This is the time of year when you need to be extra careful about what you invest in, especially when you’re buying a so-called passive index fund that tracks the S&P 500.
Add one more issue to the list: “Passive” investors paying for someone else’s actions.
Recently, the PNC S&P 500 Index Fund announced it will pay out $4.19 in cap gains per share, as pointed out in by Jason Zweig in his weekly WSJ column The Intelligent Investor.
“This week, the fund’s per-share value was around $19. So, even if you never sold a share, the fund will pay out nearly 22% of your total investment as a taxable gain,” writes Zweig.
Talk about coal in your stocking.
How can that happen?
In general, when investors exit a fund, it may cash out of some of its holdings, potentially generating a taxable gain that must be paid out to the remaining shareholders.
In recent years, at least, more investors have wanted to buy index funds than sell, tending to make such portfolios unusually tax-efficient. Vanguard 500 Index Fund hasn’t paid out a capital gain since December, 1999, according to Morningstar; State Street Institutional S&P 500 Index Fund hasn’t paid one since December, 2000.
A spokesman for PNC Funds declined to comment.
However, investors withdrew $63 million from the fund, or 38% of its assets, over the 12 months through Sept. 30, Morningstar estimates.
The manager of an index fund doesn’t have much flexibility on which shares to sell when investors want their money back, says Mark Wilson, president of Mile Wealth Management in Irvine, Calif., whose website CapGainsValet.com warns about taxable payouts.
That’s because such a portfolio needs to hold stocks in similar proportions to the index it’s seeking to match. So the manager can’t always sell selected holdings at a loss that would offset gains elsewhere. Instead, he or she has to sell pretty much across the board, which can generate unwanted capital gains.
E.J. Smith - Your Survival Guy
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