Explanation For Recent Big Drop In Mutual Fund Values
Check your brokerage account, and saw some huge 10-20% losses today? Not to worry, most likely this is due to your mutual distributing either capital gains and/or dividends for 2007. Mutual funds are baskets of stocks, so just like with stocks, they can create capital gains when they sell holdings for a profit. By law, mutual fund companies must distribute 90 percent of realized capital gains and dividends each year, and ’tis the season for passing these out.
While your fund’s net asset value (NAV) will drop, you’ll get an equivalent amount of cash in your account soon. Say your NAV is $10 and they make a $3 distribution - you’ll end up with $7 in NAV and $3 in cash. If you have it set to automatically reinvest, then that cash will go back and buy more shares. If you hold them in a taxable account, this means you’ll have to pay the appropriate taxes on these gains next year. If they are in a sheltered account like an IRA/401k, then this really means nothing to you.
For example, the Vanguard Capital Value Fund (VCVLX) went down $1.76 a share today (-14.81%). But it also has the following distributions:
$0.130 per share in dividends
$0.406 per share in short-term capital gains
$1.020 per share in long-term capital gains
—————————————————————–
$1.556 in total distributions
So most of that drop (88%) was explained by distributions, the rest is the actual market change.
Added: Find Your Specific Fund’s Distributions
The first place to look for past and future distributions is the website of your fund company, like I did above with Vanguard. If you can’t find it there, I use the Morningstar quote system a lot. Plug in your ticker symbol into the quote box, and at the bottom there is a section called “News, Alerts, and Opinions?. Look for a headline like “Fund Capital Gains Distribution” and click on it for details.
December 18th, 2007 at 6:42 am
These types of clear explanations is why your blog is so effective!!!
Merry Christmas!
Joe
December 18th, 2007 at 8:12 am
is this applicable to ETFs too?
December 18th, 2007 at 8:24 am
My only mild gripe is that this throws off the year to date % change number.
December 18th, 2007 at 9:02 am
The year to date % change number should adjust with the reinvestment of the dividends. At least that has been my experience.
December 18th, 2007 at 10:32 am
Does anyone know if it is true that index funds like Vanguard Total US Stock Market or Vanguard Total International rarely distribute capital gains if ever?
December 18th, 2007 at 11:05 am
I have vanguard VHGEX which was down 10% yesterday! didn’t know what happened until I read your blog..
December 18th, 2007 at 12:03 pm
Thank you for posting this. I wondered what happened because I lost about 10% in my retirement funds in just one day!!
December 18th, 2007 at 12:14 pm
Mutual funds can also carry over capital losses like individuals can. So if your fund had one really bad year, it may not distribute any capital gains for years.
Since index funds don’t trade as often, they don’t create as many realized short- or long-term capital gains that must be distributed.
ETFs also make cap gains distributions, but it is not as often or large due to their structure (which creates less of a need for actual selling of holding to satisfy people leaving the fund) and the fact that they mainly track passive indexes.
December 18th, 2007 at 1:40 pm
I’m about to start creating a diverse portfolio of either Index funds or ETF’s covering stock, real estate etc.
Would you recommend ETF’s or Index funds for this and which has the least amount of fees?
Thanks and I am using Sharebuilder for the brokering.
Bob
December 18th, 2007 at 2:05 pm
please would you check EKZAX and tell me, gain or lost ? I feel like lost. and how to understand 401k don’t mean nothing
December 18th, 2007 at 2:25 pm
I owe mutual funds with TRP in my IRAs and I want to *rebalance* into Vanguard index funds. I was pondering this question with myself. When is the best time to make the move. I don’t want to close my funds with TRP and don’t get my distributions if any. Should I just keep an eye on my TRP account on line and see when there is a record of distribution there and then make the move? And when is the best time to make moves as such anyway, at the end of December or early January? Any suggestions?
December 18th, 2007 at 2:34 pm
I see now, if TRP decide to carry forward and not distribute dividends this year, if I move my funds to Vanguard now, I’ll never see my dividends, RIGHT? OHHHHHHH…..One more way to punish you for moving around. But I will move. The question is WHEN is the best time to move? Maybe next summer, when markets are usually slow????
December 18th, 2007 at 3:54 pm
awesome! thanks for the explanation!
December 18th, 2007 at 9:25 pm
I often wondered why some funds would show a huge drop in a single time period! My question is, when doing “comparison shopping” for funds on brokerage sites, will the listed returns factor in the distributions as gains? Or will the drop in NAV be reflected on the ticker graphs, which might not capture those distributions/dividends?
December 19th, 2007 at 12:48 am
I believe the performance should inclusive of dividends and capital gains. You can also find the amount of unrealized capital gains a fund has.
You can also find after-tax performance stats, which can help if you are investing in a taxable account. Lots of turnover and short-term capital gains can create a lot of taxes that can hurt your net performance.
December 19th, 2007 at 1:16 am
EKZAX declared a capital gains distribution of $1.16540, effective on 12/04/2007. It also declared a dividend distribution of $0.26470 per share, effective on 12/12/2007. That’s a big part of the NAV changes, but not everything.
I found this this information using the Morningstar quote service. Look at the bottom for “News, Alerts, and Opinions”.
December 19th, 2007 at 7:46 am
So if I look at a ticker chart of the last month for EKZAX, it looks like the price on Dec 3 was $12.30. On Dec 17, it had fallen to $10.36. To me, this looks like a “good time to buy” as it’s a fund that’s done well that I can buy for 15% cheaper than a month ago.
Are you telling me is that I’m not buying it cheaper, and that anything has operable changed with the fund; merely that I just missed a dividend distribution and now the fund’s asset value is lower?
Speaking of which, how long do you have to hold a fund before qualifying for the dividend? If I buy today, and they give a dividend tomorrow, do I get the full distribution based on how many shares I now own?
Thanks for the help.
December 19th, 2007 at 9:29 am
I own BMGAX and MDLRX through blackrock funds -
1) there is no distribution listed on BMGAX yet on morningstar site, could you tell me where i can find this info?
2) Morningstar doesn’t recommend BMGAX because they don’t like their fees - how do I find/research on morningstar which fund is good for similar investing style as BMGAX? Do you recommend I should move my 4K total to another fund with lower fees? right now I am putting 50 a month in BMGAX recurring investment.
3) MDLRX is actually recommended by Morningstar - how do their fees compare with other industry funds with similar investing styles?
Thanks in advance.
Niraj
December 19th, 2007 at 10:54 am
Thank you so much for the explanation. I was out of town for a few days and was dumbfounded when I got back and checked my funds.
December 19th, 2007 at 11:15 am
Niraj - Check Blackrock.com. There are no distributions projected for BMGAX.
December 20th, 2007 at 3:26 pm
irina: when you hold funds in an IRA, distributions don’t matter and the best time to move things to vanguard is now — just move them all.
Distributions in taxable accounts are a bad thing: they just create more tax liability.
Pre-distribution, you own $100 worth of the fund. Post distribution, you have to pay tax on whatever the distribution is — say $10. So rather than making you pay tax on money you never receive, the funds split your holdings into $90 and $10, then send you the $10.
Of course, if you’re reinvesting dividends, that $10 gets plowed into more shares, so you still have $100 worth of the fund (but a higher tax bill to pay).
This is one of the reasons why passive index funds are so great in taxable accounts: they don’t distribute very much in the form of short or long term cap gains. Their after-tax performance over longer stretches is thus generally better than active funds.
December 20th, 2007 at 3:51 pm
This is a very good explanation of something that a lot of new investors don’t understand. I remember a few years ago when this happened to me and it blindsided me until I realized what it was. Shocks you for a minute.
April 21st, 2008 at 6:02 am
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