The Vanguard Group, the No. 3 U.S. exchange-traded fund firm by assets, said it expects to have capital gains distributions on 12 of its 65 U.S.-listed ETFs at the turn of the year, with all of the tax consequences focused on the fixed-income space.
Vanguard is paying cap gains on all but one of its bond funds, a reflection of a post-crisis environment that has seen investors pile into fixed income in one-way traffic that has limited many managers’ ability to offset cap gains through sales of available low-cost-basis securities at the portfolio level.
Investors have to pay federal taxes on capital gains distributions—something that’s in sharper focus these days given that an expected overhaul of the U.S. tax code next year could mean significantly higher cap gains taxes starting in 2013.
ETFs are often heralded for their tax efficiency, but that doesn’t mean they are exempt from paying capital gains distributions when profits from the sale of securities have to be recorded at the fund level. More to the point, this year’s trend of bond funds paying cap gains has been in place for the past few years, given the huge bond market rally since the market crash of 2008.
Other ETF providers who have already reported cap gains reinforced that fixed-income-focused trend, saying capital gains distributions will focus on bond funds. Those include Guggenheim and iShares.
Vanguard reporting cap gains distributions on all but one of its bond funds—the Vanguard Short-Term Inflation-Protected Securities ETF—is in line with the high percentage of Guggenheim bond funds that are paying capital gains.
On the other hand, Vanguard is paying cap gains on a much higher percentage of its bond funds than what iShares will pay. San Francisco-based iShares has said it will pay cap gains on just five of its 52 bond funds.
No Cap Gains On Vanguard Equity ETFs
Conversely, Vanguard’s 52 equities ETFs—including two dividend-focused funds—won’t be paying any capital gains, putting right in line with the general feature of index ETFs having relatively few cap gains distributions at the fund level.
In fact, having zero cap gains distributions on equity funds puts Vanguard well ahead of the industry average.
Last year, only 20 of 756 equity ETFs paid distributions—less than 3 percent of all equity ETFs, and the gains they did pay out were tiny, according to data compiled by IndexUniverse.
By comparison, Morningstar data show that 24 percent of equity mutual fund share classes made a capital gains distribution last year, and nearly two-thirds of these share classes distributed more than 2 percent of their assets as capital gains.
Vanguard’s ETFs paying distributions and the payouts are as follows:
- Vanguard Extended Duration Treasury ETF (EDV), $1.32/share short-term gains and $2.92/share long-term gains, for a total distribution of $4.24/share
- Vanguard Intermediate-Term Bond ETF (BIV), $0.12/share short-term gains and $1.42/share long-term gains, for a total distribution of $1.54/share
- Vanguard Intermediate-Term Corporate Bond ETF (VCIT), $0.28/share short-term gains and $0.17/share long-term gains, for a total distribution of $0.45/share
- Vanguard Intermediate-Term Government Bond ETF (VGIT), $0.18/share short-term gains and $0.43/share long-term gains, for a total distribution of $0.61/share
- Vanguard Long-Term Bond ETF (BLV), $0.23/share short-term gains and $1.09/share long-term gains, for a total distribution of $1.32/share
- Vanguard Long-Term Corporate Bond ETF (VCLT), $0.20/share short-term gains and $0.03/share long-term gains, for a total distribution of $0.23/share
- Vanguard Long-Term Government Bond ETF (VGLT), $0.02/share short-term gains and $0.12/share long-term gains, for a total distribution of $0.14/share
- Vanguard Mortgage-Backed Securities ETF (VMBS), $0.26/share short-term gains and $0.01/share long-term gains, for a total distribution of $0.27/share
- Vanguard Short-Term Bond ETF (BSV), $0.03/share short-term gains and $0.18/share long-term gains, for a total distribution of $0.21/share
- Vanguard Short-Term Corporate Bond ETF (VCSH), $0.04/share short-term gains and $0.09/share long-term gains, for a total distribution of $0.13/share
- Vanguard Short-Term Government Bond ETF (VGSH), $0.03/share short-term gains and $0.07/share long-term gains, for a total distribution of $0.10/share
- Vanguard Total Bond Market ETF (BND), $0.17/share short-term gains and $0.26/share long-term gains, for a total distribution of $0.43/share
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