 5 index plan.
the term index means lots of things today . there are all different index's and some work better than others .
here is a summary showing how bad internal turnover can be in just some s&p 500 funds that creates taxable events . total market funds and the larger index's are even worse .
in theory index 's should be very tax efficient with little distributions other than dividends and when when some stock gets the majority
but many do not buy all the stocks in the index . 450 stocks make up the bottom half of the entire index value while 50 stocks make up the top .
so they buy some of the bottom and flip among them trying to capture at least the market returns and maybe even a little alpha .
many are not even low fee so associating the words indexing does not mean low fee .
the right column is showing you that if you had this fund in a brokerage account you would have a pretty high yearly hit tax wise over long periods of time from the expenses and taxes
it is hard to say , they are all different. i have not seen them broken out less dividends just as an expense and distribution ratio.
don't forget taxes are due eventually and while we love delaying taxes you can end up with a tax torpedo if you make changes and have decades of pent up taxes that have not been paid . it can take you years to unwind a major change to avoid getting hammered . you can actually miss the opportunity in what you wanted to do instead , because it can take so long to avoid a tax mess
i am so glad i paid most of what was due along the way . my portfolio today is nothing as it was . i would have owed a fortune and tripped so many surcharges , got killed in medicare premiums and perhaps even amt taxed . so the tax situation is unique and different for all of us . if it is all retirement money in a plan it can mean little . if it is split between retirement money and a brokerage account it can mean quite a lot .
in our case we had as much in retirement plan money as out of it in our brokerage account and to make a change in portfolio construction like did would have involved a whole lot of taxes if we had not paid most of it over the decades ,
Last edited by mathjak107; 02-13-2017 at 12:23 PM..
You are wrong and i will post the tax efficiency of some s&p index funds that rival managed funds from turn over later when i get home. They don't own the entire index and play little trading games. Fidelity and vanguard were the lowest but you will see so many others that have a high turnover and poor tax efficiency from distributions.
I'm afraid I'm not. An actual index fund will weight towards the market winners and unweight the market losers over time. That's kind of its point.
Tax efficiency wasn't part of my statement at all, but great attempt at a redirect.
noooooo , it prevents much money flowing in to tomorrows winners , and makes today's over valued potential losers over valued as the bulk of new money goes in to what already went up the most when valuations are high .
you have it backwards. even the next microsoft would have very little effect on the index if it was in the bottom 1/2 . buying high and selling low with incoming money is the opposite . you buy what has not gone up yet or where the valuations are lower and offer better value .
for that company to play a role in moving the index and adding value it would have to soar beyond belief .
Last edited by mathjak107; 02-13-2017 at 12:43 PM..
To your point about sampling: not all index funds do that. The implication in your statement is that it is common. In indexes done in liquid markets it is not uncommon to fully replicate the index. S&P 500, specifically, is one that is not difficult to replicate and I would bet most funds fully replicate it rather than sample it:
Sampling Strategy and Full Replication ETFs
"The first method when investing in ETFs is known as full replication. This is when an investor simply buys an ETF that holds all of the same securities as the index they wish to track. Since the ETF holds every security with the same weightings, an investor can create a nearly identical replica of the underlying index.
There are index funds that allow full replication of market indexes. For example, the SPDR S&P 500 ETF (SPY A) tracks the performance of the S&P 500 Index. It is very closely matched to the S&P 500, with an average price-earnings ratio of 17 and a 2.2% dividend yield. It achieves the objective of full replication by holding a portfolio of all the stocks in the S&P 500 Index with similar weightings that correspond to the index weightings."
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