WisdomTree Investments (NasdaqGS: WETF), the fifth-largest U.S. issuer of exchange traded funds, could distribute capital gains on 17 of its ETFs this year.

For the most part, ETFs that issue capital gains distributions typically experience greater trading activity, use futures contracts, see a significant change up in its underlying index or track fixed-income securities.

ETFs that issue capital gains distributions are seen as an outlier. The ETF structure would usually negate any taxable events when diminishing or increasing holdings. Specifically, many passive ETFs inherently have low turnovers. More importantly, ETFs have to ability to redeem securities “in-kind” where fund operators can sidestep capital gains by swapping securities for other securities without incurring large capital gains. [ETFs & Mutual Funds: Lump of Capital Gains in Your Stockings]

In contrast, traditional mutual funds typically redeem securities by selling off a position for cash, triggering a taxable event. [Worried About Year-End Capital Gains Taxes? ETFs May Help]

For the most part, ETFs that issue capital gains distributions typically experience greater trading activity, use futures contracts, see a significant change up in its underlying index or track fixed-income securities.

“Overall, 7% of the 324 iShares fundsoffered by Blackrock (BLK) are expected to pay a capital gain, while 13% of Vanguard’s 68 ETFs are likely to do so, according to the respective companies’ data. At WisdomTree, it is 17% (for the entire fund-by-fund list, read here),” reports Johanna Bennett for Barron’s.

 

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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