Thread by @choffstein

0️⃣ I've received a couple questions about this paper and tax implications of this approach.

I'm not an accountant, but I think there are three main points to consider about tax efficiency and return stacking.

https://twitter.com/choffstein/status/1435214053555769351

1️⃣ Some funds achieve capital efficiency in a tax efficient manner, and some do not.

e.g. $PSLDX buys bonds and overlays with S&P 500 futures. That's very tax inefficient, since those S&P 500 futures are taxed at a 60% long-term / 40% short-term rate.

NTSX, on the other hand, buys the S&P 500 and then overlays with U.S. Treasury futures. Those futures are also taxed at the 60/40 rate, which *can* be more tax advantageous than buy-and-hold bond exposure, where the majority of the return (yield) gets taxed at ordinary income.

2️⃣ We shouldn't overlook the value-add of asset location.

If we're willing to look at the combined portfolio achieved by holdings in taxable and qualified accounts, then we can put the least tax efficient holdings in accounts where taxes are not a concern.

3️⃣ Finally, while we should always seek to minimize taxes, we should consider that some of the taxes we may be paying are on returns we otherwise wouldn't be achieving.

It's like the 60/40 portfolio is a cake. Return stacking is the icing.

Even if taxes scrape some of that icing off, wouldn't we still want a cake with some icing rather than none?

Now, this assumes we're not paying *more* taxes to achieve the same underlying 60/40 exposure, and as we saw in 1️⃣ that may or may not always be the case. But, again, we can hopefully use 2️⃣ to our advantage.

In conclusion, taxes are one of the few levers we have control over. While we should strive to minimize taxes, we should also recognize that paying higher taxes is okay if it means we're achieving higher post-tax returns!

🛑