OP: For those of us with VFORX in an IRA, this is very nice news. Had no idea, as I don’t pay attention to it. Thanks for the info!
Why would this be nice news? Fund distributes $10 per share and share price drops by $10. Net nothing.
Those with the target date fund in taxable will owe tax on the distribution.
... ETFs work differently: you're trading your share on an exchange. For you to sell your share someone else has to buy it. Large brokerages can create new shares by trading in the right number of shares of the underlying stocks (which they will do if they see the ETF is trading above its underlying value) and they can also destroy a basket of ETF shares and take the underlying stock back if they see the ETF is underpriced relative to the rest of the market.
It's actually not the brokerage, but a designated list of institutional investors motivated by profit. When their profit is enough, they use derivatives to lock in prices, and then transact a huge block of shares (for VTI it's 100,000 shares or about $24 million worth). If the price is too high, they gather the stocks that make up the ETF, create shares, and sell those shares at a profit. Their act of buying stocks and selling ETF shares drives the prices closer together.
With mutual funds that don't use Vanguard's patented approach, it's a pool of assets. If Vanguard naively held 100% stocks, any selling would require it to sell and realize capital gains. There was actually an S&P 500 fund run by a bank that did this, and suffered in it's first year in existence. But most mutual funds aren't naive, and they keep a mixture of stock, cash and derivatives. They might hold 97% stock, 1% 3x S&P 500, and 2% cash. Most of the time, redemptions come from cash. They can adjust derivatives to keep 100% stock exposure. But sometimes the selling is excessive, and they're forced to sell underlying assets.
A stock + bond fund also has another source of volatility: rebalancing. If stocks drop too far, they might be forced to rebalance. And when stocks recover, to rebalance again.