Bond ETFs and Taxes | ETF Trends

Tax efficiency has been a major selling point for exchange traded funds, but experts believe volatility through the year may inflict some surprising ETF tax consequences.

Relatively safe bond ETFs have attracted more than $32 billion in assets year-to-date, compared to $26 billion for all of 2010, reports Elizabeth O’Brien for The Wall Street Journal. [Deficit Gridlock, Europe Woes Push Treasury ETFs Higher]

Investing pros believe that while the heightened volatility contributed to large gains in may bonds, especially in Treasuries, ETF fund managers had to rebalance fund portfolios to match their target strategies, which may trigger capital gains.

“Investors could be caught off guard,” Jim Lowell, chief investment officer of Adviser Investments, said in the article.

BlackRock’s iShares revealed that its iShares Barclays Aggregate Bond (NYSeArca: AGG) will distribute capital gains this years, WSJ reported. Vanguard also stated that 10 of its bond ETFs plan to distribute capital gains, with the largest coming out of the Vanguard Extended Duration Treasury Idx ETF (NYSEArca: EDV). Additionally, PIMCO announced 17 of its ETFs will make distributions.