Morningstar's pages have a tab called "tax", which shows you the "tax cost ratio". For example, here's FCNTX 's tax page:
http://performance.morningstar.com/fund/tax-analysis.action?t=FCNTXThis calculation is but one way of representing tax efficiency. This one tells you what percentage of your investment went to pay taxes. Here's M*'s brief description:
http://www.morningstar.com/InvGlossary/tax_cost_ratio.aspxNote that most sites (and all prospectuses) use the highest tax rates in computing tax efficiency. If you're in a lower bracket, and especially if you're in a 15% or lower bracket (where qualified divs and long term cap
gains get taxed at 0%), you'll want to take the figures with a grain of salt.
There's also an oddity in how mutual funds handle cap
gains. If they have net
gains, they distribute them to you, just as if you'd owned the portfolio and bought and sold it yourself. But if they have net losses, they are not allowed to distribute them to you. The losses accrue (accumulate), and next year, or the year after, or ... whenever they have a net gain, they can use those accrued losses to reduce the
gains distributed.
This has the effect of distorting tax cost figures. After the market swoons (e.g. 2008), pretty much everyone has large losses accrued. So for the next few years, all funds look tax efficient as they apply those losses a
gainst realized
gains.
IMHO turnover should be low enough that the fund isn't generating short term
gains (taxed as ordinary income). But so long as the cap
gains are long term, it doesn't matter too much. Sooner or later, even with very low turnover, the fund is going to sell appreciated shares. If it's allowed the stock to appreciate a lot, then it will recognize large
gains then. Averaged over time, it comes out the same as taking a little at a time.
Very low turnover (vs. low turnover) helps on the cost side, since trading costs are a big hidden cost in fund ownership. As you noted, you want low costs, whether explicit (in the ER) or implicit, in the trading commissions paid by the fund.
I pay attention to tax efficiency but I don't obsess over it.
