MUTUAL FUND HOT POTATO STRATEGY ENCORE
So your mutual fund lost money and distributed capital gains?
If we did not get your attention with the first sentence – Try this: The top quartile of US equity mutual funds distributed a capital gain of 20% for 2018! We first covered this phenomenon in December: TAX BASIS IN MUTUAL FUNDS: THE HOT POTATO STRATEGY
However, these taxes were most likely realized by another investor that pulled his money out of the fund. The chart below providing this data includes all funds, indexed or active. When we focus on actively managed funds only, the numbers become even more startling because index funds can be run with greater tax efficiency. The numbers for 2019 are looking pretty scary as we think the trend of outflows is going to pick up steam and the tax impact will be magnified.
As you’ll see below, 2018 comes along with 14.87% in unrealized capital gains for the assets remaining in the mutual funds. Furthermore, during 2018 the funds only showed outflows or 1.52%, with only 0.16% coming in the 4th quarter. If the outflows have just barely begun, as we contend, there is a total of $851 billion dollars of gains yet to be realized. As the outflows accelerate, the capital gains will increase. Hot Potato Hot Potato!
ETFs own just under 10% of US stocks, while mutual funds come in at a whopping 23% ownership. We’re betting “the great shift” to ETFs will continue! So, you might be asking yourself, what can you do? One of the hardest parts of analyzing mutual funds is that their holdings are typically only disclosed on a quarterly basis. This makes apples to apples comparisons difficult. However, we have worked with the ETF Research Center (see www.etfrc.com – registration is required) to develop a tool to help you identify a worthy replacement ETF for your capital gain spewing equity fund. It measures the overlap of a specific mutual fund with a selection of ETFs.:
|Aware Ultra-Short Duration Enh Inc ETF||AWTM|
|JPMorgan Core Plus Bond ETF||JCPB|
|Amplify International Online Retail ETF||XBUY|
|Tortoise Cloud Infrastructure||TCLD|
|Tortoise Digital Payments Infrastructure||TPAY|
TETF INDEX PERFORMANCE DATA
Returns as of February 4, 2019.
Inception Date: April 4, 2017. Index performance is for informational purposes only and does not represent the ETF.
Indexes are unmanaged and one cannot invest directly in an index.
Past performance is NOT indicative of future results, which can vary.
TETF INDEX PERFORMANCE VS LEADING FINANCIAL INDEXES
As of February 4, 2019.
TOP 10 HOLDINGS PERFORMANCE
BOTTOM 10 HOLDINGS PERFORMANCE
As of February 4, 2019. Source: Morningstar Direct.