Another downside of active funds : Distributions!

[walkinwood]

Interesting information, Adrift.
I am keeping a close eye now on the remaining actively managed funds I have and will probably start taking cap gains and move the proceeds to index funds. I just don't have the time (can't be bothered) to keep track of managers and portfolio changes. Of course, with the proliferation in the number of indexes for each asset class, index funds have their own issues.

What's a man of leisure to do!

[Willers]

This was a painful lesson learned late in my investing lifetime. It has been painful paying gains at a rate 23 ppts higher than in retirement. A good reminder for those young investors out there that have growing incomes.


Sent from my iPhone using Early Retirement Forum

[bingybear]

Quote:

Originally Posted by walkinwood Interesting information, Adrift. I am keeping a close eye now on the remaining actively managed funds I have and will probably start taking cap gains and move the proceeds to index funds. I just don't have the time (can't be bothered) to keep track of managers and portfolio changes. Of course, with the proliferation in the number of indexes for each asset class, index funds have their own issues. What's a man of leisure to do!

I moved all MF out of my taxable accounts last December (remaining ones that is) and just invest in ETF and individual issues. MF often distribute large distributions after a good run up in value. Active funds seem to show this more. This is likely due partially these MF making tactical changes. The other cause is people redeeming funds. I wonder if this might eventually cause the same effect on index funds with the BB pulling assets to live on. Eventually even index funds will have to sell shares with high gains to pay redemptions.

I still have some MF, but in IRAs. The distributions have been quite large. However, it really has no effect in IRAs. Only total returns are important.

[mpeirce]

Quote:

Originally Posted by bingybear I moved all MF out of my taxable accounts last December (remaining ones that is) and just invest in ETF and individual issues. MF often distribute large distributions after a good run up in value.

Don't ETF's have distributions as well?

For example, I looked up the ETF VTI and the similar MF VTSMX. At Vanguard, they both list similar quarterly distributions (dividends).

What am I missing?

[bingybear]

absolutely. One difference is most of the trading is done between the buyer and seller in the market and does involve the MF company at all. Thus no selling the the fund in these cases. To add or subtract shares can go through authorized participants [AP] and and the fund can distribute higher gain shares when the AP liquidate shares. This can help reduce some of the distributions.

But yes, I do get some dividends (mostly qualified) and CG (mostly long term) with in ER costs me next to nothing. Obviously this is excepting the income ETFs/ETNs that kick off ordinary income by design.

[adrift]

Quote:

Originally Posted by mpeirce Don't ETF's have distributions as well? For example, I looked up the ETF VTI and the similar MF VTSMX. At Vanguard, they both list similar quarterly distributions (dividends). What am I missing?

Distributions consist of dividends and capital gains. You'll get dividends from both mutual funds and ETFs.

This article ETFs: Tax-Efficient, Not Tax-Exempt from Morningstar today has an analysis of ETF capital gains tax efficiency.

[haha]

Given these issues, why does anyone ever buy an equity fund?

Ha

[mathjak107]

For one thing because etf's can be sold short , funds have less volatility . for another reason it may not be such a good thing to put off 30 or 40 years of pent up taxes . like tax loss harvesting , deferring taxes down the road when you may get pushed in to a higher tax bracket wouldn't work out well .

i know as i got closer to retiring my fund mix changed . had i not paid what i did in taxes all along the decades the changeover would have had to be done in bits and pieces . i would have slammed in to 2008 instead of completing everything in just 2007 with not a lot of tax pain nor heavy losses by having to delay ..

also you may qualify for zero capital gains taxes earlier on .

most folks have or should have their equity's in a deferred account where the growth can do some real good being deferred vs bonds or cash at these low levels . even as little as a 2% dividend in a taxable account over decades offsets and wipes out any tax advantage and yes etf's get dividends . .

my managed funds out performed their index's by a lot and those were not available as etf's .

so yep , there are lots of reasons to buy funds . letting the tax tail wag the dog is never a good way to plan things ...

[NW-Bound]

Quote:

Originally Posted by walkinwood My unrealized gains as I said below. (though I understand the confusion) The fund is T. Rowe Price Small Cap Value - PRSVX

I look out of curiosity. On Friday 12/11, it was at $44.38/share, before distributing $8.19/share. That's 18.5%.

I don't think I ever had an MF distribution that large. When I still had earned income, the extra tax hit would hurt like crazy and got me bent out of shape.

Now that I am retired and fairly diversified, I would be able to accommodate such cap gain and dividend without much trouble. I would only have to do a smaller Roth conversion.

[bingybear]

Quote:

Originally Posted by NW-Bound I look out of curiosity. On Friday 12/11, it was at $44.38/share, before distributing $8.19/share. That's 18.5%. I don't think I ever had an MF distribution that large. When I still had earned income, the extra tax hit would hurt like crazy and got me bent out of shape. Now that I am retired and fairly diversified, I would be able to accommodate such cap gain and dividend without much trouble. I would only have to do a smaller Roth conversion.

In 2007 my MF distributions alone would have put me above the 15% bracket. So I tend not to use MF in taxable accounts. Like you, I can take a bit of a distribution and just shift roth conversions, but I could not take 20% -25% - or more distribution from all my taxable investments.
Presently with tax loss harvesting, I can offset LTCG distributions. STCG just act like income, so stuck with those.