Tax Efficient International Fund

Mona

I am back to a question that I still have not been able to answer comfortably.

I am a Flagship member with Vanguard and also invest with Schwab. In a retirement account with Schwab I currently hold SGOVX. In a different retirement account at Schwab I hold MAPIX and MACSX. In my taxable account with Schwab I hold ARTKX. I currently do not hold an international fund at Vanguard.

My plan within the six months to a year is to increase my international exposure. I am not looking to make any changes with MAPIX or MACSX.

I hold SGOVX in a retirement account because it is fairly tax inefficient. The problem is, I am out of room in that account and also want more mid cap value exposure, which I can satisfy by selling SGOVX and adding to my ARTQX position in that same account. Of course, when I do this, not only am I not increasing my international exposure, I am decreasing it.

One potential solution is to add to ARTKX, which historically seems to have been fairly tax efficient. The two issues with doing this is besides MAPIX and MACSX, I would be putting over 60% of my international exposure in one fund. Also, per M* ARTKX has about a 25% potential capital gains exposure.

A second way I could go is to purchase UMBWX at either Schwab or Vanguard. It's long term performance has been good, its expense ratio seems reasonable (18 basis points below ARTKX), it's been fairly tax efficient, and it seems like it would be a complement to ARTKX because it has an average market cap about three times the size of ARTKX. However, UMBWX has a potential capital gains exposure of about 19%.

A third way to go is to purchase VGSTX at Vanguard and call it quits ;-). It's tax efficient, it has a low expense ratio at 16 basis points, a low capital gains exposure at about 5%, and a an average market cap about twice ARTKX. However, while about 50% of my domestic exposure is in index funds, I have not been a big fan of indexing international.

With the above in mind, I certainly would appreciate some thoughts.

Mona

randynevin

I think you mean VGTSX (Total Intl) rather than VGSTX (STAR).

Among some of the more tax-efficient international (and global) funds are: ARTRX, WGRNX, MGLBX, ARTGX, ARTHX, OAKWX, ARTKX, MPACX, UMBWX, ACFFX.

Some of them are artificially tax-efficient, because they have short histories. But all of them are performing well compared to their benchmarks.

BannedfromBogleheads

When it comes to tax efficiency I think it's important to remember that any fund you couldn't live with holding forever (and never selling) will not necessarily be tax efficient. And I think this should always be your goal because I'm of the old school of thought that trying to realize capital gains is speculation (just look it up in the dictionary) and that, in the long term, the only legitimate purpose of capital gains is to elevate the dollar amount of the dividend in a sound and prudent fashion (as opposed to chasing yield). So an index fund, even if not the ideal choice for a tax efficient fund today, is probably best in the long run because it's never going to be at the bottom of the pile (and thus tempt you to sell before this happens) after accruing significant capital gains; and also, since it is more difficult to be confident about the future dividends of actively managed funds, this confidence that capital gains/losses are only of secondary importance (except when it comes to taxes) will also allow you to actually achieve the goal of living off the dividend by eliminating from your portfolio inferior asset classes like "high quality" bonds (which underperform because they are simply poor investments, not because they are "less risky" as claimed by some fools...how could there be a lower risk of underperforming when everyone knows that the underperformance is consistent and predictable?).

That being said, there doesn't appear to be much diversification in holding international vs domestic indexes because everything is highly correlated. Some, like Jack Bogle, conclude from this that one should AVOID heavy allocations to international index funds (<50%), but I say it's all the justification needed to EMBRACE heavy allocations to international index funds (>=50%). Think of it this way: if you thought that they were both going to perform the same then there'd be no reason to select one or the other and so you'd need to split it 50/50, but the most notable difference between the two is that, for a tiny increase in the already insignificant ER of domestic index funds, international index funds give you a much higher dividend (without chasing yield) AND you're investing in an asset class that an awful lot of investors (passive and active alike) have an irrational and/or involuntary aversion to because of their home bias and/or the relative inaccessibility of international investment tools (not to mention all the negative sentiment due to the political problems in the eurozone if you're inclined to invest on that basis in addition to the known behaviors already listed).

And for me personally?...since March 2011, share classes of VGTSX (which is the Vanguard Total International Index Fund) is the only investment I have purchased in taxable accounts and I have been "dollar cost averaging" all my new savings into it every month (and also advancing my purchases with margin every time the eurozone crises flares up). With this "core", I then use my tax advantaged account to "explore" various active funds regardless of their tax efficiency, but my tax advantaged account is only about 5% of my overall portfolio due to the success of my taxable investments and arbitrages (which I don't consider investments because they are 1-temporary opportunities, 2-have guaranteed outcomes, and 3-I only do them with borrowed money so my assets are not actually "vested" even though I reap the profits).

Mona

Reply to @randynevin:

I think you mean VGTSX (Total Intl) rather than VGSTX (STAR).

Yes, thank you. But I really meant VTIAX, the Admiral shares of VGTSX.

Mona