Please someone comment on the following: if I buy into an index (say
SP500) mutual fund or I buy the stocks (approximately) which make up
the index, should I not come ahead by buying stock directly, simply
because the mutual fund income is taxed yearly while the stock is not?
(Assuming a long term upward trend.)
Thanks,
Matyas
<> wrote in message
news:
> Please someone comment on the following: if I buy into an index (say
> SP500) mutual fund or I buy the stocks (approximately) which make up
> the index, should I not come ahead by buying stock directly, simply
> because the mutual fund income is taxed yearly while the stock is not?
> (Assuming a long term upward trend.)
Income is taxed whether you own the stocks in a fund or directly.
Your broker would send you a 1099-DIV listing your taxable dividends.
Mutual funds can throw off capital gains from sales of stocks within
the fund even if you don't sell the fund. Then you have to pay income
tax on those cap gains.
In reality there are some other differences also, not the least of
which, managing a 500 stock portfolio is going to be a pretty
complicated task.
"Doug" <> wrote in message
news:
> Mutual funds can throw off capital gains from sales of stocks within
> the fund even if you don't sell the fund. Then you have to pay income
> tax on those cap gains.
>
> In reality there are some other differences also, not the least of
> which, managing a 500 stock portfolio is going to be a pretty
> complicated task.
It wouldn't be for the typical investor. The cost could be really
prohibitive.
What is the income on a stock that goes up, but was not sold in the tax
year in question? I was under the impression that there is no tax
liability.
Thanks,
Matyas
<> wrote in message
news:
> What is the income on a stock that goes up, but was not sold in the tax
> year in question? I was under the impression that there is no tax
> liability.
> Thanks,
> Matyas
That's not income, it's a capital gain. The problem you would have is if you
mean what you say. If you did indeed want to track the S&P500 like a
Vanguard index fund, you would have to sell one stock and buy another when
S&P makes a change to the index. Therefore, you would have realized capital
gains (or losses) and they (any gains) would appear on your 1099's. There
really wouldn't be much/any advantage to tracking the index outside of a
fund other than expenses if you had a low cost broker and invested enough to
make your expenses lower than 10 bp or so. Good luck with that.
Keep in mind that an S&P500 index fund does not sell a stock and realize a
gain unless Standard & Poor's removes a stock from the index.
This link should take you to the S&P500 index changes for 2006
You would have to sell all of the deletions and buy all of the additions.
The cost to replicate the S&P 500 by purchasing stocks would be
expensive.
I would assume the costs for doing this would be around $8-$12/stock,
minimum (some brokers charge between $20-$50 a trade). So purchasing
500 stocks at $12 cost per stock is $6000. This is the COST. So if
this were 1% of portfolio, The overall investment would be $600,000.
At sharebuilder, someone could do this for $20/month, and allow you 20
free trades per month (so in 25 months, all 500 stocks would be owned).
Not the optimum program, but cheaper than above.
jIM wrote:
> The cost to replicate the S&P 500 by purchasing stocks would be
> expensive.
> I would assume the costs for doing this would be around $8-$12/stock,
> minimum (some brokers charge between $20-$50 a trade). So purchasing
> 500 stocks at $12 cost per stock is $6000. This is the COST. So if
> this were 1% of portfolio, The overall investment would be $600,000.
Exactly. Then you have the annual changes to the index fund. Index
funds have a huge economy of scale advantage that wipes out any
advantage you get from not paying the expense ratios.
wrote:
> What is the income on a stock that goes up, but was not sold in the tax
> year in question? I was under the impression that there is no tax
> liability.
I think the piece of the puzzle that you're missing is that you don't
pay taxes on mutual funds just because the stock increased in value.
You only pay taxes if the mutual fund sold the stock for a capital
gain. Which is the same as if you held it yourself.
Thanks, that was it. I got the wrong impression from someone else
talking about this. The tax in that case must have been not on the yet
unrealized capital gians.
Thanks for clearing this up.
Matyas
Most of the comments highlighting the costs of duplicating the S&P500
missed my point somewhat. (Probably due to the fact that I did not
explain myself clearly...)
As I understand now, when you buy into a mutual fund you get ownership
of the shares of the mutual fund, bot not directly the stocks that the
fund is buying. (That is you cannot say 'roll over' these stocks to a
brokerage or cast a vote as a shareholder etc.)
I wonder whether there would be a case when it would be beneficial to
set up some kind of fund that works mostly like a mutual fund, but the
members are directly the owners of the stock the fund selects (tracks),
that is the fund only administers the buy/sell/rebalance as an agent
for the members. Would such a set-up result in any difference in the
taxes paid (to advantage)? Could the voting rights be of any benefit
to the members?
Is this something that a personalized portfolio management does? I
probably do not need that - I hear that it makes sense for very rich
people - I would be ok with tracking some index or follow some
predefined investment strategy. I am not that rich I guess; I am just
getting ready to invest in a couple months (I payed off the car loan
and mortgage, and I am saving the max on 401k and roth IRA). In fact,
I was looking at a Vanguard fund for the health sector (I expect that
all the baby boomers will be generating a lot of business, while the
social security system is being dismantled); unfortunatelly that fund
was closed for new investors already. I checked what stocks the fund
was buying and 55% was in 7-8 big stocks. So I thought at that point,
that maybe I could directly buy those 10-12 health stocks I favour
instead of waiting for the Vanguard fund to come back.
Thanks for all of you for the replies.
Matyas
<> wrote
> Most of the comments highlighting the costs of duplicating the S&P500
> missed my point somewhat. (Probably due to the fact that I did not
> explain myself clearly...)
>
> As I understand now, when you buy into a mutual fund you get ownership
> of the shares of the mutual fund, bot not directly the stocks that the
> fund is buying. (That is you cannot say 'roll over' these stocks to a
> brokerage or cast a vote as a shareholder etc.)
>
> I wonder whether there would be a case when it would be beneficial to
> set up some kind of fund that works mostly like a mutual fund, but the
> members are directly the owners of the stock the fund selects (tracks),
> that is the fund only administers the buy/sell/rebalance as an agent
> for the members. Would such a set-up result in any difference in the
> taxes paid (to advantage)? Could the voting rights be of any benefit
> to the members?
Rad, some ideas below follow.
I don't know if you're aware of it, but what you're describing sounds
similar to an investment club, for one. Google for {NAIC club} for more
information.
But I do not recommend an investment club. I have never belonged to one but
have been reading NAIC's magazine for the past year. As sanguine as the
magazine's contributors are (and they're practially all club members), I can
only see a lot of problems in pooling my money with others today. It really
doesn't make sense, given all the discount brokerages and mutual funds
available.
Still, you might investigate it.
Sure there can be tax benefits to holding the shares outright. Whether there
are or not depends on what your goal is. For example, if you're old and plan
on never cashing in most of your investments, but instead plan to leave them
to your heirs, then you pretty much won't ever pay capital gains taxes on
the stocks. With mutual funds, one can count on
> Is this something that a personalized portfolio management does? I
> probably do not need that - I hear that it makes sense for very rich
> people - I would be ok with tracking some index or follow some
> predefined investment strategy. I am not that rich I guess; I am just
> getting ready to invest in a couple months (I payed off the car loan
> and mortgage, and I am saving the max on 401k and roth IRA).
Where are you planning on doing this investing? Within your 401(k) or IRA?
They're tax protected, so I would stick with mutual funds or ETFs.
For your reference, the general guideline is to, in order:
1. Contribute to one's 401(k) up to the employer match
2. Contribute to one's Roth IRA
3. Resume contributions to one's 401(k).
> In fact,
> I was looking at a Vanguard fund for the health sector (I expect that
> all the baby boomers will be generating a lot of business, while the
> social security system is being dismantled); unfortunatelly that fund
> was closed for new investors already. I checked what stocks the fund
> was buying and 55% was in 7-8 big stocks. So I thought at that point,
> that maybe I could directly buy those 10-12 health stocks I favour
> instead of waiting for the Vanguard fund to come back.
I guess you mean VGHCX above.
If you truly know something about evaluating a company, then I do think it's
fine to go after the top ten or so positions, even though, let's face it,
those are going to change over time. That's what one gets with a mutual
fund, after all: Adjustments to it per the manager's discretion.. One of the
advantages of this is you can try to time a little; that is, go after a
stock that is down somewhat (but not about to be thrown out of the fund
because of, say, bankruptcy, presumably). That's where some knowledge of
evaluating a company's fundamentals comes in.
Has someone mentioned Vanguard's ETF rough equivalent to this fund, VHT?
<> wrote in message
news:
> Most of the comments highlighting the costs of duplicating the S&P500
> missed my point somewhat. (Probably due to the fact that I did not
> explain myself clearly...)
>
> As I understand now, when you buy into a mutual fund you get ownership
> of the shares of the mutual fund, bot not directly the stocks that the
> fund is buying. (That is you cannot say 'roll over' these stocks to a
> brokerage or cast a vote as a shareholder etc.)
Rad:
Perhaps it is just semantics but a mutual fund is a trust that is definitely
owned by the fundholders. You cannot vote the shares in the fund directly,
that is done by the directors for whom you do vote. If you don't like how a
fund votes your shares you can take it up at the annual meeting but most
people would find it easier to simply withdraw from the fund and find one
more to your liking.
-herb
<> wrote in message
news:
> I wonder whether there would be a case when it would be beneficial to
> set up some kind of fund that works mostly like a mutual fund, but the
> members are directly the owners of the stock the fund selects (tracks),
> that is the fund only administers the buy/sell/rebalance as an agent
> for the members. Would such a set-up result in any difference in the
> taxes paid (to advantage)? Could the voting rights be of any benefit
> to the members?
I have done something akin to your idea with dividend reinvestment plans
(DRIPs). I have purchased DRIPs in 14 companies since 2001 and like to think
of them as my own little "mutual fund." My thinking is that the savings in
brokerage fees and sales charges will in the long run turn out to make a
substantial difference in total return. The dividends just keep getting
rolled into new shares of stock without fees. I also am inclined to believe
that some degree of diversification and safety is possible with fewer stocks
than the large numbers suggested by conventional wisdom.
I will go with a mutual fund for now, since I will not have enough time
to research individual stocks.
As I mentioned I maxed out the 401K and roth IRA (14K, 4K), and I am
not aware of any other tax benefit supported savings option. Actually
a friend mentioned something called health savings account which
appears to be like 401K but for health expenses, and after age 591/2
can be used for retirement as well. That I will check out.
Thanks for all the insightful comments.
Matyas
wrote:
>
> [...]
> As I understand now, when you buy into a mutual fund you get ownership
> of the shares of the mutual fund, bot not directly the stocks that the
> fund is buying. (That is you cannot say 'roll over' these stocks to a
> brokerage or cast a vote as a shareholder etc.)
>
> [...]
> I was looking at a Vanguard fund for the health sector (I expect that
> all the baby boomers will be generating a lot of business, while the
> social security system is being dismantled);
There is an alternative to mutual funds. Have you looked at the HOLDR
for Pharmaceuticals?
Unlike mutual funds, which behave the way you described above, HOLDRs do
give you direct ownership of the underlying stocks; you can 'roll over'
these stocks to a brokerage, and you can cast votes as a shareholder:
"You can continue to own HOLDRS or cancel HOLDRS in order to take
possession of the underlying stocks ...
"As an owner of HOLDRS, you have the right to receive all shareholder
materials, including annual and quarterly reports distributed by the
issuers of the underlying companies. You can vote all the proxies issued
by these companies. You will also receive all dividends and other
distributions less custodial fees of $2.00 per 100 share lot, per
quarter that are declared by the underlying companies."
As far as capital gains are concerned, there are usually none, because
HOLDRs never trade stocks in their portfolios - the ultimate in passive
management (not that I particularly advocate this):
"Do the underlying stocks change?
"The specific underlying stocks and the respective share amounts
represented in each round-lot of 100 HOLDRS are established on a date
prior to the HOLDRS initial public offering. Absent a corporate event
undertaken by an issuer of an underlying stock, these share amounts will
not change."
> unfortunatelly that fund
> was closed for new investors already. I checked what stocks the fund
> was buying and 55% was in 7-8 big stocks.
I'm not sure which fund you are talking about, because the actively
managed (and closed) Vanguard Health Care Fund has "only" 35% in its top
ten stocks, and the Vanguard Health Care Index fund, that has 49% in its
top ten stocks, is open.
--
Mark Freeland
Elle wrote:
>
> <> wrote
> > I was looking at a Vanguard fund for the health sector (I expect
> > that all the baby boomers will be generating a lot of business,
> > while the social security system is being dismantled);
> > unfortunatelly that fund was closed for new investors already. I
> > checked what stocks the fund was buying and 55% was in 7-8 big
> > stocks. So I thought at that point,
> > that maybe I could directly buy those 10-12 health stocks I favour
> > instead of waiting for the Vanguard fund to come back.
>
> I guess you mean VGHCX above.
> Has someone mentioned Vanguard's ETF rough equivalent to this fund,
> VHT?
VHT is a share class of Vanguard Health Care Index fund, and entirely
different fund from Vanguard Health Care Fund. All they have in common
is the sector and the fund distributor. One is actively managed, one is
passively managed. One is managed by Wellington Management, one is
managed by The Vanguard Group. One returned 21% in the past year, the
other returned 14%. To quote Morningstar, "[Vanguard Health Care Index]
fund is no substitute for many of its actively managed rivals."
"Rough", indeed.
--
Mark Freeland
Herb wrote:
>
>
> Perhaps it is just semantics but a mutual fund is a trust that is
> definitely owned by the fundholders.
While some funds are strutured as unit investment trusts under the
Investment Company Act of 1940, most are structured as management
companies. Either way, you do own shares of the company (or trust),
just as one may own shares of Berkshire Hathaway, without owning the
underlying companies (e.g. Gen Re).
(ICA 1940)
(Berkshire
subsidiaries)
--
Mark Freeland
jIM wrote:
> The cost to replicate the S&P 500 by purchasing stocks would be
> expensive.
>
> I would assume the costs for doing this would be around $8-$12/stock,
> minimum (some brokers charge between $20-$50 a trade). So purchasing
> 500 stocks at $12 cost per stock is $6000. This is the COST. So if
> this were 1% of portfolio, The overall investment would be $600,000.
>
> At sharebuilder, someone could do this for $20/month, and allow you 20
> free trades per month (so in 25 months, all 500 stocks would be owned).
> Not the optimum program, but cheaper than above.
Another thing is whether you would really want to buy all ~ 500 stocks
and not forego some because they have poorer prospects than the others.
Also, there are plenty of ETFs and mutual funds that can be allocated
to do better than the S&P500. Which ones they are I do not know. Funds
beat the S&P500 every year. Not the same funds year after year, but
there are funds that do it. The S&P 500 has worked well over the long
term much due to the general uptrend of the market and the low costs
that an index incurs. Whether an index is the "right" fund to be in
seems to be a debatable issue. For a passive investor, most likely yes
then.