I have been investing for a long time based on general principles of the efficient frontier and "modern" portfolio theory. Which I am very thankful for and recommend. 1952-ish paper?
Anyway, I am wondering about LT cap gains, taxes and mutual funds. This is a hypothetical question because the specific example is held in my tax-free Roth IRA.
I noticed that my Small Gap Growth Index fund distributed 8% in LT cap gain on 8/14. As far as I can tell some previously small cap stocks (eg super micro, etc) grew to a point the fund HAD to sell because they are no longer in the Index. Presumably my Mid Cap Index fund, in turn, had a sell, rebalance and purchase these same stocks.
From a total portfolio point of view, in a taxable account, this seems highly inefficient. At the end I still own proportionally similar amounts of these stocks just in different funds. The small cap fund realized the LT cap gains and the mid cap also needed to rebalance which might cause it to realize more gains (I haven't looked). Just to end up basically with the same portfolio?
A single investment in a "Total Stock Market" index fund would own all these positions and not realize any extra gains. But, as an investor, you lose the ability to rebalance between large/mid/small cap stocks as they diverge. This divergence has been quite a boon to me in the past and is the core of portfolio theory.
I think, as I am writing this, that the right here is ETF, ETF, ETF. The power of "in-kind."
Thanks for reading my random musings. Am I missing anything?