How I Made $5000 in the Stock Market

Vanguard Funds, Others Are Issuing Capital Gains for 2025. This Is Gonna Hurt.

Nov 17, 2025 14:40:00 -0500 by Ian Salisbury | #Mutual Funds

Vanguard is known for its skill in avoiding capital gains for investors in its funds. (Hannah Beier/Bloomberg)

Key Points

For mutual fund investors, the final months of a big up year for the stock market can carry a hidden barb: capital gains. This year, plenty of investors will feel the sting.

With the S&P 500 up 14%, it has been a great year for the stock market. That means many mutual funds have made winning trades, whether their portfolios actually beat the market or not. That success translates into capital gains, which often means a tax bill for people who have shares in the funds.

Each calendar year, mutual funds are required to “distribute” capital gains to fundholders, who then must report them to the Internal Revenue Service and pay any relevant taxes. That is regardless of whether investors actually received a cash payout they could spend, or automatically reinvested the money in the fund, as most do.

In a report last week, Morningstar compiled a list of hundreds of mutual funds that will be distributing capital gains to investors this year. A handful of funds expect to distribute gains equal to more than 25% of their net asset value. That would mean investors may have to report a capital gain to the IRS equal to one-fourth of their entire investment in the fund.

Among these funds were the Royce SMid-Cap Total Return Fund, with an estimated distribution of 83% of its net asset value; AB Sustainable US Thematic Portfolio (55%); Federated Hermes International Growth Fund (48%); John Hancock Equity Income Fund (34%); and many more.

Even some money-management companies known for their skill at avoiding the payouts had funds with significant capital gains this year. Vanguard, the largest U.S. fund company by assets, said more than two dozen of its funds would pass out gains, including the Vanguard Mid-Cap Growth Fund, with a gain equal to more than 17% of its NAV; Vanguard PrimeCap Core Fund (15%); and the Vanguard International Value Fund (14%).

“Capital gains distributions are normal part of mutual fund operations.” said Vanguard head of active equity product Ryan Barksdale, in a statement. He added that Vanguard Mid-Cap Growth’s unusually large distribution this year was in part because the fund switched management teams, and the new subadvisor made trades in order to implement their own investment strategy.

Tremblant Capital took over from previous subadvisors Frontier Capital Management and Wellington Management in September.

Vanguard’s traditional success on the capital gains front is partly because many of its largest funds are index funds, which seek to track the market, rather than buying and selling to lock in gains. A second factor is the special legal structure of Vanguard exchange-traded funds.

Vanguard index ETFs are typically set up not as stand-alone funds but as share classes of its index mutual funds. ETFs operate under a different set of legal rules, which allows the index mutual funds to eliminate some capital gains they might otherwise have to distribute.

Good news for investors: The SEC recently made a legal tweak that could allow many more fund firms to copy Vanguard’s ETF share-class design in the future.

While a big capital gain suggests a mutual fund has earned a solid total return for the year, it doesn’t guarantee those returns beat those of the broader market. With the S&P 500’s performance driven by just a few big tech stocks, it has been hard for large-cap U.S. portfolio managers to keep pace without placing outsize bets on market leaders like Nvidia or Alphabet.

Index funds’ relative ability to avoid recognizing capital gains, plus the fact that the S&P 500 is especially hard for active managers to beat these days, may be two reasons to stick with passive investing.

Write to Ian Salisbury at ian.salisbury@barrons.com