Capital gains distribution
A capital gains distribution is a payout a is required to make to its when it realizes net gains from selling securities inside the during the year. Unlike a , where an investor only owes when they personally sell their shares, a passes its realized trading gains through to even if those never sold anything themselves.
Funds typically make these distributions once a year, near the end of the calendar year, based on gains realized from during the prior twelve months. A fund with high , or one that has to sell winning positions to meet a wave of redemptions, can generate a large distribution even in a year when the fund's overall price barely moved. The distribution reduces the fund's per share by the amount paid out, so the is not receiving extra wealth, they are receiving a taxable event on gains the fund already earned inside the .
This is one of the reasons buying a shortly before its annual distribution date can be costly from a tax standpoint, an investor can owe tax on gains that built up before they ever owned the shares. largely avoid this problem because their and redemption process lets them remove appreciated securities from the without triggering a taxable sale, which is why are generally more tax efficient than holding similar .