Why did my fund unexpectedly drop in value? Posts asking why
The market was up but my fund is (unexpectedly) down
are quite frequent on the Bogleheads forum, particularly in late December. The usual answer to this question is that the fund's value dropped because it paid a distribution.
Fund net asset values and fund distributions
Mutual funds and exchange-traded funds (ETFs) must pay net income and net realized capital gains to their shareholders at least annually. While some do so monthly or quarterly, most do so annually, during the last half of December. Funds gain income from the securities they hold (dividends for funds holding stocks, and interest income for funds holding bonds and money market instruments).[note 1]
Also, funds may realize capital gains when they liquidate holdings. In order for the fund company to avoid having to pay taxes, the law requires that the fund pays these dividends and capital gains to shareholders, so that the shareholders pay any taxes due. In taxable accounts, you will receive a Form 1099-DIV in January for any distribution payments.
If your stock or balanced fund is paying out a dividend or capital gains distribution, or both, the net asset value (NAV) of the fund will drop by the per share amount of the distributions (most bond funds accrue interest so that dividend distributions do not reduce net asset value). Taxes aside, the distributions do not change your economic position, regardless of whether you re-invest the distributions in the fund or take them in cash.
If your fund has a surprising drop in value, follow these guidelines to help figure out what happened:
- Check your online statement. Be aware that the dividend may not be paid until a few days after it is declared.
- Check the fund’s web site. For mutual funds, the ex-dividend date is typically the first business day after the record date.[note 2]
- Check your e-mail. Fund companies routinely send e-mails in advance of paying distributions. Fund holders routinely ignore these e-mails.
- Check out the fund history at the providers website, or financial websites such as Yahoo! Finance or Google Finance. These sites often show the date and amount of distributions paid. Data for past years (dates and amounts paid) may be quite useful for your planning.
If you are invested in a tax-advantaged account with dividends reinvested, none of this really matters, because the distributions are shielded from current taxation. (You might ask yourself why you are paying so much attention to daily price fluctuations.)
In a taxable account, the distribution does matter, because it is an involuntary taxable event. You probably should wait until after the distribution to purchase new holdings in the fund. And, if you are selling the fund in a taxable account, you would want to sell before the distribution in order to avoid paying taxes (at probably less favorable rates) on the distribution. See dates and timing for descriptions of the different dates associated with distributions.
Why does my economic position not change?
If you are reinvesting dividends, and you check before and after the distribution, you will see that you now own a larger number of shares of the mutual fund. When the dividend is paid, the share price drops by the amount of the dividend; but because you reinvested, you own more of those lower-valued shares, and it all balances out.
If you are not reinvesting dividends, then in your statement the total value of your fund falls; but because of the distribution, your money market settlement account now has a higher value, because the dividends were paid into that account.
Of course, the intrinsic value the marketplace puts on each share continuously fluctuates day by day, so the numbers will not add up exactly.
Most published daily returns will adjust for the distribution, so that you will not see the drop. For example, if your fund reported a value of $30.00 on December 19, paid a $2.00 distribution, and reported a value of $28.28 on December 20, the reported daily change will be +0.28 and +1%. If you held the fund and reinvested the distribution, you did gain 1%, so this is the correct number for the fund performance.
- Funds also receive interest income from lending portfolio securities, from earning interest on temporary cash balances, and from amortizing bond discounts and premiums.
- Vanguard provides a link to a Reuters tool for finding historical ex-dividend dates on its Tax Information for Vanguard Funds[dead link] page. To open the tool, click the "Research ex-dividend dates" heading link.
- "26 U.S. Code § 4982 - Excise tax on undistributed income of regulated investment companies". Legal Law Institute, Cornell University Law School. Retrieved December 12, 2023.
- Bogleheads forum topic:
- Why share price may go down when the market's up,[dead link] Vanguard, June 01, 2015. Viewed June 22, 2015.