Specifically, leveraged and inverse ETFs that use futures contracts can incur capital gains distributions. Moreover, currency-hedged equity ETFs may see capital gains distributions, with managers triggering gains by rolling currency futures and forward contracts hedges as the U.S. dollar strengthened this year.
If a benchmark index removes and replaces a large chunk of its holdings, a passive ETF that tracks the index may also have to swap around its components. For instance, the MSCI recently upgraded Qatar and the United Arab Emirates from frontier to emerging-market status. [UAE ETF Surges Ahead of MSCI Upgrade]
Additionally, bond ETFs will regularly have maturing debt holdings, and during the recent falling-rate environment, providers had to sell the bonds at a gain. Nevertheless, capital gains are still fairly minimal. For example, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) has an estimated capital gains distribution of 0.10% of its net asset value and the Vanguard Total Bond Market ETF (NYSEArca: BND) has an estimated 0.27% of NAV.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.