Squeezing out more tax efficiency from my portfolio

My portfolio is currently allocated as follows:

  • US LargeCap 11%
  • US SmallCap 8%
  • US REITs 4%
  • US Timber REITs 4%
  • US MLP (PIK dividends only) 4%
  • INT EAFE 20%
  • INT Emerging Market 11%
  • PreciousMetal Equity 5%
  • Fixed Income 33%

The ranking of the asset classes, in terms of tax efficiency (based on historical dividends), are as follows (most tax efficient at the top):

  • US MLPs EEQ & KMR (with PIK paid-in-kind dividends only) : 0% taxed.
  • US Timber REITs PCH, PCL & RYN: 0% taxed due to my enormous capital losses accumulated (see related post “Tax-Free Dividends from Timber REIT Investing” HERE).
  • US SmallCap (IJS) : distribution yield ~2.0% will be taxed.
  • PreciousMetal Equity (GDX) : distribution yield ~2.0% will be taxed.
  • US LargeCap (IWB) : distribution yield ~2.8% will be taxed.
  • INT EAFE (VEA) : distribution yield ~4.0% will be taxed.
  • INT Emerging Markets (VWO) : distribution yield ~5.0% will be taxed.
  • Least efficient : US REITs and Fixed Income.

The commonly sprouted ‘wisdom’ of putting International equities and emerging market equity in the taxable account so as to get the foreign tax credit is coming back to bite me now (and probably in future as well) with huge 4% (VEA) and 5% (EEM) distribution yields. This is ironic considering that VEA is simply just another class of Vanguard’s Tax-Managed International stock fund.

On the other hand, US SmallCap Value has a sub-3.0% yield but ‘experts’ usually would recommend putting this asset class into tax-deferred accounts.

Anyway, based on this analysis, I have been re-directing new money in the taxable account to the most tax-efficient assets listed above.

1 Comment

  1. Pingback: indexfundfan @ indextown » Blog Archive » Portfolio Return for May 2009

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