Explanation For Recent Big Drop In Mutual Fund Values

Many people will log into their brokerage accounts in December and be surprised by some curious losses. Not to worry, most likely this is due to your mutual distributing either capital gains and/or dividends. Mutual funds and ETFs 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.

If you invest with Vanguard, they have a nicely organized list of estimated year-end distributions for Vanguard funds and ETFs, with capital gains broken down into short-term and long-term. Most index funds have very low turnover, so for the most part they have very little capital gains to distribute. Many index funds and ETFs are however distributing dividends.

While your fund’s net asset value (NAV) will drop after a distribution, you’ll get an equivalent amount of cash in your account. Let’s 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 on your upcoming tax returns. If they are in a sheltered account like an IRA/401k, then you don’t have to worry about taxes.

For example, the Vanguard Wellesley Income Fund Investor Shares (VWINX) went down $0.53 a share (–2.15%) on Monday 12/17/2012, and the Vanguard Health Care Fund Investor Shares (VGHCX) went down –$4.01 (-2.70%). But the overall market went up? We see though, that VGHCX had the following distributions:

$2.661 per share in dividends
$0.173 per share in short-term capital gains
$1.964 per share in long-term capital gains
—————————————————————–
$4.798 in total distributions

So the vast majority of the changes were in reaction to these distributions ($0.53 vs $0.54, $4.01 vs $4.80). The rest is the actual market value change of the underlying investments.

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 scroll down for a specific section called “Dividend and Capital Gains Distributions” which will provide you a past distribution history.

Comments

  1. Joseph Sangl says:

    These types of clear explanations is why your blog is so effective!!!

    Merry Christmas!
    Joe

  2. is this applicable to ETFs too?

  3. My only mild gripe is that this throws off the year to date % change number.

  4. The year to date % change number should adjust with the reinvestment of the dividends. At least that has been my experience.

  5. I have vanguard VHGEX which was down 10% yesterday! didn’t know what happened until I read your blog..

  6. 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?

  7. Thank you for posting this. I wondered what happened because I lost about 10% in my retirement funds in just one day!!

  8. 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.

  9. Cheapster Bob says:

    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

  10. please would you check EKZAX and tell me, gain or lost ? I feel like lost. and how to understand 401k don’t mean nothing

  11. 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?

  12. 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????

  13. awesome! thanks for the explanation!

  14. 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?

  15. 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.

  16. 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”.

  17. 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.

  18. 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

  19. Jason Hayes says:

    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.

  20. Niraj – Check Blackrock.com. There are no distributions projected for BMGAX.

  21. 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.

  22. 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.

  23. Updated with current info after *exactly* 5 years, but all the basic stuff is still the same. :)

  24. alex johnston says:

    Always good to remind people about this. I’ve been shocked myself numerous times in the past before getting hip to this. Thanks.

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