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A Stock Index Mutual Fund Without Net Capital Gains Realizations


  • Joel M. Dickson
  • John B. Shoven


This paper reconsiders the literature on tax options by examining the ability to defer net capital gains realizations within an equity portfolio whose constituents change over time. Unlike previous studies on the value of tax options, this paper examines after-tax returns to shareholders within an equity mutual fund. The mutual fund context allows certain features of the United States' tax laws -- namely, wash-sale rules and the offsetting of short-term and long-term capital gains and losses -- to be incorporated in assessing the potential improvement in post-tax returns to investors engaging in tax minimization strategies. Specifically, this paper examines the feasibility of managing open-end and closed-end Standard and Poor's 500 index funds which defer net capital gains realizations. A combination of HIFO (highest in, first out) accounting procedures and the systematic booking of significant losses in portfolio constituents would have allowed the open-end fund variant to match the annual pre-tax return of Vanguard's Index 500 Fund while improving annual after-tax performance by as much as ninety-seven basis points through the elimination of all capital gains realizations between 1977 and 1991. Deferring capital gains is shown to be easier for open-end funds relative to closed-end funds while the additional turnover required to implement these strategies is quite modest. The authors name the tax-sensitive funds in this paper 'SURGE (Strategies Using Realized Gains Elimination) funds.'

Suggested Citation

  • Joel M. Dickson & John B. Shoven, 1994. "A Stock Index Mutual Fund Without Net Capital Gains Realizations," NBER Working Papers 4717, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4717
    Note: PE

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    References listed on IDEAS

    1. Stiglitz, Joseph E., 1983. "Some aspects of the taxation of capital gains," Journal of Public Economics, Elsevier, vol. 21(2), pages 257-294, July.
    2. Joel M. Dickson & John B. Shoven, 1993. "Ranking Mutual Funds on an After-Tax Basis," NBER Working Papers 4393, National Bureau of Economic Research, Inc.
    3. Constantinides, George M., 1984. "Optimal stock trading with personal taxes : Implications for prices and the abnormal January returns," Journal of Financial Economics, Elsevier, vol. 13(1), pages 65-89, March.
    4. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, vol. 51(3), pages 611-636, May.
    5. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1990. "Closed-End Mutual Funds," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 153-164, Fall.
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    Cited by:

    1. Christoffersen, Susan E.K. & Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2005. "Crossborder dividend taxation and the preferences of taxable and nontaxable investors: Evidence from Canada," Journal of Financial Economics, Elsevier, vol. 78(1), pages 121-144, October.
    2. Joel M. Dickson & John B. Shoven, 1995. "Taxation and Mutual Funds: An Investor Perspective," NBER Chapters,in: Tax Policy and the Economy, Volume 9, pages 151-180 National Bureau of Economic Research, Inc.
    3. Dickson, Joel M. & Shoven, John B. & Sialm, Clemens, 2000. "Tax Externalities of Equity Mutual Funds," National Tax Journal, National Tax Association, vol. 53(3), pages 607-628, September.
    4. Plancich, Stephanie, 2003. "Mutual Fund Capital Gain Distributions and the Tax Reform Act of 1997," National Tax Journal, National Tax Association, vol. 56(1), pages 271-296, March.
    5. Barclay, Michael J. & Pearson, Neil D. & Weisbach, Michael S., 1998. "Open-end mutual funds and capital-gains taxes," Journal of Financial Economics, Elsevier, vol. 49(1), pages 3-43, July.
    6. Milevsky, Moshe Arye & Panyagometh, Kamphol, 2001. "Variable annuities versus mutual funds: a Monte-Carlo analysis of the options," Financial Services Review, Elsevier, vol. 10(1-4), pages 145-161.
    7. Agapova, Anna, 2011. "Conventional mutual index funds versus exchange-traded funds," Journal of Financial Markets, Elsevier, vol. 14(2), pages 323-343, May.

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