Vanguard Mutual Funds vs. ETFs: Which Are Better?

Vanguard LogoWhen Vanguard lowered its stock and ETF trading fees this week, I received an email from Eric, one of the long time readers of Bargaineering. He wondered if this made Vanguard ETFs superior to their mutual funds, to which I was pretty sure the answer was “Yes.”

You have to make the assumption that the mutual fund and the ETF will track the underlying index in the same way. If they’re run by the same company, in this case Vanguard, I think this is a fairly safe assumption to make. If there is no tracking error, then it comes down to costs. Whichever investment is cheaper, wins.

(Click to continue reading…)


Tax Loss Harvesting

Tax Loss HarvestingHas the stock market decimated your portfolio too? Yeah, us too. Fortunately, there’s something called tax loss harvesting and it can help anyone get a little edge on the recovery. The idea behind tax loss harvesting is that you sell a particular holding, take the capital loss, and then immediately invest it in something similar but not the same as the original holding. By doing this, you “harvest” some of your losses to offset gains or ordinary income, and by investing in a similar but not a “substantially identical security,” you also benefit from the recovery. The key in this strategy is that you invest the tax savings, from the loss, back with the original sum.

Some words of advice on tax loss harvesting:

  • The reason why you can’t by something “substantially identical” has to do with the wash sale rule. If you want to deduct the loss, you have to follow wash sale rules.
  • Don’t do this in a retirement account. There is no capital gains or losses tax in retirement accounts. 401(k)’s and IRAs appreciate without taxes and taxes are only assessed at distribution time (with the exception of Roth IRAs, which are never taxed).
  • Substantially identical is a gray area because the IRS hasn’t clearly defined it but make sure it passes the sniff test. One interesting thing of note is this explanation on IRS Publication 564: “Substantially identical. In determining whether the shares are substantially identical, you must consider all the facts and circumstances. Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.” The key word there is ordinarily. Just pass the sniff test, I’m sure your nose works well. 🙂
  • If your capital losses exceed your gains, you can deduct $3,000 of capital losses against your ordinary income. If your losses exceed that, you can carry those losses forward each year without limit.
  • You don’t have to wait until the end of the year to do this, in fact it’s probably better to give yourself the flexibility of doing this earlier in the year because of wash sale rules.

Why Tax Loss Harvesting Works

Let’s consider the scenario where a fund has dropped 10%, the investor opts to harvest losses and immediately invests in a fund that closely mimics the original fund. Both the original fund and the new fund appreciate by 11.1%. The investor invested $10,000 and is in the 25% tax bracket. Who wins?

Does not tax loss harvest: This scenario is simple, the investor has effectively had no change because the original fund has return to its original value. He sells and has no capital gains or losses.
Does tax loss harvest: The fund fell in value from $10,000 to $9,000 and the investor does some tax loss harvesting to extract the $1,000 in loss. The $1,000, come tax time, will yield him $250 in tax savings. He reinvests the $9,250 into a similar but not “substantially similar” fund and it appreciates by 11.1% to $10,276.75. When he sells, he pays taxes on $1026.75 of capital gains – or $256.69. Subtract that from his $10,276.75 and he’s left with $10,020.06, which is $20.06 ahead of what he had if he hadn’t harvested losses.

Tax Loss Harvesting with Placeholders

Let’s say that you really like a particular mutual fund, your brokerage doesn’t offer anything similar, and you aren’t about to open up another account at another brokerage just to do this tax loss harvest. A potential option is to use exchange traded funds (ETFs) as a placeholder for the wash rule period. Sell your loss, buy into an ETF, wait 31 days, then sell the ETF and get back into your fund. By selecting a similar ETF, you can catch any rises in the industry without sitting on the sidelines.

Please consult with an accountant to clarify your particular situation before doing anything I’ve talked about here.

(Photo: tonivc)

 Personal Finance 

50 Financial Skills Every Person Needs To Know

Popular Mechanics created a list of 100 Skills Every man Should Know, which naturally gravitated towards DIY/physical skills like jump starting a car and split firewood. The Frisky listed 30 Skills Every Woman Should Have Before Turning 30, which actually touched on more than physical skills (though #12 is physical :)), with a handful of financial skills (#17 – #20).

This isn’t a checklist of things you need to necessarily do in your life, it’s just a list of things that you should know how to do (in case the need arises).

(Click to continue reading…)

 Personal Finance 

Seven Wonders of the Personal Finance World

When I was younger, I used to play Sid Meier’s Civilization all the time. One of the best parts of the game was trying to build one of the Seven Wonders of the Ancient World because it gave your civilization a distinct advantage in the world. My personal favorites were the Lighthouse (it gave your ships a farther range and they wouldn’t get lost) and the Hanging Gardens of Babylon (I believe each one of your cities now had a Granary), but fun part was being exposed to these wonder in the first place.

Since then, there have been more “Wonders of the World” like the Natural Wonders of the World, 7 Wonders of the Modern World, so why not create a Seven Wonders of the Personal Finance World? Hokey, I know, but it’s my opinion that, if you can, you should “visit” every single one of these wonders.

(Click to continue reading…)


Model Portfolios Built with ETFs, Part 4

This is a guest post by Sun of Sun’s Financial Diary and is the fourth segment of the Model Portfolios Built with ETFs series. Part III can be found here.

So far in this series, I have discussed possible choices to build some well-known portfolios with nothing but ETFs. Looking back at the six model portfolios being covered, we can easily see that none of them has exposure in the precious metal sector, one that is considered as a good diversifier in a portfolio due to its weak correlation with other major asset classes. In this part, we will have a chance to build a portfolio that has a new element: precious metal.

In his discussion of model portfolios, Jonathan at My Money Blog used an example from the book, The Intelligent Asset Allocator by William Bernstein, to introduce precious metal into the picture. The bold investor portfolio has 70% in stocks and 30% in bonds and consists of the following asset classes:

  • S&P 500 index: 10%
  • Small-cap stocks: 10%
  • REIT: 10%
  • International larg-cap stocks: 10%
  • International small-cap stocks: 10%
  • Emerging markets stocks: 10%
  • Precious metals: 10%
  • U.S. short-term bonds: 30%

Except precious metals, possible ETFs for all other components of this portfolio have been discussed before (in part I and part II of this series), thus, will not be repeated here. Using Morningstar’s ETF list, I identified the following precious metal ETFs as candidates for this portfolio:

  • streetTRACKS Gold Shares (GLD)
  • iShares COMEX Gold Trust (IAU)
  • PowerShares DB Gold (DGL)
  • Market Vectors Gold Miners (GDX)
  • PowerShares DB Precious Metals (DBP)
  • PowerShares DB Silver (DBS)
  • iShares Silver Trust (SLV)

Among them, GLD and IAU have longer tracking record than the new comers such as PowerShares’ DGL, which incepted in January, and GLD is the leader in both net assets and trading volume. Another key difference between GLD, IAU and DGL is that both GLD and IAU are directly backed by bullion and their share values are based on the price of spot gold, while DGL mainly invests in gold future contract (more on DGL).

Symbol ER (%)
Yield (%) YTD return (%) 1-yr return (%)
GLD 0.40 N/A 7.85 14.20
IAU 0.40 N/A 7.37 13.79
DGL 0.50 N/A 8.58* N/A
GDX 0.55 N/A 6.11 N/A
DBP 0.75 N/A 8.68* N/A
DBS 0.50 N/A 9.12* N/A
SLV 0.50 N/A 8.75 N/A

As the above table shows, most ETFs in the precious metal sector have been around for only several months, thus, it’s difficult to evaluate their performance. For GLD and IAU, the price of spot gold will determine their share prices. Considering that precious metal can be a powerful force in boosting a portfolio’s return, a 10% allocation seems to be appropriate.

*3-month return


Picking a Firm for your Roth IRA

Many friends of mine are opening up Roth IRAs for the first time and have asked where the best place to put that account. My first thought was to go with a brokerage firm that has favorable fee schedules for the investments they’re looking to use. A firm that has higher stock transaction fees but lower mutual fund fees works for someone who only wants to leverage the benefits of “automatic” diversification and will never buy a single share of Microsoft. Conversely, if you’re looking to bank on the sustained growth of a handful of companies or want to jump onto ETFs, a firm with low stock transaction fees is where you’d like to go.

(Click to continue reading…)


ETFs and Mutual Funds – Empowering Average Joe Trader

Let’s be honest… the average Joe Trade is awful at picking stocks. I am awful at picking stocks (don’t ever listen to my stock suggestions). Everyone I know is awful at picking stocks… but everyone knows what the hot sectors are these days right? During the Internet boom, everyone knew Internet stocks were crazy! Get in on the IPO and get rich! The problem was Joe Trader picked a stock, it tanked, he (or she) was burned, and quit trading all together. Diversification is Joe Trader’s best friend and ETFs/Mutual Funds allow Joe Trader to capitalize on the “hot sector” concept without swinging at the blazing fastball and striking out miserably. ETFs are like fast moving mutual funds because you can trade them throughout the day, whereas with a mutual fund you need to wait until the end of the day. That’s why ETFs are becoming more popular.

Yahoo! Finance has a great section on ETFs (Exchange Traded Funds). Morningstar has a very good ETF section as well. Read them and understand them thoroughly because I’m not going go into them in detail. The main difference is that ETFs have intraday prices and trade like stocks (with commission fees too!) whereas mutual funds are traded using end of the day prices.

Money is rushing into ETFs like crazy, ETF assets grew 47% to $222 billion, according to Morningstar. (Article, requires free registration, use BugMeNot) Why? Because ETFs empower the regular trader and allows them to invest in a “hot sector” with little work involved. Do you believe, like everyone, that Biotech and Energy are hot? Invest in an Energy-ish ETF. Right now they top Morningstar’s lists of great performers.

There are downsides to ETFs, mostly regarding commission fees eating into your return, so do your due diligence. Allow this article to open your mind to the concept of ETFs and what they can do for the average trader. Instead of pumping all your cash into Company X because you believe that sector is hot, you can consider pumping it into an ETF for that sector instead.

Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2016 by All rights reserved.