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Vanguards estimates

When looking at retirement funds, investor & institutional , why the large difference in % dividend ?
VITVX 2.87% VS VTXVX 9.75% 2015 year.

VITWX 1.93 % VS VTWNX 13.94% 2020 year

Thanks, Derf

Comments

  • edited November 2021
    Those large differences in yearend distributions do look strange.

    The VG TDF and VG Institutional TDF series are distinct (i.e., not classes of same portfolios), but they have similar glide-paths and portfolio managements except for different ERs, minimums and client bases. I looked at turnovers, and strangely, Institutional TDF have higher turnover.

    My guess is that large difference in yearend distributions may be related to the merger of regular VG TDF and VG Institutional TDF by 02/2022. Their tax-cost ratios may be different. Unfortunately, the news related to the merger is silent on this aspect.

    https://pressroom.vanguard.com/news/Press-Release-Vanguard-to-Lower-Investor-Costs-by-an-Estimated-190M-Through-Enhancements-to-TRFs-092821.html
  • @yogibearbull : Thank you for the reply. I looked @ VG ,but couldn't find any info.
  • @derf, it is kind sad that VG is touting only the lower ER overall and has not mentioned tax aspects of this merger. May be some holders of the affected funds should call VG about tax details and why their yearend CGs are different.
  • I just sent them off a why question & await their reply.
    Stay tuned, Derf
  • Good evening : VG reply came back today Tuesday. Basically stated difference in dividend % was due to ER. YTD returns were close , difference .09% .
    ER difference .04 % .
    @yogibearbull : Read your link last night & will look at it again. Something smells fishy as I don't see how the BIG difference in dividends, VG wouldn't be trying to pull a fast one ?
    Has anyone had this happen to a fund when they get merged ?
  • MyMoneyBlog, citing Bogleheads, has a good explanation of what happened.
    https://www.mymoneyblog.com/vanguard-target-retirement-funds-nav-drop-cap-gains-distribution.html

    In brief, in early 2021 Vanguard enabled lots of employer plans move money from the retail TDFs to the institutional TDF, by lowering the mins from $100M to $5M. Companies responded. There was a mass movement of dollars out of the retail TDFs, creating large cap gains for those remaining.

    As pointed out in the blog, had Vanguard merged the funds first, then none of these plans would have moved money around and there would have been no large gains distributed.

    So the gains were not because of the merger, but in spite of the merger.
  • Thanks for the info on TDF @msf. One other thing comes to mind. Investors removing money from the institutional had lower CG's due to a later inception date. Or is my thinking bad ?
    When the retail goes to institutional will a taxable event take place. I'm thinking no?!

    Have a good one, Derf

  • Not sure why Vanguard did not split up tax-free the retail TDF to isolate employer plans from retail clients and then merge the employer part with the institutional TDF. Vanguard does strange things that are not good for its business.
  • msf
    edited January 8
    What happened was that investors sold retail fund holdings and purchased institutional fund holdings. Such a move would have been a taxable event had it been done in taxable accounts, but employer plans (e.g. 401(k)s, 403(b)s) are tax sheltered.

    If someone had between $5M and $100M in a taxable retail TDF, it is unlikely that one would have sold shares (recognizing personal cap gains earlier in 2021, before distributions). The cost of the taxes on the realized gain would likely have outweighed the benefit of switching to a lower ER fund.

    (I personally faced a similar decision years ago. I owned service class shares of a fund. The A shares, with a slightly lower ER, were subsequently offered load-waived. The fund declined to do a tax-free exchange for me. So I continued to hold the higher cost service class shares.)

    Investors weren't selling off shares because they wanted out. They were just moving to a lower ER replacement fund. So whether retail or institutional series had higher unrealized gains seems somewhat moot. That said, I agree that the younger institutional series was likely to have had lower unrealized gains.

    Since Vanguard decided to merge the series entirely, there wouldn't seem to be much point in merging the employer plan investors and then months later merging the rest of the investors. Had Vanguard given this enough thought to realize that the first change (lowering the institutional min) would trigger the mass migration, it could have skipped that step completely and merged everyone at once.
  • "(I personally faced a similar decision years ago. I owned service class shares of a fund. The A shares, with a slightly lower ER, were subsequently offered load-waived. The fund declined to do a tax-free exchange for me. So I continued to hold the higher cost service class shares.)" as per @msf
    Does that decision still hold today ? In other words does the fund , any fund, dictate if the exchange is taxed or not ?
    Thank you much, Derf
  • edited January 9
    @Derf, Not sure if the following is what you are asking -

    If the fund prospectus provides for exchanges between classes (i.e., conversion), then one can exchange (convert) tax free, and the prospectus would say it. These conversions are pretty routine for a lot of fund families. But certain brokerages may not participate in conversions, in which case, one is stuck with selling one class and buying the other in a taxable transaction, subject to wash sale rules or simply transfer the fund out to another brokerage that participates in conversion and convert there. (E.g., Schwab did not convert until a couple of years ago and I have no knowledge of their current status but Fidelity converts quite routinely.) If a fund is closed to new investors, that prohibition may extend to conversions.
  • That's basically it. In addition to the brokerage being willing, the fund itself must assist with the class conversion. FWIW, I held the fund at Fidelity which was willing to do its part, but the fund company would not allow the conversion.
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