Key Takeaways

• This year, more ETFs are paying out capital gains than in 2022 and 2023. Nonetheless, ETFs remain more tax-efficient than mutual funds.
• Most ETFs that expect to distribute gains this year were launched within the past two years.
• Sector and international stock ETFs were most likely to estimate capital gains greater than 1% of their net asset value.

Exchange-traded funds’ tax advantage shone through once again in 2024. Less than 4% of the ETFs we surveyed are projected to distribute capital gains this year. Of those, most are projected to pay out less than 1% of the fund’s net asset value.

Bạn đang xem: Good News for ETF Investors: Capital Gains Distributions Remain Low

In total, we surveyed 15 firms and more than 1,800 ETFs, gathering estimated capital gains distribution data. We examined some of the biggest firms in the ETF space, like iShares, Vanguard, and State Street.

What Are Capital Gains Distributions?

Capital gains can happen on several levels for fund shareholders. Investors owe taxes when selling ETFs that have appreciated in value, and fund managers owe taxes on securities they have sold at a profit.

The capital gains are distributed to all shareholders proportionally, even if they don’t sell any shares in the fund. Those distributions are taxable events, unless the ETFs are held in a nontaxable account, such as a 401(k) or IRA. Tax-conscious investors may want to pick ETFs with minimal capital gains distributions.

And the Winner Is …

ProShares’ UltraPro Short 20+ Year Treasury ETF TTT. This ETF is projected to pay out nearly 12% of its NAV in capital gains this year. Close behind is First Trust WCM International Equity ETF WCMI, with nearly 11%.

The ProShares ETF seeks to capture 3 times the inverse of the daily performance of a long-term Treasury bond index. To accomplish this, the fund holds Treasury swaps, a type of derivative.

Xem thêm : Why You Should Be Investing In Actively Managed Funds

Most derivatives, such as swaps, forward contracts, and some options contracts, cannot be traded in-kind. Often, ETFs using these securities must distribute capital gains.

International ETFs, which frequently appear on this list, tend to have larger capital gains. Some international ETFs use derivatives to hedge currency risk. However, that’s not the only reason they are heavily represented.

Many countries, especially emerging markets, don’t allow in-kind transactions. India is one of those countries, and three ETFs tracking that market made the top 10 for distributions as a percentage of NAV.

Sector-Equity Strikes Again

For the second year in a row, sector equity ETFs topped the charts for the number of ETFs distributing capital gains greater than 1%. The top offender, iShares Future Metaverse Tech and Communications ETF IVRS, had large allocations to Chinese and South Korean stocks. Neither country allows in-kind transactions, and the fund is directly invested in local listings, exposing it to capital gains.

Alternative ETFs appeared for the first time in several years. Of the four that made the list, three involved digital asset strategies. Three of the ETFs used derivatives, which often cannot be traded in-kind.

Taxable-bond ETFs represent the largest portion of ETFs distributing capital gains. However, no ETF is projected to distribute more than 1% of its NAV.

IShares topped the list for the number of ETFs distributing capital gains. IShares Future Metaverse Tech and Communications ETF and iShares MSCI India Small-Cap ETF SMIN are projected to distribute more than 5% each to investors, with heavy allocations to China and India—both countries that don’t allow in-kind transactions.

Xtrackers had the highest proportion of funds with capital gains. Nearly all its funds with distributions were the usual suspects—sector equity funds.

Charles Schwab and Goldman Sachs escaped unscathed this year, once again.

Why Do ETFs Have a Tax Advantage Over Mutual Funds?

Mutual funds take cash from investors and use that cash to buy securities. If investors want their money back, the manager will often have to sell securities to raise cash for redemption, which generates taxable gains for the mutual fund.

Unique share creation and redemption drive ETFs’ tax efficiency. Unlike mutual funds, ETF investors do not trade directly with the fund managers. Authorized participants, typically large institutional investors or market makers, are responsible for creating and redeeming shares of an ETF.

APs deliver a basket of securities to the ETF issuer in exchange for new ETF shares, which they then sell to investors. When an investor sells their shares, the AP buys them and exchanges them for the basket of securities from the ETF issuer. This exchange, known as an in-kind transaction, allows ETFs to avoid capital gains since the ETF provider doesn’t transact in cash.

While it’s true that ETFs are generally more tax-efficient than mutual funds, it’s important to remember where these advantages come from. ETFs’ tax benefits aren’t airtight, and taxable investors will still get a bill for regular distributions of income.