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Vanguard GNMA Inv Message Board

  • dunphy Mar 1, 2012 10:07 PM Flag

    Dumb Question

    I apologize for the dumb question as I am new to investing in bond funds. Does the fund price automatically decrease when the monthly dividend is issue? Also, same question when capital gains is issued?

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    • Here's a simple way to look at it : NAV is the net assets (i.e., assets - liabilities) divided by total number of shares. The interest that must be paid to the VFIIX holders is a liability. To pay the liability, the assets must decrease by a corresponding amount. So the numerator of the NAV equation stays constant, and of course the denominator (# of shares) did not change directly as a result of paying the monthly dividend. HOP

    • Found this explanation/example from a website:
      When a distribution is made on a fund’s “reinvest date” (which is also known as ex-date, or ex-dividend) the Net Asset Value (NAV) goes down by the same amount. However, even though the NAV may go down, unless there is a change to the fund’s underlying securities, the value of your account will not be affected.

      For example: Assume you own 100 shares of a fund with an NAV of $10, your investment is worth $1,000. The fund declares and makes a distribution of $0.10 per share. On the reinvest date, the fund's NAV drops to $9.90 per share, assuming the shares did not change in value due to market conditions. If you reinvest your $10 distribution (100 shares x $0.10 per share), you buy an additional 1.01 shares at $9.90 per share. The value of your account is still $1,000 (101.01 shares x $9.90 per share).

      If you do not reinvest your distribution, the value of your account would be worth $990 (100 shares x $9.90 per share). But you would not have lost any money because you will receive the $10 distribution, either by check, directly into your bank account or invested in another Domini Fund, however you choose. HOP

    • You can see the actual results yourself using the "historical prices" feature of the yahoo stock board. If you check the 12/29/11 row, you will see that VFIIX paid a $0.128 end of year distribution (EOYD). On 12/28/11, the pre-adjusted closing price (PACP) was $11.18. On 12/29/11, the PACP was $11.06. So the NAV dropped $0.12, which is in line with the distribution amount. Similarly, on 12/30/10, the PACP on 12/29/10 was $10.95, the EOYD was $0.231, and the 12/30/10 PACP was $10.71, which is again what one would expect. HOP

    • It could but Vanguard does have a minimum time to hold this fund in order to avoid such volatility. I believe their hold time is 30-days. They also seem to keep track of folks who frequently trade shares. Restrictions should be on the prospectus. FYI though, I think the drop overnight was one cent but the divy was ~three...


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