As of early December, 15 ETF providers published capital gains estimates for the year, including BlackRock’s iShares, Vanguard, State Street Global Advisors, Invesco or formerly PowerShares, Charles Schwab, First Trust, WisdomTree, VanEck, PIMCO, DWS or formerly Deutsche Asset Management, Fidelity, Goldman Sachs, Global X and OppenheimerFunds.
These 15 fund sponsors represented 1,290 ETFs and $3.4 trillion in assets under management. Of the ETFs in question, 74 or only 5.7% of the total are expected to distribute capital gains for 2018. Furthermore, the percentage of ETFs distributing capital gains is lower than the estimated distribution in both 2017 of 7.7% and 2016 of 7.0%. Only 14 of the 1,290 ETFs this year is expected to show capital gains distributions of over 2% of the fund’s NAV as of the end of November.
ETFs are not immune to capital gains distributions. Some fund strategies typically exhibit a greater likelihood of capital gains distributions. For example, currency-hedged strategies have a higher proportion of funds that distribute capital gains due to the underlying currency swaps. There are several defining characteristics that make some ETFs more prone to issue capital gains. Specifically, ETFs that use derivatives that periodically reset are susceptible to capital gains distributions, which usually includes currency-hedged strategies. Additionally, bond funds can also be more susceptible as funds must sell bonds upon maturity, which can result in a gain.
“Most ETFs, especially those that track broadly diversified, market-cap-weighted indexes, are very tax-efficient. Exchange-traded funds that move beyond the area of plain-vanilla may be more susceptible to capital gains distributions. Tax-conscious investors would do well to understand the tax implications of more complex ETF strategies, and scrutinize the tax record of these strategies before investing,” McCullough said.
For more information on ETFs, visit our ETF 101 category.