Rockbridge Named #81 on CNBC's Top 100 Fee Only Wealth Mgmt Firms List
Mar 02

Tax Efficiency: Index Funds vs. Actively Managed Funds

by Claire Kobylanski

Tax season is in full swing, which may bring up many questions and considerations about your investments. Am I saving in the most tax-efficient locations for my financial situation? Are my individual investments tax-efficient as well?

A recent article by Vanguard discusses how broadly based index funds are more tax-efficient than actively managed funds. Rockbridge has built their models strictly using index funds because of their low costs and range of securities within the funds. Their tax efficiency is just another reason why index funds make sense.

One way a fund’s tax efficiency can be measured is with its “tax cost.” Tax cost is the difference between the before-tax return of a fund and its preliquidation after-tax return. According to the article, the median tax costs for index stock funds is 27 basis points less than actively managed stock funds.

Several actively managed funds have a higher tax cost compared to index funds because they tend to change the investments within the fund more often. Since they are attempting to achieve a higher return than the market, they frequently liquidate and make new purchases in order to hold the funds their research shows will perform well. The sale of current investments for new ones causes the owners of the fund to realize capital gains (which are taxed) more often.

Although we believe it is much more important to manage the overall allocation of assets in your portfolio based on your risk tolerance than it is to manage exclusively for taxes, your portfolio’s tax efficiency is still important to take into account.

You Might Also Like

Other articles filed under Investing

New York State Office of Unclaimed Funds

February 8, 2019
Over the summer, we had a client ask if there was a place to look for existing accounts or funds they or family members may have accumulated and forgotten about over the years. That sparked Julie’s memory of the New...
Continue Reading

The Reward of Tuning Out 11 Years of Noise

January 22, 2019
This recent market downturn has many investors drawing parallels to how they felt during the infamous 2008 financial crisis. The last 11 years have been a roller-coaster ride for investors. Right after seeing market highs in late 2007, investors experienced...
Continue Reading

2018 Market Insights

January 18, 2019
2018 was a woeful year for investing. All major stock market indexes were down, bonds enjoyed a year-end rally to finish flat, and commodities such as gold and oil fell. Seeing all asset classes drop in unison is unusual and...
Continue Reading

Invest Like You’re Driving, Drive Like You’re Investing

January 14, 2019
I’ve been watching people drive all my life. I’ve been an individual investor and an investment advisor guiding clients for more than half of my adult life.  I’m a curious soul and during a recent trip from Syracuse to Atlanta,...
Continue Reading

Quarterly Market Commentary – January 2019

January 11, 2019
Stock Markets December’s market reminds us that risk is real – even after the uptick at the end of the month, a global stock portfolio is down about 15% for the quarter and 12% for the year. Technology stocks (Amazon,...
Continue Reading

‹ Back to Blog Home

getting started is simple

315.671.0588 info@rockbridgeinvest.com Schedule a meeting Sign Up for Our Newsletter