The explanation give was something like this;That doesn't seem to match up with the definition in M*'s white paper......let's say you say the tax ratio is 1%, you subtract that from your return, so if you fund return 10%, then a 1% tax ratio means your return is reduce to 9%.
Their formula is Tax Ratio = 1 - (1+After-Tax Return) / (1+Pre-Tax Return) per their white paper.
That formula has raw return in both the numerator and denominator so different asset classes should work.
If VTSAX has an expected return of 11.5% (historical avg from 1928-2017) and taxable LTCG distribution of 1.2%, which is taxed at 15% bracket, then the pre-tax return is 11.5% and the after-tax return is 11.5% - (1.25% x 15%) = 11.32%. Remember, no shares were sold... it's tax-efficiency of just holding it without selling.
So M*'s Tax Ratio = 1 - (1+11.32%) / (1+11.5%) = 1.44%
If the VBTLX has an expected return of 5.2% (historical avg for 10y T-Notes from 1928-2017) and, for argument, 100% of the return is bond interest that's taxable at 22%, then the pre-tax return is 5.2% and the after-tax return is 5.2% x (1 - 22%) = 4.06%.
So M*s' Tax Ratio = 1 - (1+4.06%) / (1+5.2%) = 18.39% (i.e., it's not very tax-efficient in a Taxable account).
That's why I'm so puzzled that they say this value is 1.21% for VBTLX and not some thing in the 15-20% range (Tax Ratio would be almost 31% for the 37% tax bracket compared to 22% example).
For example, if a fund had a 2% tax cost ratio for the three-year time period, it
means that on average each year, investors in that fund lost 2% of their assets to
taxes. If the fund had a three-year annualized pre-tax return of 10%, an investor in
the fund took home about 8% on an after-tax basis. (Because the returns are
compounded, the after-tax return is actually 7.8%.)
I didn't work out the formular like you did.
Statistics: Posted by gavinsiu — Thu Nov 28, 2024 8:18 am — Replies 8 — Views 774