While it’s sometimes impossible to avoid distributing capital gains, there are measures a fund company can take to try to minimize these events. For example, iShares prioritizes tax management as a part of our portfolio management process, using tax efficiency as an input in our trading process and managing tax lots on an ongoing basis throughout the year. We also use a stand-alone ETF structure, which means that our shareholders are not adversely affected by the actions of others in a related mutual fund share class. Only 5 of our 50 fixed income iShares will make a capital gains distribution in 2012. Comparatively, of the 142 fixed income ETFs that have provided estimates so far, 46% plan to distribute capital gains. For more information on comparing ETFs, click here.
I encourage all investors to do due diligence on the funds you are looking to invest in, and specifically to look at the fund’s tax efficiency track record. Taxes may not be the most exciting topic, but capital gains distributions can take a real bite out of a portfolio’s performance.
Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy.
All registered investment companies, including iShares Funds, are obliged to distribute portfolio gains to shareholders at year-end regardless of performance. Trading iShares Funds will also generate tax consequences and transaction expenses. The information provided is not intended to be tax advice. Tax consequences of dividend distributions may vary by individual taxpayer.
To receive a distribution, you must be a registered shareholder of the fund on the record date. Distributions are paid to shareholders on the payment date. Past distributions are not indicative of future distributions.