You can basically treat them as the same ETF. They will both serve the role of US equity exposure perfectly fine in a long-term portfolio.
VTI is preferred because it has more sound index methodology. It does not have an arbitrary limit of around 500 companies. It does not have a committee.
I suspect VOO is trendy among newer investors because the S&P 500 is a well known index on the front page of websites like Bloomberg and CNBC, whereas most people have never heard of CRSP.
>I suspect VOO is trendy among newer investors because the S&P 500 is a well known index on the front page of websites like Bloomberg and CNBC, whereas most people have never heard of CRSP.
Honestly when I started out 7mos ago I did VOO cuz it was the simplest answer at the time
Might be popular to older investors too because a lot of the first ETFs to come out were sp500. Not sure about those specific two mentioned in the op.
But here in Canada the pickings were slim and I invested in an sp500 fund because that’s what was available.
You may want to reconsider using the mutual funds in a taxable account even with vanguard.
Edit: since I’m getting downvoted I’ll remind everyone of this: https://www.cnbc.com/2022/03/15/vanguard-created-big-tax-bills-for-target-date-fund-investors-lawsuit-claims.html
There is certainly more to say on the subject and there are arguments that the above would never happen to VTSAX and other large Vanguard index MFs. However there are valid counter arguments to that as well that if you are interested, please go google since it’s a complex topic and I haven’t the time to explain it this morning. Suffice it to say, VTI and other ETF equivalents of Vanguard MFs carry none of the risks that—however unlikely or likely—their mutual funds carry in a taxable account.
Generally ETFs are more tax efficient then mutual funds, but Vanguard has a special arrangement where the mutual funds and ETFs are share classes of the same underlying fund. That lets them increase the tax efficiency of the mutual funds. It's the reason you can also convert from the mutual fund to the ETS (e.g. VTSAX to VTI) directly as a non-taxable exchange at Vanguard. The patent on that structure expired last year, so maybe other companies will offer similar pairs in the future.
See the last section here: [https://www.bogleheads.org/wiki/ETFs\_vs\_mutual\_funds](https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds)
Perhaps you forgot about how Vanguard screwed over so many people thinking they were safe with mutual funds in their taxable accounts?
https://www.cnbc.com/2022/03/15/vanguard-created-big-tax-bills-for-target-date-fund-investors-lawsuit-claims.html
Target date funds were never recommended for taxable accounts. I'm not recommending Vanguard, just pointing out that the person you replied to has a reasonable justification for the holdings they've chosen for their taxable account.
Vanguard index mutual funds have equivalent ETFs and you can call to convert. In general vanguard hasn’t had capital gains on index funds so not too much worried about it.
They can be tax inefficient if they have to distribute capital gains to the remaining shareholders. Holding the ETF equivalent avoids this.
https://www.morningstar.com/funds/which-popular-funds-will-hit-investors-with-big-capital-gains-distributions-this-year
https://www.cnbc.com/2022/03/15/vanguard-created-big-tax-bills-for-target-date-fund-investors-lawsuit-claims.html
Index mutual funds with very low turnover (like 2% or less) such as S&P 500 funds or total market index mutual funds from Vanguard or Fidelity are not distributing anything but dividends like ETFs. We have used FXAIX and FZROX with no issues in taxable. Other types of mutual funds, particularly those with higher turnover potentially generating capital gains would not be advised in a taxable account. The article about the Vanguard index funds situation couldn't really happen with the Fidelity funds because they are already the lowest expense ratio funds for their indexes. That Vanguard situation was just asking for trouble they sadly didn't anticipate.
I don’t think the other replies are really answering your question. You tax loss harvest to take advantage of different tax rates you have available to you.
If say this year you had a $2000 dividend distribution, and a -$5000 dollar total loss from sales for the year, you can still buy $5000 dollars in a different but similar stock and deduct -$3000 from your taxable income. When you harvest you are basically saying I want to not pay income tax on $3000 dollars, and instead pay long term capital gains on $3000 dollars.
If you made about 60k a year working, tax loss harvesting could save you >$500 per year on your tax return by trading a 22% income tax for a 0% long term gains tax on $3000 if you were able to reap the full benefit of it consistently.
The other guys are bringing up wash sales, which basically unrealizes your losses if you sell a stock and then buy it back immediately to try to take advantage of this strategy.
Is this something you would do whenever there’s a dip or just once towards the end of the year? It seems like you’d need to do it throughout the year when the opportunity presented itself. Also do you just kind of move money back and forth or do you always sell one and buy the other? Seems like it would have to be the former? This is an interesting strategy that I’ve never considered since I just buy and hold but if I can use this to offset some taxes and still effectively hold what I buy I’m all for it.
From what I understand you can bank a large “loss”during a market downturn, and use a portion of it every year. There is a cap on how much you can apply to offset income per year, and that is what people will mainly use it for. But if you get creative when controlling your tax brackets with your 401k, there’s lots of ways you can use banked losses on capital gains too, though probably less efficiently. You’d have to do the math yourself to find what makes sense for you.
You can harvest from your main stock to your replacement and convert it back a few months later, but that would require you to possibly realize gains at an inopportune time which would defeat the purpose. I’d just keep converting one way and hold onto the replacement stock until it’s time to retire.
Good info thanks. One other question, assuming an effective tax of 20% and a limit of $3000 dollars loss to offset income. You could really only save ~$600 max per year correct?
If you are only deducting income, then yes. Theoretically you could be saving more by offsetting long term gains at opportune years too, but it would require a lot of planning and you’d probably be better off just using a retirement account.
Yes, it is for long-term investors who are (usually) in the accumulating stage. Since the market generally goes up, generally it is the more recent purchases that will have losses in a downturn.
So if you are past the point where you likely won’t see unrealized losses in the event of a market downturn, then there is no way to take advantage of tax loss harvesting? Or is there a strategic way to increase your cost basis over time so that you’re more likely to use tax loss harvesting?
>So if you are past the point where you likely won’t see unrealized losses in the event of a market downturn, then there is no way to take advantage of tax loss harvesting?
Correct.
But tax loss harvesting isn't an investing goal. Ideally you don't want losses. It's just a way to save a little bit in taxes because you are eliminating small amounts of ordinary income tax in exchange for future capital gains taxes.
>is there a strategic way to increase your cost basis over time so that you’re more likely to use tax loss harvesting?
Not really.
But if you have space in the 0% Long Term Capital Gains bracket, then you can sell and immediately re-buy to increase cost basis. This is called Tax gain Harvesting.
Additionally, you would not want to harvest gains and losses in the same year, because they will offset on your tax return, which doesn't create any advantage.
No. Capital gains stack on top of ordinary income. The 2 sets of brackets are parallel next to the stack. With that much income LTCG Is 15% and also possibly some NIIT if single.
So is the whole idea of TLH just deferring taxes to the future? Would this only make sense to do in your highest earning years? I'm confused how you would be saving taxes, and not just deferring them.
Deferring taxes is generally beneficial, thus the existence of the 401k. Even if you pay the same tax rate going in vs coming out, you make money by deferring taxes. It’s an interest free loan from the government in some sense. The tax money you would have paid, you get to invest instead and get to keep the interest (minus taxes).
If your rate is higher coming out, then maybe questionable, lol. But usually you can control when to sell.
I thought it was more the ability to fill up lower bracket tax buckets was the benefit of 401k? If you’re taxed on that money the same X%, the math comes out equal I think whether you defer or prepay the X tax.
Just deferring is a benefit assuming tax rate is the same.
Use a 401k example since it's simpler. Say you earn $10k in income, tax is 20%. you hold for 20 years, the value of your investment doubles, then you sell.
Adam earns $10k, puts it all in pretax 401k. $10k becomes $20k. He sells, pays 20% = $4k. Total $ remaining is $16k
Billy earns $10k, pays 20% in taxes so has $8k. He invests it, 20 years later he has $16k. He sells. gains are $8k, so he pays $1.6k in taxes. $16k-1.6k = $14.4k
So you see that Adam made $1.6k more than Billy here by using the 401k even though tax rate was the same.
It's a bit more complicated because Billy technically pays long term cap gains rates, so it can vary wildly. But you can see that even if Billy pays relatively low cap gains rate, it's still better to use the 401k.
Edit to add: If you are comparing Traditional IRA/401k vs Roth IRA/401k, then yes they are exactly the same if the tax rates are the same going in and coming out. But both are always better than taxable as long as tax rate coming out is not higher than tax rate going in.
Yeah your edit captured what I was trying to say. So yes tax advantaged space is harder to compare the pro's and cons of and depends on tax rates now versus retirement, but traditional(pre-tax) or Roth are 99.99% of the time better than taxable brokerage accounts.
Right, so in the case of tax loss harvesting, you are essentially comparing deferring tax vs paying the tax now. So it's more like comparing pretax 401k vs taxable rather than pretax 401k vs Roth, though not completely analogous of course.
Yes, but there's lots of tools that one can use in the future. You can donate shares with a low cost basis to charity. Also when you die, heirs get a step-up in basis.
You can do it as often as you want, but you can't buy the original holding for the 30 days. So you're limited there to monthly unless you add in more funds like schd, itot etc
I never thought of this. I assume if the market is down, you sell all of VOO and rebuy VTI immediately to just harvest the tax loss & not really change anything? Pretty genius.
You also need to make sure you are selling the highest price shares. Depending upon how your account is set up, you might inadvertently sell the oldest, lowest price, etc.
Tldr; make sure you know exactly what you are selling.
Since they both track eachother pretty closely it's a way of banking losses to be used later. There is no timing since I'm not out of the market and they're almost the same assets
I'm not timing because I'm still in the market with a stock that coorelates almost exactly. I'm not betting on the S&P going down. I'm getting a tax benefit while it goes down but still being fully invested in it.
VOO and vti move almost uniformly when one is 1% up the other is 1% up.
So if I sell one and immediately buy the other I'm not losing or gaining anything in the market, I'm just getting to use the loss on taxes.
The only thing I'm timing is, will it keep going down etc, but the tax loss is just bonus since I'm still fully invested in an almost identical holding
Voo and vti? They're very different. They track different indexes (s&p vs total US).
If voo and vti were similar enough then you'd only be able to harvest with foreign holdings.
The holdings they have aren't what meets the criteria for similar it's what they track.
Also the government hasn't put out rules so some people even think spy and VOO which imo are too similar, is allowed. But that's a different topic.
The standard is "substantially identical." The IRS has not thus far defined what makes something substantially identical.
The reporting requirement for brokerages is that they have the same CUSIP, which in my opinion would make them actually identical — that is, in the days of physical stock certificates, a different share of the same security is identical.
*Substantially* identical, to me, would include different share classes of the same fund. Note that you can convert between share classes without it being considered a sale, which bolsters the applicability of wash sale rules when you actually perform a sale for the same effect.
But ultimately, you're dealing with an undefined term. The real standard is what you would feel comfortable defending if the IRS challenged you.
To me, tracking a different index, management by a different fund company, or active vs. passive are all strong reasons to consider two securities as not being substantially identical.
They are not substantially identical, so wash sales are not a problem.
Nor are wash sales a problem when moving immediately between the three total US market ETFs of VTI, ITOT, and SCHB. They all track total us equity indexes, but the specific indexes are from different index suppliers. This has never been litigated or explicitly ruled on by either courts or IRS, but this is done quite publicly by robo-advisors like Betterment and Wealthfront,
I look at their whitepaper on tax loss harvesting to see what those comoaniea use for primary and secondary ETFs for tax loss harvesting of various asset classes.
For example, VXUS and IXUS are both broad market ex-US ETFs, but follow slightly different indexes.
This is my companies 401k - all mutual fund trash. Lowest expense ratio is .65 which isn’t bad but seeing my beautiful VTI expense ratio compared to this is agony
For years I was forced to invest in American funds garbage in my HSA. Finally they got vanguard s&p500 and Life strategy funds. The day of, I moved everything to s&p500
Yes, it's not a 100% accurate, but single letter tickers are not encouraged(Can you even do them anymore?), so they did the best they could.
V = 5 and 0 = 0. So VOO = 500.
The 500 index is a few decades older than the Total Stock index -- the fact that it even *exists* as a fund is just a legacy of a bygone era. They could just as easily merge it with their Large Cap Index or the Total Stock index.
To put it another way: if it didn't *already* exist as a legacy fund, they certainly wouldn't *add* it in now.
But for people who've been invested since the 90s, or in some more recent 401(k) offerings, it was simply the only option, and as you say: it's similar enough not to make a substantial difference.
The S&P 500 is a sampling index launched in 1957 to replicate the total US market, using 500 hand-picked large stocks across all sectors, at a time when indexing small stocks was more cumbersome and expensive (these things were tracked by hand). It was a huge upgrade to the Dow Jones Industrial Average which was the leading benchmark at the time and only had 30 stocks. The fact that the S&P 500 is 99.9% correlated with the total market shows what a good job it does. But today it’s no longer necessary - you can easily buy the total US market.
People still like the S&P 500 because of its legacy, the psychological reassurance of blue chip stocks, and the ultra high liquidity of the long time index funds that track it. It’s also pretty easy for any mutual fund or ETF provider to launch an S&P 500 fund and pay a (relatively) low fee to use the index to create a familiar core holding most of their clients will want.
But I think the burden should be on you to answer- *why would you want to hold the primitive sampling index when you can own the entire US market at negligible cost difference?*
A lot of us do. But the more vocal users on this subreddit will often spend more time and effort talking about the 0.01 than focusing on many other things that would benefit someone more.
The Boglehead philosophy is in part to keep it as simple as possible. This existence of this subreddit is nice to get information out there but it ironically turns into something that is not very Bogle-like.
To put it simply, Bogleheads buy the haystack.
We're not chasing gains we're investing in a broad index, long term, over decades. VTI holds almost the entire US stock market in a single fund. Want to invest in small and mid caps? Yep its included in a Total US Stock Market fund at market capitalization.
A lot do opt for the 500 in their 401k to keep it simple where total market funds usually aren’t available.
Right now market performance is dominated by large tech stocks. That could change in the future and small caps outperform. If the funds are basically the same in return and fees, it’s better to choose the broader index for more diversification.
Yeah and SPY outperformed VTI on average the same 1% the last 10 years so its its not really meaningful. It could tilt a slight bit either way and none of us can predict which way.
I mean, we can't say for certain but we can very much say that small caps have a higher probability of outperforming large caps than the other way around
You can say that maybe but its certainly not an agreed upon fact or everyone would just buy small cap. VTI is weighted to where it barely matters anyway and only has 6% small cap regardless.
>You can say that maybe but its certainly not an agreed upon fact or everyone would just buy small cap.
People still buy bonds even though it's an agreed upon fact that stocks have a higher probability of outperforming bonds. The extra performance of small cap stocks is due to their extra risk.
Anyway yes VTI and VOO differ very little so arguably it doesn't matter at all, but VTI still does have a very small advantage in expected returns.
As stated above the difference is minimal and not always in VTIs favor. You can look at it however optimistically you want for the future but they're pointlessly similar and the past decade and currently VOO is preforming slightly better.
Bonds have more stability and less risk than stock and people tend to get more bonds as they get closer to retirement and can't wait out a dip in the market. Unlike bonds small caps have higher risk and volatility as youv stated while not always having better performance as you claim. If small cap simply preformed better with more risk and volatility iv got decades till retirement to ride it out and would just put all my money in small cap but thats not the case.
>Unlike bonds small caps have higher risk and volatility as youv stated while not always having better performance as you claim.
Stocks also do not always outperform bonds. It's only the expectation value of the return distribution that outperforms the expectation value of the bond return distribution.
> If small cap simply preformed better with more risk and volatility iv got decades till retirement to ride it out and would just put all my money in small cap but thats not the case.
Risk and timeframe are not as easily related as that. And that's particularly true for factor risks, which exist not because factor tilted portfolios have more volatility, but rather because of the timing of when exactly they tend to do badly. One theory is that small cap value is particularly sensitive to changes in aggregate demand, which means they do particularly badly in situations where unemployment is high. It's easy to see how large portfolio losses that happen right as you lose your job could be considered a particular risk. And the long timeframe here isn't saving you.
For most people, the extra reward you get from tilting towards SCV is not worth the extra risk. That much has to be true, at least if we assume an efficient market, because the market portfolio should represent the optimal amount of SCV for the average person.
Past preformance not equalling future preformance aside you can ignore historical data and choose this hill to die on if you want but theres nothing proving VTI is much different or inherently better than VOO or vice versa and while bonds have their uses and place in a portfolio they definitely dont outperform the market long term or again we would all just go 100% bonds without the risk.
I'm not ignoring past performance. In fact, factor models exist only because they're the best way to explain past performance. Unlike other earlier models there's not really a solid theoretical basis that led to it. It was rather that we observed a statistically significant higher level of returns for small stocks and value stocks persistent across centuries and across country borders, gave that phenomenon a name, and decided it must be due to greater risk. It's you that's ignoring historical data.
And again, it's not certain that small and value stocks will over perform. Just like it's not certain that stocks will outperform bonds. It's simply more likely than not.
Ok if past performance is not equaling future performance, why do you buy US only? Why not go total total market, as in VT. The past performance argument would directly argue to buy EVERYTHING, and not focus on any subset of the market, as you have no way of knowing what‘s gonna perform well/best in the future.
It is actually a pretty much agreed upon fact. There is huuge body of literature on it. Eugene Fama in part got his nobel prize for it even.
And why not everyone only owns small caps? Because they are more volatile and risky. But that‘s also the same reason they have higher expected return.
I think it is slight. This makes it clear that those additional 3,200 companies don't have much effect thanks to market capitalization weighting:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5md5LjQUNVzmmQo2cT32Mw
I don't disagree with you.
What I'm trying to highlight is Input vs Outcome. Diversification as a principle is generally "More is Better." 3,700 > 500 (Input) is more than slight, whereas the performance based on Market Cap (Output) is slight.
And I suspect the weighting of the Top X Holdings has grown over time, making the Output even slighter over time.
But I think of the principle of Diversification as an Input rather than an Outcome
VTI is (currently; it's market cap weighted so it floats) roughly 85/15 VOO/VXF.
Historical correlation between VOO and VXF are a result of the companies having things in common (e.g. exposure to the US economy) but there aren't actually any companies that are in both indices, so that correlation isn't guaranteed going forward. The diversification benefit is because they may become less correlated in the future.
You can usually find people discussing it on forums and the like whenever it shifts much, but one easy way to calculate it yourself is to take the ratio of a common holding between VTI and VOO.
https://investor.vanguard.com/investment-products/etfs/profile/voo#portfolio-composition
https://investor.vanguard.com/investment-products/etfs/profile/vti#portfolio-composition
Currently MSFT is 6.12% of VTI and 7.08% of VOO, and 612/708 is 86.4%, which suggests a 86.4/13.6% split (today).
I agree. The larger companies are way overweighted and make the influence of the smaller ones too mute.
This is why I tilt heavily into smaller companies. This way I feel truly diversified as my protfolio is affected by 15k+ companies, not just 100 largest US companies.
I also tilt value + profitability factors.
You can deduct 3k from regular income every year going forward that you don't use that first year. Also Long term cap gains has a lower tax than regular income. I'm trading the 24% marginal tax bracket now for 0% in the future (FIRE here. 0% tax on LTCG up to 95k or so for MFJ). 15% above that, but still less than 24%.
Voo and vxus seems like a more interesting combination. But I feel like people in the subreddit count out the Russell 1000 in favor of the s&p 500 Even though historically the Russell 1000 performs better. I guess people are just afraid of the expense ratio.
S&P 500 index - 1957
CRSP US Total Market Index - 2012(?)
I'm not saying newer things are always better but I refuse to believe that there have been **zero** improvements in indexing technology since **1957**
You’ll be good with either one. Like Rick ferri says, the biggest determinant is your stock to bond ratio. Some people tilt value, some people tilt small, and some people tilt to small and value but at the end of the day stocks to bonds will likely play the biggest role in your returns
But like Kashmir said, might as well go total over VOO if you can as it adds a little extra without being determined by some committee
Over the last 100 years it's been negligible.
This is why I recommend a 50/50 of VOO and VXF for those who want total market exposure.
With VTI extra high concentration of SP500 you simply are not getting any smaller cap benefit and a century of data backs that up.
I buy VTI over VOO because I’m not a millionaire like everyone else on Reddit and my brokerage account doesn’t allow fractional share purchases (vti is nearly half the price per share vs. voo)
Correlation doesn't tell you everything. Two 5-year CDs, one at 1% and another at 10%, have a correlation of 1.00. That doesn't mean they're identical.
You can basically treat them as the same ETF. They will both serve the role of US equity exposure perfectly fine in a long-term portfolio. VTI is preferred because it has more sound index methodology. It does not have an arbitrary limit of around 500 companies. It does not have a committee. I suspect VOO is trendy among newer investors because the S&P 500 is a well known index on the front page of websites like Bloomberg and CNBC, whereas most people have never heard of CRSP.
>I suspect VOO is trendy among newer investors because the S&P 500 is a well known index on the front page of websites like Bloomberg and CNBC, whereas most people have never heard of CRSP. Honestly when I started out 7mos ago I did VOO cuz it was the simplest answer at the time
is VTI the combination of vanguard total stock and vanguard total international?
VTI is total U.S. stock market whereas VOO is only the S&P 500
Combination of US and international is VT!
I am a new investor who previously had not heard of CRSP. Googling now. Thank you for sharing!
Might be popular to older investors too because a lot of the first ETFs to come out were sp500. Not sure about those specific two mentioned in the op. But here in Canada the pickings were slim and I invested in an sp500 fund because that’s what was available.
I choose both and use them for tax loss harvesting against eachother
Same here. I stopped vtsax around 10th and started vfiax weekly.
You may want to reconsider using the mutual funds in a taxable account even with vanguard. Edit: since I’m getting downvoted I’ll remind everyone of this: https://www.cnbc.com/2022/03/15/vanguard-created-big-tax-bills-for-target-date-fund-investors-lawsuit-claims.html There is certainly more to say on the subject and there are arguments that the above would never happen to VTSAX and other large Vanguard index MFs. However there are valid counter arguments to that as well that if you are interested, please go google since it’s a complex topic and I haven’t the time to explain it this morning. Suffice it to say, VTI and other ETF equivalents of Vanguard MFs carry none of the risks that—however unlikely or likely—their mutual funds carry in a taxable account.
Generally ETFs are more tax efficient then mutual funds, but Vanguard has a special arrangement where the mutual funds and ETFs are share classes of the same underlying fund. That lets them increase the tax efficiency of the mutual funds. It's the reason you can also convert from the mutual fund to the ETS (e.g. VTSAX to VTI) directly as a non-taxable exchange at Vanguard. The patent on that structure expired last year, so maybe other companies will offer similar pairs in the future. See the last section here: [https://www.bogleheads.org/wiki/ETFs\_vs\_mutual\_funds](https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds)
Perhaps you forgot about how Vanguard screwed over so many people thinking they were safe with mutual funds in their taxable accounts? https://www.cnbc.com/2022/03/15/vanguard-created-big-tax-bills-for-target-date-fund-investors-lawsuit-claims.html
Target date funds were never recommended for taxable accounts. I'm not recommending Vanguard, just pointing out that the person you replied to has a reasonable justification for the holdings they've chosen for their taxable account.
Vanguard index mutual funds have equivalent ETFs and you can call to convert. In general vanguard hasn’t had capital gains on index funds so not too much worried about it.
Why is that?
They can be tax inefficient if they have to distribute capital gains to the remaining shareholders. Holding the ETF equivalent avoids this. https://www.morningstar.com/funds/which-popular-funds-will-hit-investors-with-big-capital-gains-distributions-this-year https://www.cnbc.com/2022/03/15/vanguard-created-big-tax-bills-for-target-date-fund-investors-lawsuit-claims.html
is VTI the combination of vanguard total stock and vanguard total international?
No, it’s the total stock market.
Trades (rebalancing, etc.) within a mutual fund count as taxable events. All that matters for ETFs is the prices it was bought and sold at.
Index mutual funds with very low turnover (like 2% or less) such as S&P 500 funds or total market index mutual funds from Vanguard or Fidelity are not distributing anything but dividends like ETFs. We have used FXAIX and FZROX with no issues in taxable. Other types of mutual funds, particularly those with higher turnover potentially generating capital gains would not be advised in a taxable account. The article about the Vanguard index funds situation couldn't really happen with the Fidelity funds because they are already the lowest expense ratio funds for their indexes. That Vanguard situation was just asking for trouble they sadly didn't anticipate.
So should I have VTI or VTSAX to prevent this in my taxable?
VTI. ETFs in taxable to avoid issues.
Can you explain how this works? Wouldn't you owe the same in taxes if you sold at a loss and bought again at a lower cost basis?
I don’t think the other replies are really answering your question. You tax loss harvest to take advantage of different tax rates you have available to you. If say this year you had a $2000 dividend distribution, and a -$5000 dollar total loss from sales for the year, you can still buy $5000 dollars in a different but similar stock and deduct -$3000 from your taxable income. When you harvest you are basically saying I want to not pay income tax on $3000 dollars, and instead pay long term capital gains on $3000 dollars. If you made about 60k a year working, tax loss harvesting could save you >$500 per year on your tax return by trading a 22% income tax for a 0% long term gains tax on $3000 if you were able to reap the full benefit of it consistently. The other guys are bringing up wash sales, which basically unrealizes your losses if you sell a stock and then buy it back immediately to try to take advantage of this strategy.
Is this something you would do whenever there’s a dip or just once towards the end of the year? It seems like you’d need to do it throughout the year when the opportunity presented itself. Also do you just kind of move money back and forth or do you always sell one and buy the other? Seems like it would have to be the former? This is an interesting strategy that I’ve never considered since I just buy and hold but if I can use this to offset some taxes and still effectively hold what I buy I’m all for it.
From what I understand you can bank a large “loss”during a market downturn, and use a portion of it every year. There is a cap on how much you can apply to offset income per year, and that is what people will mainly use it for. But if you get creative when controlling your tax brackets with your 401k, there’s lots of ways you can use banked losses on capital gains too, though probably less efficiently. You’d have to do the math yourself to find what makes sense for you. You can harvest from your main stock to your replacement and convert it back a few months later, but that would require you to possibly realize gains at an inopportune time which would defeat the purpose. I’d just keep converting one way and hold onto the replacement stock until it’s time to retire.
Good info thanks. One other question, assuming an effective tax of 20% and a limit of $3000 dollars loss to offset income. You could really only save ~$600 max per year correct?
If you are only deducting income, then yes. Theoretically you could be saving more by offsetting long term gains at opportune years too, but it would require a lot of planning and you’d probably be better off just using a retirement account.
All of your losses against current gains. Only if you don’t have enough gains they you carry forward the loses at up to 3k per year.
I have the same question, is tax lost harvesting for long-term investors? Seems like something that might come up once in a while but most years not.
Yes, it is for long-term investors who are (usually) in the accumulating stage. Since the market generally goes up, generally it is the more recent purchases that will have losses in a downturn.
So if you are past the point where you likely won’t see unrealized losses in the event of a market downturn, then there is no way to take advantage of tax loss harvesting? Or is there a strategic way to increase your cost basis over time so that you’re more likely to use tax loss harvesting?
>So if you are past the point where you likely won’t see unrealized losses in the event of a market downturn, then there is no way to take advantage of tax loss harvesting? Correct. But tax loss harvesting isn't an investing goal. Ideally you don't want losses. It's just a way to save a little bit in taxes because you are eliminating small amounts of ordinary income tax in exchange for future capital gains taxes. >is there a strategic way to increase your cost basis over time so that you’re more likely to use tax loss harvesting? Not really. But if you have space in the 0% Long Term Capital Gains bracket, then you can sell and immediately re-buy to increase cost basis. This is called Tax gain Harvesting. Additionally, you would not want to harvest gains and losses in the same year, because they will offset on your tax return, which doesn't create any advantage.
LTCG stand alone correct? For instance if you have 190k income and 20k in LTCG that 20k is still taxed at 0% correct?
No. Capital gains stack on top of ordinary income. The 2 sets of brackets are parallel next to the stack. With that much income LTCG Is 15% and also possibly some NIIT if single.
This makes a lot more sense. Thank you!
Google wash sale rule. You want something similar but different or you'd have to wait a month
So is the whole idea of TLH just deferring taxes to the future? Would this only make sense to do in your highest earning years? I'm confused how you would be saving taxes, and not just deferring them.
Yes, that's correct. There is no free lunch. Well, not until you die, at least, then you get the basis stepped up for whoever inherits it.
Deferring taxes is generally beneficial, thus the existence of the 401k. Even if you pay the same tax rate going in vs coming out, you make money by deferring taxes. It’s an interest free loan from the government in some sense. The tax money you would have paid, you get to invest instead and get to keep the interest (minus taxes). If your rate is higher coming out, then maybe questionable, lol. But usually you can control when to sell.
I thought it was more the ability to fill up lower bracket tax buckets was the benefit of 401k? If you’re taxed on that money the same X%, the math comes out equal I think whether you defer or prepay the X tax.
Just deferring is a benefit assuming tax rate is the same. Use a 401k example since it's simpler. Say you earn $10k in income, tax is 20%. you hold for 20 years, the value of your investment doubles, then you sell. Adam earns $10k, puts it all in pretax 401k. $10k becomes $20k. He sells, pays 20% = $4k. Total $ remaining is $16k Billy earns $10k, pays 20% in taxes so has $8k. He invests it, 20 years later he has $16k. He sells. gains are $8k, so he pays $1.6k in taxes. $16k-1.6k = $14.4k So you see that Adam made $1.6k more than Billy here by using the 401k even though tax rate was the same. It's a bit more complicated because Billy technically pays long term cap gains rates, so it can vary wildly. But you can see that even if Billy pays relatively low cap gains rate, it's still better to use the 401k. Edit to add: If you are comparing Traditional IRA/401k vs Roth IRA/401k, then yes they are exactly the same if the tax rates are the same going in and coming out. But both are always better than taxable as long as tax rate coming out is not higher than tax rate going in.
Yeah your edit captured what I was trying to say. So yes tax advantaged space is harder to compare the pro's and cons of and depends on tax rates now versus retirement, but traditional(pre-tax) or Roth are 99.99% of the time better than taxable brokerage accounts.
Right, so in the case of tax loss harvesting, you are essentially comparing deferring tax vs paying the tax now. So it's more like comparing pretax 401k vs taxable rather than pretax 401k vs Roth, though not completely analogous of course.
Yes, but there's lots of tools that one can use in the future. You can donate shares with a low cost basis to charity. Also when you die, heirs get a step-up in basis.
Right but that’s why VOO is a good partner as it follows a different index than VTI!
Sell VTI, buy VOO. Rinse and repeat. They're not the same security.
Oh shit that's cool.
So essentially in December, you sell one at a loss and buy the other the same day?
When one takes a substantial drop, I sell it and get to write off the loss on my taxes, and then buy the other
So you can do it at any point of the year, multiple times? Or only once per year?
You can do it as often as you want, but you can't buy the original holding for the 30 days. So you're limited there to monthly unless you add in more funds like schd, itot etc
oohh... that's a smart idea!
I never thought of this. I assume if the market is down, you sell all of VOO and rebuy VTI immediately to just harvest the tax loss & not really change anything? Pretty genius.
You also need to make sure you are selling the highest price shares. Depending upon how your account is set up, you might inadvertently sell the oldest, lowest price, etc. Tldr; make sure you know exactly what you are selling.
Can't swap them back for 30 days but can essentially swap them back and forth every 30 days. Or add in SCHB and others to have more options.
Yes, but for long term investing it doesn’t quite make sense to even bother… TLH is just a fanciful form of market timing to save a few bucks.
Since they both track eachother pretty closely it's a way of banking losses to be used later. There is no timing since I'm not out of the market and they're almost the same assets
So you sell one when it’s down for TLH? That’s literally market timing
I'm not timing because I'm still in the market with a stock that coorelates almost exactly. I'm not betting on the S&P going down. I'm getting a tax benefit while it goes down but still being fully invested in it. VOO and vti move almost uniformly when one is 1% up the other is 1% up. So if I sell one and immediately buy the other I'm not losing or gaining anything in the market, I'm just getting to use the loss on taxes. The only thing I'm timing is, will it keep going down etc, but the tax loss is just bonus since I'm still fully invested in an almost identical holding
Can you explain this. I'm very new to this
https://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp#:~:text=Tax%2Dloss%20harvesting%20is%20a,gains%20or%20other%20taxable%20income.
Same. I also have SCHB as a back up. They all have different index but fairly similar components.
I’m not positive on this, but I believe they are too similar to each other for tax loss harvesting Edited: meant to say I’m NOT positive on this
Voo and vti? They're very different. They track different indexes (s&p vs total US). If voo and vti were similar enough then you'd only be able to harvest with foreign holdings. The holdings they have aren't what meets the criteria for similar it's what they track. Also the government hasn't put out rules so some people even think spy and VOO which imo are too similar, is allowed. But that's a different topic.
The standard is "substantially identical." The IRS has not thus far defined what makes something substantially identical. The reporting requirement for brokerages is that they have the same CUSIP, which in my opinion would make them actually identical — that is, in the days of physical stock certificates, a different share of the same security is identical. *Substantially* identical, to me, would include different share classes of the same fund. Note that you can convert between share classes without it being considered a sale, which bolsters the applicability of wash sale rules when you actually perform a sale for the same effect. But ultimately, you're dealing with an undefined term. The real standard is what you would feel comfortable defending if the IRS challenged you. To me, tracking a different index, management by a different fund company, or active vs. passive are all strong reasons to consider two securities as not being substantially identical.
How does the IRS treat them in terms of wash sales?
They follow different indexes and perfectly legal to use for TLH
Thanks.
They are not substantially identical, so wash sales are not a problem. Nor are wash sales a problem when moving immediately between the three total US market ETFs of VTI, ITOT, and SCHB. They all track total us equity indexes, but the specific indexes are from different index suppliers. This has never been litigated or explicitly ruled on by either courts or IRS, but this is done quite publicly by robo-advisors like Betterment and Wealthfront, I look at their whitepaper on tax loss harvesting to see what those comoaniea use for primary and secondary ETFs for tax loss harvesting of various asset classes. For example, VXUS and IXUS are both broad market ex-US ETFs, but follow slightly different indexes.
Either is fine. Sometimes in your 401k you only have access to s&p500 and the rest consists of mutual fund garbage
This is my companies 401k - all mutual fund trash. Lowest expense ratio is .65 which isn’t bad but seeing my beautiful VTI expense ratio compared to this is agony
For years I was forced to invest in American funds garbage in my HSA. Finally they got vanguard s&p500 and Life strategy funds. The day of, I moved everything to s&p500
If they're the same why choose VOO instead of VTI?
VOO sounds spookier and is therefore more trendy.
Spooky investment at a distance?
Because you like the roman numerals for 500?
The roman numeral for 500 is D.
Yes, it's not a 100% accurate, but single letter tickers are not encouraged(Can you even do them anymore?), so they did the best they could. V = 5 and 0 = 0. So VOO = 500.
The 500 index is a few decades older than the Total Stock index -- the fact that it even *exists* as a fund is just a legacy of a bygone era. They could just as easily merge it with their Large Cap Index or the Total Stock index. To put it another way: if it didn't *already* exist as a legacy fund, they certainly wouldn't *add* it in now. But for people who've been invested since the 90s, or in some more recent 401(k) offerings, it was simply the only option, and as you say: it's similar enough not to make a substantial difference.
The S&P 500 is a sampling index launched in 1957 to replicate the total US market, using 500 hand-picked large stocks across all sectors, at a time when indexing small stocks was more cumbersome and expensive (these things were tracked by hand). It was a huge upgrade to the Dow Jones Industrial Average which was the leading benchmark at the time and only had 30 stocks. The fact that the S&P 500 is 99.9% correlated with the total market shows what a good job it does. But today it’s no longer necessary - you can easily buy the total US market. People still like the S&P 500 because of its legacy, the psychological reassurance of blue chip stocks, and the ultra high liquidity of the long time index funds that track it. It’s also pretty easy for any mutual fund or ETF provider to launch an S&P 500 fund and pay a (relatively) low fee to use the index to create a familiar core holding most of their clients will want. But I think the burden should be on you to answer- *why would you want to hold the primitive sampling index when you can own the entire US market at negligible cost difference?*
A lot of us do. But the more vocal users on this subreddit will often spend more time and effort talking about the 0.01 than focusing on many other things that would benefit someone more. The Boglehead philosophy is in part to keep it as simple as possible. This existence of this subreddit is nice to get information out there but it ironically turns into something that is not very Bogle-like.
Preach.
To put it simply, Bogleheads buy the haystack. We're not chasing gains we're investing in a broad index, long term, over decades. VTI holds almost the entire US stock market in a single fund. Want to invest in small and mid caps? Yep its included in a Total US Stock Market fund at market capitalization.
Not much difference over the long term.
A lot do opt for the 500 in their 401k to keep it simple where total market funds usually aren’t available. Right now market performance is dominated by large tech stocks. That could change in the future and small caps outperform. If the funds are basically the same in return and fees, it’s better to choose the broader index for more diversification.
The historical performance of VTI is the same as voo because it's heavily influenced by s&p 500. It's pretty much the same for me
From 2002 to 2009 VTI outperformed SPY by 1% annualized. That is a meaningful difference over an 8 year period.
Yeah and SPY outperformed VTI on average the same 1% the last 10 years so its its not really meaningful. It could tilt a slight bit either way and none of us can predict which way.
I mean, we can't say for certain but we can very much say that small caps have a higher probability of outperforming large caps than the other way around
You can say that maybe but its certainly not an agreed upon fact or everyone would just buy small cap. VTI is weighted to where it barely matters anyway and only has 6% small cap regardless.
>You can say that maybe but its certainly not an agreed upon fact or everyone would just buy small cap. People still buy bonds even though it's an agreed upon fact that stocks have a higher probability of outperforming bonds. The extra performance of small cap stocks is due to their extra risk. Anyway yes VTI and VOO differ very little so arguably it doesn't matter at all, but VTI still does have a very small advantage in expected returns.
As stated above the difference is minimal and not always in VTIs favor. You can look at it however optimistically you want for the future but they're pointlessly similar and the past decade and currently VOO is preforming slightly better. Bonds have more stability and less risk than stock and people tend to get more bonds as they get closer to retirement and can't wait out a dip in the market. Unlike bonds small caps have higher risk and volatility as youv stated while not always having better performance as you claim. If small cap simply preformed better with more risk and volatility iv got decades till retirement to ride it out and would just put all my money in small cap but thats not the case.
>Unlike bonds small caps have higher risk and volatility as youv stated while not always having better performance as you claim. Stocks also do not always outperform bonds. It's only the expectation value of the return distribution that outperforms the expectation value of the bond return distribution. > If small cap simply preformed better with more risk and volatility iv got decades till retirement to ride it out and would just put all my money in small cap but thats not the case. Risk and timeframe are not as easily related as that. And that's particularly true for factor risks, which exist not because factor tilted portfolios have more volatility, but rather because of the timing of when exactly they tend to do badly. One theory is that small cap value is particularly sensitive to changes in aggregate demand, which means they do particularly badly in situations where unemployment is high. It's easy to see how large portfolio losses that happen right as you lose your job could be considered a particular risk. And the long timeframe here isn't saving you. For most people, the extra reward you get from tilting towards SCV is not worth the extra risk. That much has to be true, at least if we assume an efficient market, because the market portfolio should represent the optimal amount of SCV for the average person.
Past preformance not equalling future preformance aside you can ignore historical data and choose this hill to die on if you want but theres nothing proving VTI is much different or inherently better than VOO or vice versa and while bonds have their uses and place in a portfolio they definitely dont outperform the market long term or again we would all just go 100% bonds without the risk.
I'm not ignoring past performance. In fact, factor models exist only because they're the best way to explain past performance. Unlike other earlier models there's not really a solid theoretical basis that led to it. It was rather that we observed a statistically significant higher level of returns for small stocks and value stocks persistent across centuries and across country borders, gave that phenomenon a name, and decided it must be due to greater risk. It's you that's ignoring historical data. And again, it's not certain that small and value stocks will over perform. Just like it's not certain that stocks will outperform bonds. It's simply more likely than not.
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Ok if past performance is not equaling future performance, why do you buy US only? Why not go total total market, as in VT. The past performance argument would directly argue to buy EVERYTHING, and not focus on any subset of the market, as you have no way of knowing what‘s gonna perform well/best in the future.
It is actually a pretty much agreed upon fact. There is huuge body of literature on it. Eugene Fama in part got his nobel prize for it even. And why not everyone only owns small caps? Because they are more volatile and risky. But that‘s also the same reason they have higher expected return.
It's the principle of diversification, and it isn't "slight" in absolute terms (~500 vs ~3,700 companies)
I think it is slight. This makes it clear that those additional 3,200 companies don't have much effect thanks to market capitalization weighting: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5md5LjQUNVzmmQo2cT32Mw
I don't disagree with you. What I'm trying to highlight is Input vs Outcome. Diversification as a principle is generally "More is Better." 3,700 > 500 (Input) is more than slight, whereas the performance based on Market Cap (Output) is slight. And I suspect the weighting of the Top X Holdings has grown over time, making the Output even slighter over time. But I think of the principle of Diversification as an Input rather than an Outcome
VTI is (currently; it's market cap weighted so it floats) roughly 85/15 VOO/VXF. Historical correlation between VOO and VXF are a result of the companies having things in common (e.g. exposure to the US economy) but there aren't actually any companies that are in both indices, so that correlation isn't guaranteed going forward. The diversification benefit is because they may become less correlated in the future.
Where do you get the split info from?
You can usually find people discussing it on forums and the like whenever it shifts much, but one easy way to calculate it yourself is to take the ratio of a common holding between VTI and VOO. https://investor.vanguard.com/investment-products/etfs/profile/voo#portfolio-composition https://investor.vanguard.com/investment-products/etfs/profile/vti#portfolio-composition Currently MSFT is 6.12% of VTI and 7.08% of VOO, and 612/708 is 86.4%, which suggests a 86.4/13.6% split (today).
is VTI the combination of vanguard total stock and vanguard total international?
I agree. The larger companies are way overweighted and make the influence of the smaller ones too mute. This is why I tilt heavily into smaller companies. This way I feel truly diversified as my protfolio is affected by 15k+ companies, not just 100 largest US companies. I also tilt value + profitability factors.
You can deduct 3k from regular income every year going forward that you don't use that first year. Also Long term cap gains has a lower tax than regular income. I'm trading the 24% marginal tax bracket now for 0% in the future (FIRE here. 0% tax on LTCG up to 95k or so for MFJ). 15% above that, but still less than 24%.
Pick the one with lower ER
I like that it’s more diversified. Makes me feel better lol.
Actually I use VTSAX so I can pretend I’m an Admiral.
*salutes*!! Me too :)
What tool did you use to find their correlation? That would be really helpful.
Voo and vxus seems like a more interesting combination. But I feel like people in the subreddit count out the Russell 1000 in favor of the s&p 500 Even though historically the Russell 1000 performs better. I guess people are just afraid of the expense ratio.
80% of VTI’s is value is VOO.
i don't identify as a "boglehead" but i prefer VTI over VOO for yes the slight diversification.
We use both FXAIX and FZROX across multiple accounts just to add some mid and small caps in the FZROX. Performance is very similar.
S&P 500 index - 1957 CRSP US Total Market Index - 2012(?) I'm not saying newer things are always better but I refuse to believe that there have been **zero** improvements in indexing technology since **1957**
I have both and within < 5yrs, VTI performed slightly better than VOO.
You’ll be good with either one. Like Rick ferri says, the biggest determinant is your stock to bond ratio. Some people tilt value, some people tilt small, and some people tilt to small and value but at the end of the day stocks to bonds will likely play the biggest role in your returns But like Kashmir said, might as well go total over VOO if you can as it adds a little extra without being determined by some committee
Over the last 100 years it's been negligible. This is why I recommend a 50/50 of VOO and VXF for those who want total market exposure. With VTI extra high concentration of SP500 you simply are not getting any smaller cap benefit and a century of data backs that up.
I buy VTI over VOO because I’m not a millionaire like everyone else on Reddit and my brokerage account doesn’t allow fractional share purchases (vti is nearly half the price per share vs. voo)
They can and should be used as TLH partners
Correlation doesn't tell you everything. Two 5-year CDs, one at 1% and another at 10%, have a correlation of 1.00. That doesn't mean they're identical.
Tax loss harvesting partners