4. Consider two mutual funds and an ETF that invest in mid-cap U.S. stocks: VIMS

Question

4. Consider two mutual funds and an ETF that invest in mid-cap U.S. stocks: VIMSX, CRIMX, and IUH. Below is a table summarizing key statistics for the three funds VIMSX CRIMX IJH ETF 0.07% 8.87% Fund type Expense ratio 10-year annualized return before taxes 10-year annualized return after taxes on distributions Turnover Has the fund distributed capital gains in the past? Passive mutual fundActive mutual fund 0.18% 0.95% 7.78% 6.99% 7.40% 4.35% 8.49% 15% 4% 14% 0 Yes, substantially so 0 Based on the information provided, which fund would you consider the be the most tax efficient? Why?

Explanation / Answer

The answer is IJH fund becaus of the following reasons

1) It has the least turnover. It means out of the 3 funds, IJH does minimum buying and selling which results in least capital gains.

2) IJH also has the highest tax management efficiency ratio. The tax management efficiency ratio (TMER) is calculated by dividing the post-tax return by the pre-tax returns. TMER = 8.49% / 8.87 % = 96.5%.

3) It also has the lowest expense ratio.

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