Another strong year for stocks means a lot of happy investors, at least until their 1099s are distributed! Higher equity prices and continued outflows from traditional mutual funds spells trouble for impending capital gains payouts. This may be best illustrated by this figure: of the legacy mutual funds at Carson, there are 10 “tax managed” mutual funds, 6 of which have or are expecting to distribute capital gains. Headlining this figure is the SEI Tax-Managed Volatility Fund that distributed a 17.5% capital gain! Even Vanguard was not able to avoid capital gain payouts this year, the $323 Billion Vanguard Institutional Index fund is expecting to distribute a 1% capital gain for the 6th straight year.
Looking across our legacy platform, there are a number of funds still awaiting payouts as shown in the chart below. A Platform ETF replacement idea is also shown, typically with lower expenses, no expected capital gains payouts, and in a lot of cases better historical performance. Increasingly these ETFs are managed very similarly if not identically to their mutual fund counterpart (particularly with Capital Group/American Funds, T. Rowe Price, and Fidelity).
Sources: Carson Investment Research, Morningstar, Blackrock
The Carson platform is ETF-first in large part due to ETF’s ability to avoid capital gain payouts. It should be mentioned that ETFs are not completely immune to distributing capital gains, but well managed products are able to flush out low-cost-basis positions in-kind without realizing those losses inside the fund and therefore having to pass those on to investors. As more and more ETF issuers come to market, understanding their operational ability to make this happen consistently is an important and often overlooked due diligence characteristic.
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Please reach out to the Carson Investment Research team (investments@carsongroup.com) if you have questions or concerns about legacy mutual fund capital gains or potential ETF replacement ideas.
For more content by Grant Engelbart, VP, Investment Strategist click here.
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