Seeking Alpha

Jim Trippon's  Instablog

Jim Trippon
Send Message
Jim Trippon is an Amazon.com bestselling business and finance author, a practicing CPA, and a fee based investment advisor. His portfolio of companies includes J.M. Trippon & Company CPA, Trippon Wealth Management & Trippon Financial Publishing. Jim has dedicated his business career to... More
My company:
Trippon Financial Research, Inc.
My blog:
Global Profit$ Alert
My book:
Stay Rich Forever: Retirement Planning Secrets of Millionaires and How They Can Work For You!
  • Be Ware Of ETF Distributions 0 comments
    Jun 27, 2011 8:38 AM | about stocks: VWO, EEM
    Obviously, I'm a big fan of exchange traded products and I don't mince words about those feelings, but like almost everything else in this world, ETFs are not perfect. Hence, just two months removed from paying Uncle Sam my 2010 tax tab, I'm bringing up the issue of ETF distributions today.

    Distributions are supposed to be and are for the most part, the primary advantage of owning ETFs over mutual funds. When a mutual fund manager sells a stock at a profit, the capital gains tax on that profit is passed on to you, the investor. That's a bad deal, particularly when considering that most mutual funds often feature much higher fees than comparable ETFs.

    Unfortunately, taxable distributions are a fact of life in the ETF universe as well. At the end of May there were above 1,230 ETFs and ETNs trading on U.S. exchanges and I'd venture to say, albeit unscientifically, that the vast majority, probably in the neighborhood of 70% to 75% give or take a few percentage points, don't subject investors to taxable distributions.

    As I am so fond of saying the devil is in the details and this is a situation that can be avoided with just a few minutes of homework because essentially every ETF that MIGHT subject investors to taxable distributions makes note of this fact in the fund's prospectus. Again, ETF prospectuses aren't the most exhilarating reads on the shelf, but reading them does help your pocketbook.

    There is another way around the ETF distribution situation, though I can't say I'm a big fan of it. If you are subject to a big distribution, say 25% or more, the fund's net asset value should drop by the same dollar amount and if you bail-out of that ETF before the end of the year, the loss you've absorbed should offset the distribution.

    I also thought it was timely to bring up the issue of ETF distributions because two of the most popular ETFs on the market could be subject to distributions very soon. MSCI, the company that provides indexes for tons of ETFs, is expected to announce market reclassification on Tuesday evening, meaning some emerging markets could be promoted to developed market status.

    This is an issue shareholders in the Vanguard MSCI Emerging Markets ETF (NYSE: VWO) and the iShares MSCI Emerging Markets Index Fund (NYSE: EEM), two of the most popular ETFs on the market as ranked by assets under management, need to be aware. Why? Glad you asked.

    The reason is simple. South Korea and Taiwan, each of which combine for over 26% of the country allocations in both EEM and VWO, could very well be promoted to developed market status. If that happens, and I emphasize if as I am writing this well advance of the MSCI release, iShares and Vanguard will be forced to sell South Korean and Taiwanese stocks. Those are both cash markets and that sets investors up for a potential taxable distribution.

    Now I'm not saying run out and sell EEM or VWO just because of the distributions. Frankly, I think these two ETFs could become more attractive if they fill the gaps created with the loss of South Korea and Taiwan with countries like Colombia, Poland and Russia. That's just my two cents. In the meantime, endure the distributions in the case of EEM and VWO and make it a note to avoid them in the future.


    Click HERE to learn more about the ETF Profit Report - An ETF Trading Service For Serious ETF Investors
    How To Profit From "Quick Strike" ETF Trading

    We recently bagged gains of 16.2%, 6.78%, 1.34%, 5.85%, 7.77%, and 10.7% for our subscribers.

    In today's low interest rate backdrop, those gains would not be bad if they were annual.

    But these happened in the last three weeks.

    Click HERE for more details.


    For more information and archived issues, visit http://www.globalprofitsalert.com

    Global Profits Alert (GPA) is published by Trippon Financial Research, Inc. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Todd Shriber, Kelley Damiani and J. Daryl Thompson.

    Would you like to republish this article? Global Profits Alert issues can be republished, as long as the republished issues contain the name of the author(s) and the following short paragraph:

    This information was brought to you by GlobalProfitsAlert.com, a publication of Trippon Financial Research, Inc. GlobalProfitsAlert.com publishes information on Investing in the China stock market and emerging markets, dividend stock and income investing, exchange traded funds (ETFs), green energy stocks, technology stocks, global market trends and other investment information. To view archives or subscribe, visit http://www.globalprofitsalert.com

Back To Jim Trippon's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.