Vanguard to pay short-term capital gains on money market funds

This first for the fund company was inspired by low-interest-rate environment

Sep 24, 2013 @ 3:18 pm

By Megan Durisin

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 today, on three of its money market funds, said Emily White, a Vanguard spokeswoman. The Admiral Treasury Money Market Fund (VUSXX) will pay out $0.000016 per share, and the Federal Money Market Fund (VMFXX) will pay $0.000059 per share. Both the institutional and investor shares of the Prime Money Market Fund (VMMXX), the largest of the three funds, will receive payouts of $0.000086 per share.

Ms. White said this is the first time the three funds have issued short-term capital gains. She added that the firm doesn’t expect to report further capital gains on the funds, but it is difficult to say for certain.

“It is highly unusual for money market funds, but capital gain distributions have become more common,” Ms. White said. “It’s a reaction to the interest rate environment.”

Kate Stalter, an investment adviser at Portfolio LLC, said 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,” Ms. Stalter said. “In most cases, we’re avoiding money markets. Clients come to us so they can relax, live out their passions and enjoy their lives without having to worry about things like this.”

According to Ms. White, Vanguard has not heard any reaction from its clients about the reported gains.

In a note this morning, 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,” Mr. Wiener wrote.

Mr. Wiener added in a phone interview that most investors are likely unaware of the capital gains issuance and won’t be much affected by it, since the gains are so small. Still, he said he is unsure why Vanguard is pointing to the low-interest-rate environment as the cause for the gains, since interest rates have been low for several years.

“To say it’s coming from a low-interest-rate environment, that’s like saying the sun was up today,” Wiener said. “It’s been a low interest rate environment for three years.”

According to Vanguard’s website, the three funds contained 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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