One of the most important (and overlooked) components of successful investing is taxes.
I hope you know already that when you sell any investment; a CD, a bond, a stock or a mutual fund, you will pay taxes on any gain.
What you may not know is that when a mutual fund buys and sells stocks, etc on your behalf, you own the tax consequences! They will distribute the gains to you, even before you sell!!
This is called turnover rate which is the amount (in percentage) of the total portfolio that the manager buys and sells. Often times, turnover rate or ratio is well over 100%.
What this means to you is that two mutual funds can have the exact same return but after your tax consequences, can be very different to your bottom line.
Additionally, if you buy into a mutual fund near the end of the year, you will own the tax consequences for buys and sells for the entire year, even when you didn't own it!
The lower the turnover the better so in addition to looking for returns and expenses, make sure to look at turnover ratio as well (which is another reason no one should use a stockbroker but more on that in another blog).
Yahoo Finance does a great job and is a great resource. For an example, here is a link to Yahoo Finance for VTSAX showing you the turnover rate of just 5% (its on the right, scroll down).
There is a tax advantage to owning ETF's over mutual funds because of the way they are structured and classified by the IRS. More on this in a later blog.
As always, let me know if you have any questions or concerns.