However, this is not to say ETFs are bullet-proof to capital gains as there are situations where ETFs could be forced to make distributions. For instance, actively managed ETFs typically have higher portfolio turnovers compared to passive index funds. Other areas that ETFs have also seen distributions include fixed-income assets, leveraged/inverse, alternatives and currencies.
ETFs may have to sell positions for a number of reasons to maintain their target exposures. For example, the bond market has experienced a robust rally, and ETFs that need to reallocate positions to maintain certain exposure to credit quality or an average maturity would sell bonds that have appreciated in value.
Nevertheless, for those worried about potential capital gains distributions, each ETF provider releases a list of funds that incur capital gains annually.
For more information on taxes in ETFs, visit our taxes category.
Max Chen contributed to this article.