Potential Capital Gains Exposure

Potential capital gains exposure (PCGE), estimates the percent of a fund's assets that have unrealized gains.

Unrealized gains signify that the fund holds stocks that have appreciated in value since the fund purchased them. Since these gains have not been realized, they may represent potential tax consequences for the investor if they choose to invest in the fund. If the fund decides to sell the assets that gained in value, they will redistribute those gains to their investors, who will pay taxes on those gains. This may include gains that occurred even before when the investors held shares in the fund.

Morningstar calculates potential capital gains exposure to provide investors insight into a fund’s potential tax efficiency. If a fund has a positive PCGE and decides to liquidate the appreciated assets, any distributions investors receive are taxed at ordinary income rates. A negative PCGE, however, may imply that the fund has some tax losses it can use to offset future capital gains, which could lead to tax efficiency.