A Stock Index Mutual Fund Without Net Capital Gains Realizations
Posted: 30 Dec 1998
Date Written: April 1994
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. 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."
JEL Classification: G2, G23
Suggested Citation: Suggested Citation