Does it make sense to switch to a lower cost fund?

[mighty58]

I invested in an Emerging Markets index fund back around 2015-16, and the money's been sitting there ever since. Back then, the best option on Monex was the "DC インデックス海外新興国株式", with an expense ratio of 0.594%. Fast forward to today, and the eMAXIS slim Emerging Markets Fund is available with an expense ratio of just 0.204%, investing in the exact same index, the MSCI Emerging Markets Index.

I was planning on just holding the fund long-term without touching it, but the (relatively) high expense ratio is bothering me, as I know I'm paying more (almost triple!) in fees for absolutely nothing in return.

Does it make sense to sell it, pay the capital gains tax (I'm currently up about 25%, and it's in a taxable account) and then put it back into the lower expense-ratio fund?

[RetireJapan]

Really interesting question. Paying the capital gains tax now rather than later is not ideal, but saving 0.3% a year is good. My gut instinct is that might be a big enough difference to make it worth switching.

Anyone have a definitive answer for this?

[Sybil]

Before switching you need to compare the funds in question. Index tracker funds can vary a few percentage points a year due to tracking errors.

[StockBeard]

It depends mostly on whether you still contribute to that fund, how long you're going to wait before you touch the money, and to a lesser extent (because the fees are so low to begin with), the annual expected return.

There are a few calculators online that can help you compare the two scenarios. Here's one I found with a random search. Unlike others it lets you start with different values for the two scenarios, which is what you want: https://www.moneysmart.gov.au/tools-and ... calculator

Imagine you have $10'000 in the fund.
In one case, you sell, pay 20% taxes on the capital gain (25% of gain, so let's say you pay 20% of $2'500, that's $500) and start fresh with $9'500 at a 0.2% fee.
In the other case, you keep your $10'000 and keep going at 0.59% fee

Play with the tool. It's not a clear cut as far as I can see. Depending on the variables I can see a benefit in switching if you intend to stay in the fund for 15 years or more. You have the slight tax difference at the other end to also take into account (this specific tool doesn't give that option).

Personally, I wouldn't bother given the seemingly small difference at the end. However, I'd stop contributing to that fund and start with the other one (assuming equivalent returns), then I would ensure I withdraw from the expensive one first, when that time comes.

[RetireJapan]

Personally, I wouldn't bother given the seemingly small difference at the end. However, I'd stop contributing to that fund and start with the other one (assuming equivalent returns), then I would ensure I withdraw from the expensive one first, when that time comes.

That is a great solution! Appeals to my lazy nature

[mighty58]

Thanks for the link Stockbeard! I punched in my own numbers and you're right, after 15 years it "might" start to make a difference. "Might" because keeping that money invested might make even more of a difference, depending on the returns. It's difficult to call either way.

As such, I agree with your conclusion as well ... as I'm not paying some ridiculous MER, it's probably easier to just leave it as is.

[jcc]

I ran the numbers based on 5% annual gains and the same starting load(100k of which 25k are already taxable). I included the fact that the initial gains have already been taxed in the lower cost switch case. Even after one year you're ahead(though only a small amount). The value of deferring taxation is far lower than cutting out .3% annual drag.

Fwiw, after 10 years, it's $1200 difference, and after 25 about $8900.

Personally, I'd do it, it's one fewer things to track when updating my spreadsheet I use for rebalancing...

[StockBeard]

I ran the numbers based on 5% annual gains and the same starting load(100k of which 25k are already taxable). I included the fact that the initial gains have already been taxed in the lower cost switch case. Even after one year you're ahead(though only a small amount)

Not sure how your math works, can you clarify?

Case 1: keep all the money (100k), assume 5% with a 0.594% drag --> +4.406% by end of year
100 * 1.04406 = 104.41K

Case 2: Sell, take a hit on tax (25k * 20% = 5k, so start with 95k), assume 5% with a 0.204% drag --> +4.796% by end of year
95*1.04796 = 99.55k

You're certainly not ahead after one year... what am I missing?

[jcc]

I ran the numbers based on 5% annual gains and the same starting load(100k of which 25k are already taxable). I included the fact that the initial gains have already been taxed in the lower cost switch case. Even after one year you're ahead(though only a small amount)

Not sure how your math works, can you clarify?

Case 1: keep all the money (100k), assume 5% with a 0.594% drag --> +4.406% by end of year
100 * 1.04406 = 104.41K

Case 2: Sell, take a hit on tax (25k * 20% = 5k, so start with 95k), assume 5% with a 0.204% drag --> +4.796% by end of year
95*1.04796 = 99.55k

You're certainly not ahead after one year... what am I missing?

You're forgetting that that 104.41k the 104.41k includes 29.41k of taxable gains, while the latter contains only 4.55k. So it may look like a bigger number in your account, but the second you withdraw and get taxed case 2 is ahead. The benefits of deferring the taxation of that 25k do not outweigh the excess drag of the more expensive fund.