Capital Gains: When Being Below Average Is A Good Thing

From 2008 onward, U.S. market returns have been strong and consistent, and 2021 was no different, with the S&P 500 returning a solid 29%. There should be nothing to complain about, right? That’s a true statement until the 2022 tax season takes a bite out of your gains.

In 2021, 81% of U.S. equity funds made a capital gain distribution and, on average, that distribution was 12% of NAV (net asset value). Since a distribution is a taxable event, your non-qualified investments will likely generate a larger tax bill than you may be used to seeing.

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Capital gain distributions
Source: Russell Investments and Morningstar Direct: U.S. Stocks Returns = S&P 500 Index; U.S. equity funds: Morningstar broad category ‘US Equity’ (large/mid/small V/B/G) which includes mutual funds and ETFs (and multiple share classes). Average U.S. equity fund Distribution: Capital Gains/Share (% of NAV) based on Morningstar U.S. OE Mutual Funds and ETFs. % = total cap gain distribution ÷ respective pre-distribution NAV.