One point that needs to be made about “A Taxing Problem” ( JofA, May00, page 51) relates to the tax efficiency of index mutual funds.
Due to their extremely low distributions, index funds tend to function in a manner similar to tax-managed funds. Index funds also have lower expense ratios and an ongoing verifiable history of performance—both of which are obviously critical to the decision-making process.
Perhaps the only time a distribution might occur, other than in a dividend distribution, is when there is a change in the composition of the index. Nevertheless, current low dividend yields are a persuasive argument in favor of index funds.
I believe that with a little research, an investor can construct a highly tax-efficient portfolio using the variety of index funds currently available and, at the same time, maintain performance with a minimum of risk per unit of return.
I would like the JofA to address these points in future articles.
Mark S. Glochowsky
Gerber Plumbing Fixtures Corp.