Key insights
- The post discusses the potential tax implications and rebalancing challenges for broad market index funds (VT/VTI) when a very large company is added to the index, particularly following an IPO or other event. While the impact of typical IPOs is small, a massive addition could necessitate significant selling of existing holdings to buy the new stock, potentially triggering capital gains taxes for investors in taxable accounts. The author questions whether incoming funds alone would be sufficient for the rebalancing.
I imagine when a company goes IPO and is absorbed into the CRSP US Total Market Indexto keep the allocation tracking the index they have to sell some stocks and buy the new stock to rebalance. This is fine when an IPO hits and the company is valued at around 30 billion or whatever, since the total impact is pretty small.
What happens when a massive company gets absorbed? Would this potentially cause a large re-balance?
I legitimately do not know, which is why I am asking.
Asking Gemini this results it talking about "IPO in Kind Transfer", which either I don't understand or doesn't apply here? My understanding is that to re-balance with the same amount of cash they either have to only buy the new stock with incoming funds?
I remember Target Date funds had to sell stocks and buy bonds to maintain allocations, which caused people that held TDFs in taxable accounts to suffer some unexpected taxation.