Allocating Global Equities in a Taxable Account

It has often been recommended to overweight US equities in tax-advantaged accounts to reduce the tax drag associated with non-US equities. Yet our research shows that investors in higher tax brackets may also be able to lower their tax costs by overweighting US equities within taxable accounts. This is largely driven by lower dividend yields for US equities and the ability of some fund managers to cut down on overall realized capital gains.

In a taxable account, investors need to consider both capital gains and dividend distributions from the funds they hold. Capital gains distributions in equity ETFs tend to be low. For example, none of Dimensional’s equity ETFs distributed capital gains in 2025. And while mutual funds are often associated with greater capital gains distributions than ETFs, the majority of Dimensional’s equity mutual funds distributed zero short- and long-term capital gains in 2025. Dimensional has a strong track record of tax-efficient portfolio management in a variety of vehicle structures and, in recent years, has been able to further reduce capital gains distributions across the majority of our mutual funds through tax-efficient rebalancing, including in-kind redemptions. In-kind redemptions allow Dimensional’s portfolios to reduce weight in securities without realizing a taxable gain. In calendar year 2025, Dimensional’s mutual funds traded $27.6 billion in kind and transferred out $19.5 billion in net gains.

As Dimensional funds have increasingly distributed low capital gains, or none at all, tax costs for asset allocations using Dimensional equity funds have largely come from other sources: dividend income, the nature of dividends received, and any applicable foreign withholding taxes for which investors can potentially claim foreign tax credits or deductions.

Dividend yields have been higher outside the US since at least 2010.¹ Over 2025, for example, the dividend income as a percentage of average NAV (net asset value), or dividend yield, for the Dimensional US Core Equity 2 ETF (DFAC) was 0.98%. The Dimensional International Core Equity 2 ETF (DFIC) and Dimensional Emerging Markets Core Equity 2 ETF (DFEM), by comparison, had a dividend yield more than twice that: 2.54% and 2.33%, respectively.

This suggests, all else equal, there is an advantage to holding US stocks over non-US stocks in a taxable account.

The nature of the dividend income indicates whether the dividends are considered qualified dividend income (QDI) or nonqualified dividend income (NQDI). Dividends that meet certain criteria, such as holding period requirements, are considered “qualified” and are generally taxed at the lower long-term capital gains tax rate. Meanwhile, NQDI is taxed at the same rate as ordinary income.

Qualified dividend income percentages are typically lower outside the US due to the lack of tax treaties with some markets, among other reasons.² QDI for the Dimensional US Core Equity 2 ETF in 2025 was 100%, versus 96% for the Dimensional International Core Equity 2 ETF and 50% for the Dimensional Emerging Markets Core Equity 2 ETF.

QDI percentages lead to the same conclusion as dividend yields: All else equal, an investor should prefer to hold US stocks in taxable accounts.

Regardless of the account type in which dividend-paying stocks are held, dividends earned on non-US stocks generally face a foreign dividend withholding tax (WHT). A German stock that pays a dividend may incur, for example, a 15% WHT by the German government. This WHT is paid directly by the mutual fund or ETF, regardless of whether the end investor holds the fund in a taxable or a tax-advantaged account.

To limit double taxation, the IRS allows US taxpayers to claim a foreign tax credit (FTC) on income that is taxed by both the US and a foreign country. If taxpayers can claim it, the FTC can approximately offset the foreign WHT.³

However, for an account to qualify for the FTC, the related income must be subject to US taxation. Income earned in tax-deferred accounts, such as a 401k or an IRA, is not subject to US taxation, and therefore the investor cannot claim the FTC for income earned in such accounts. As a result, foreign taxes paid reduce the net return on the investment without an offsetting US tax benefit.

In contrast, investors holding non-US stocks in a taxable account can claim the FTC. The FTC advantage, though, tends not to be enough to offset the higher tax costs driven by regional differences in dividend yields and QDI. In 2025, the FTC for DFIC was 0.21% as a percentage of NAV, but still the difference in tax cost between DFAC and DFIC was 0.32%. For DFEM, the FTC was 0.35%, still resulting in a 0.49% difference in tax cost versus DFAC.

While laws vary by country, real estate investment trusts (REITs) generally distribute a substantial percentage of their income to shareholders annually. For example, by IRS regulation, US REITs are required to distribute at least 90% of taxable income to shareholders annually in the form of dividends. As a result, dividend yields are generally higher for REITs than other equity securities. In addition, the income distributed by REITs generally is classified as NQDI and therefore tends to be taxed at higher rates.

For these reasons, investors may prefer to hold their REIT exposure in more tax-advantaged account types. Most Dimensional equity ETFs and mutual funds exclude REITs, and Dimensional offers separate, standalone REIT funds to allow investors to customize their real estate exposure. The Dimensional Tax-Sensitive Wealth Models, broadly designed for investors who wish to hold the models in a taxable account, exclude REIT allocations.

As realized capital gains distributions in Dimensional equity mutual funds have come down and tend to be zero in Dimensional equity ETFs, the tax cost on dividend yields is the primary driver of regional tax cost differences across Dimensional equity strategies. And with higher dividend yields and lower QDI outside the US, the tax cost for US-based investors is lowest for US equities compared to developed ex US and emerging markets equities, even after considering the FTC. 

For each 10% increase to US equities away from developed ex US or emerging markets equities, the tax cost of the overall portfolio is likely to decrease by 3–5 basis points. This value is estimated as the difference in tax cost between DFAC and DFIC or DFEM, times 10%.

Therefore, investors may seek to overweight their allocation to US stocks in taxable accounts.