Vanguard funds: distribution methodology

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The Vanguard fund distribution articles contain data obtained either directly from the fund's annual report, or derived from the annual report data with assumptions. This article explains the methodology and assumptions used.

Vanguard FTSE All-World ex-US Small-Cap Index Fund tax distributions is used as a representative example.

Dividends

Dividends are obtained from the fund's annual report, not the fund's web site. The web site's stated dividend may not appear in the fund's current annual report as explained by Vanguard in its financial statement footnotes:

Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

Translation: If the fund does not have a fiscal year that corresponds with the calendar tax year, the dividend may not correspond with a given fund's December year-end dividend distribution.

For example, a fund may have a fiscal year ending in August 2010 or October 2010. Thus, the reported income reflects any dividend earnings accrued or distributed during the fall of 2009 and the months in 2010 prior to the end of the fiscal year. By law, a fund must distribute all realized income. Therefore, if a fund with an August or October fiscal year (FY) distributes a dividend or a capital gain in December 2010, the dividends and gain will be reflected in the dividends and capital gains in the FY 2011 annual report.

Vanguard's annual report defines Dividend Yield as follows:

Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.

Translation: Dividend is actually a yield, and is reported in annual reports as the Ratio of Net Investment Income to Average Net Assets. These reported figures are a permanent record of the long-term history of distributions which, along with other accounting data, can provide insight into the fundamental drivers behind distributions, as well as show the potential for future distributions. Reported yield numbers are convenient when researching for 10-15 years of fund yield data, which are filed in the SEC's EDGAR database.[1]

For example, Vanguard FTSE All-World ex-US Small-Cap Index Fund Investor Shares (VFSVX) made distributions in December 2009. The 2010 fiscal year began on October 31, 2009 so these distributions appear in the 2010 annual report. For corroboration, compare these distributions to the 2010 Certified Shareholder Report:[2]

  • Dividend of $0.31400 on 12/22/2009 matches with Dividends from Net Investment Income (.314)
  • Short Term capital gains (ST Cap Gain) of $0.20900 on 12/22/2009 matches with Distributions from Realized Capital Gains (.209)

The dividend yield is 1.89% (Ratio of Net Investment Income to Average Net Assets).

Funds with a December 31 fiscal year: The per share dividend income and distributed net income figure are usually very close and discrepancies are likely the result of small "supplementary" distributions the funds often make during the early months of the ensuing year.

Capital gains

Capital gains are derived from annual reports, and are calculated by dividing the dollar capital gain distribution by the average net assets of the fund, derived from annual NSAR reports.

Expressing the capital gain distribution as a "yield" allows one to conceptualize the distribution in a consistent, familiar metric similar to the dividend yield percentage (above).

From the 2010 (VFSVX) Certified Shareholder Report[2]:

  • Statement of Changes in Net Assets, Year Ended October 31, 2010, Total Distributions ($000) = (7,548) = -$7,548,000 (shown as a negative number)

The Form NSAR-B 2010-10-31 answer file contains: 075 B000600 559740,[3] which is an average net asset of $559,740,000

1.35% (short term capital gain) = -(-$7,548,000) (total distributions) / $559,740,000 (average net assets) * 100%

Qualifying dividends

Qualified Dividend Income (QDI) is listed in the annual report in an unaudited statement following the auditor's report. This lists the total amount of distributed dividends which were QDI in the fiscal year; thus, for a fund with annual distributions and a fiscal year ending before the record date, the QDI will be the amount distributed in the previous calendar year.

The percentage of dividends which are qualified is the ratio of the reported QDI to the reported income distributions. Since short-term gains are reported as non-qualified dividends for tax purposes, the percentage of reported dividends which are qualified is the ratio of the reported QDI to the reported income plus short-term gain distributions.

From the 2010 (VFSVX) Certified Shareholder Report, Special 2010 tax information (unaudited): The fund distributed $2,342,000 of qualified dividend income to shareholders during the fiscal year.

From the Estimated year-end distributions for Vanguard funds: QDI = 74%

Foreign tax credit

The foreign tax credit information for the fiscal year is listed in the annual report in an unaudited statement following the auditor's report, which lists the foreign source income and the foreign tax paid. The taxable income realized by the fund is thus the income received plus the foreign tax paid.

The credit (assuming that the investor can deduct the entire tax, which most investors can do) can be estimated by:

  1. Dividing the foreign tax paid by the average net assets of the fund.

The average net assets figure is taken from the SEC's EDGAR database and the NSAR reports.

The numbers in the annual report are the foreign income and foreign tax paid during the fiscal year; this will only correspond to the numbers on an investor's Form 1099 if the fiscal year matches the calendar year.

From the 2010 (VFSVX) Certified Shareholder Report and the 2010-10-31 EDGAR NSAR report:

Average Net Assets: $559,740,000
Special 2010 tax information (unaudited): The fund designates to shareholders foreign source income of $12,638,000 and foreign taxes paid of $1,024,000.

Foreign tax credit:

0.18% (Foreign tax credit) = 1,024,000 (Foreign tax) / 559,740,000 (Average Net Assets) * 100%

See also

References

  1. For example, to locate the annual reports for VFSVX:
    1. Search the Next-Generation EDGAR System, enter the ticker symbol: VFSVX
    2. Select 0000857489 (see all company filings)
    3. Search for Filing Type: N-CSR, which displays historical reports from present back to 2003. (Certified Shareholder Report)
    4. Search for Filing Type: N-30D, which displays historical reports from 1994 to 2003. (Annual and semi-annual reports mailed to shareholders [Rule 30d-1])
    Also, one can use Vanguard SEC filings to quickly find the proper links to annual report documents.
  2. 2.0 2.1 The SEC filing of Vanguard's annual report. FTSE All-World ex-US Small-Cap Index Fund --> Financial Highlights --> Investor Shares --> Year Ended October 31, 2010.
  3. EDGAR database gives a brief overview of how this data was obtained. 075 is the answer to Form Question #75: State the fund's average net assets, B000600 identifies the FTSE small-cap index fund, 559740 is the value.