updated its cap-gains distribution estimates Monday. Despite the market's swoon, the picture doesn't look much brighter.
September the firm, known for low-cost index investing and tax efficiency, announced that half of its 54 stock and balanced funds were anticipating making taxable capital-gains distributions. Vanguard rightly made the announcement to keep investors from buying shares of funds set to pay a gain -- this might leave them paying taxes on other investors' gains.
On Monday the firm announced that estimates through Oct. 31 indicate 39 of its stock and balanced funds are estimated to pay a cap-gains distribution, up from 27. Cap-gains are considered big when they top 10% of a fund's
net asset value (NAV) or share price. Seven Vanguard funds' distributions equal 10% or more of their NAV, up from five back in September.
Those funds and their gains as a percentage of their NAV are:
Vanguard Explorer (18%),
Vanguard Strategic Equity (17%),
Vanguard U.S. Growth (17%),
Vanguard Small-Cap Index (12%),
Vanguard Windsor (11%), Vanguard Morgan Growth (10%) and
Vanguard Extended Market Index (10%).
When a fund's realized gains outweigh its accumulated losses, funds have to pay them out to shareholders. Most investors reinvest these gains in additional fund shares, but if you don't own the fund in a tax-deferred account like a 401(k) or individual retirement account (IRA), you have to pay taxes on the gains. After last year's steep gains many funds are paying out big gains this year.
Vanguard funds' record dates -- the day on which fund shareholders will receive its distribution -- fall on one of the following: Dec. 14, 19, 21 or 26. Between now and then, each fund's cap gain could grow or decline, depending on manager moves and market activity.
The firm's gains, while higher than usual, are in-line or below many of those paid out by
other firms. Of the 39 Vanguard funds expected to pay out gains, 23 are estimated to make payouts equaling 4% or less than the fund's NAV.
Most investors' cap-gains tax rate is 20%. So, an investor owning 100 shares of the Vanguard Explorer, currently expecting a $14.07 a share distribution, would owe Uncle Sam about $280 if he or she didn't offset the gain with losses.
The Vanguard 500 Index fund, the largest fund in the nation with $104.8 billion in its coffers, isn't expected to pay a cap-gains distribution this year.