Mutual fund investors should be on the lookout for capital gains distributions in their accounts before the end of the year.
Capital gains distributions will only affect your tax situation if you own them in certain accounts.
Tune it to this week’s video to see how we typically deal with capital gains distributions and whether or not you’ll be affected.
Interested in hearing more about ETFs? Check out another recent video on why ETFs are NOT just for beginners!
Show Notes
ETFs shine as high taxes loom on US mutual fund capital gains – Financial Times
S&P 500 Index tracking ETFs are more tax efficient than MFs – Daniel Sotiroff
What You Should Expect from Capital Gains Distributions – Full Transcript
**Click here for a downloadable PDF version of this transcript**
Casey Mullooly: In Episode 273, we talk about efficient ETFs. Keep watching.
Casey Mullooly: Welcome back to the Mullooly Asset Show, this is Episode 273. And I’m your host, Casey Mullooly, and I got the number right this week, I hope. So we’re filming this in the beginning of December, it’s the end of the year, and for mutual fund investors, you know what that means. Yep, capital gains distributions are coming.
So some of the largest mutual fund issuers like Vanguard, T. Rowe Price, Invesco, have warned their active mutual fund investors that they could be seeing capital gains distributions of up to 20%. This is according to a recent article in The Financial Times.
So depending on what type of account you own mutual funds in, this could mean, capital gains distributions could mean an increase in the amount of tax that you have to pay for the end of the year. You’re all right if you own mutual funds in your 401k, or an IRA, or a retirement plan such as that, you don’t have to worry about this.
Casey Mullooly: But for people who own them in regular brokerage accounts and taxable accounts, this is a pretty big deal. So 2021 has seen the perfect storm for high capital gain distributions, we’ve seen good stock market performance, broadly speaking, as well as outflows from mutual funds. We’ve seen $187 billion in the first 10 months of this year flowing out of mutual funds. So outflows are when people take money out of mutual funds.
Capital gain distributions occur because people are taking the money out so the mutual funds have to give them their money back. And when the stock market is performing well, they sell those shares at a gain, which they then pass on to the mutual fund holders themselves.
The average mutual fund in… Or excuse me, the median mutual fund, my math teacher, my grade school math teachers would have my neck if I mixed up median and average. So the median mutual fund in 2020 paid out 3.5% of its net asset value or its price, basically. The median exchange-traded fund or the median ETF 0%.
Casey Mullooly: So this tax efficiency of exchange-traded funds, of ETFs, are why we’re such huge proponents of building portfolios that use exchange-traded funds because these small differences, while 3.5%, not that much, but these small differences add up over time.
And ETFs have seen a record $290 billion of inflows in the first 10 months of this year. So it’s a trend that’s happening over time that we’ve been paying attention to. As more people are cashing out of mutual funds, they’re moving more money into exchange-traded funds. So ETFs, way more tax efficient than mutual funds. That’s the message for Episode 273. See you on 274.