Vanguard money funds paying capital gains

The Vanguard Group Inc. is paying out short-term capital gains on three of its money market funds, an unprecedented move sparked by the low-interest-rate environment.

The company announced short-term capital gains, payable last Tuesday, said Emily White, a Vanguard spokeswoman.

The Admiral Treasury Money Market Fund (VUSXX) paid $0.000016 per share, and the Federal Money Market Fund (VMFXX) paid $0.000059 per share. Both the institutional and investor shares of the Prime Money Market Fund (VMMXX), the largest of the three funds, received payouts of $0.000086 per share.

REACTION TO RATES

This is the first time that the three funds have issued short-term capital gains, Ms. White said.

The firm doesn't expect to report further capital gains on the funds, but it is hard to say for sure, she said.

“It is highly unusual for money market funds, but capital gain distributions have become more common,” Ms. White said.

Kate Stalter, an investment adviser at Portfolio LLC, said that the news about Vanguard's short-term capital gains isn't a positive development.

“This is just one more reason in this low-interest-rate environment to stop chasing yield,” she said. “In most cases, we're avoiding money markets.”

Vanguard hasn't heard any reaction from its clients about the reported gains, Ms. White said.

In a note last Tuesday, Dan Wiener, editor of The Independent Adviser for Vanguard Investors newsletter, called the move “a big surprise” to investors in the funds.

“Admittedly, these are fractional amounts, but they still reflect a change, given that … I've never seen this happen at Vanguard, and these are old, old funds,” he wrote.

Most investors are likely unaware of the capital gains issuance and won't be much affected by it, since the gains are so small, Mr. Wiener said in an interview.

Still, he said that he is unsure why Vanguard is pointing to low rates as the cause for the gains, as rates have been low for several years.

According to Vanguard's website, the three funds had a total of $144.4 billion in net assets as of Aug. 31.

Short-term capital gains are taxed at the same rate as an investor's ordinary income.

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