By Daniela Pylypczak
The year-end periods provides the ETF industry with a couple of opportunities to flex its collective muscle; performance comparisons generally tend to favor those products with lower expense ratios–a defining feature of exchange-traded funds. But early January also puts another benefit of exchange-traded products into focus: enhanced tax efficiency relative to traditional mutual funds. The nuances of the exchange-traded structure have the potential to bring additional tax efficiencies to investors thanks to the availability of an “in kind redemption” that ultimately gives investors more control over the timing of tax obligations. Mutual funds, on the other hand, have a nasty tendency to stick remaining shareholders with tax liabilities incurred as a result of redemptions by others–a development that can obviously be undesirable.
ETFs won’t allow investors to skip out on their taxes, but this product structure can deliver more control and greater efficiency in this regard. It is important to note, however, that not all ETFs are created equal when it comes to tax efficiency. Certain asset classes are less efficient than others; bond ETFs, for example, should be expected to incur capital gains taxes with some regularity.
Below, we run through the capital gains results for several of the largest ETF issuers, beginning with the market leader:
iShares, which accounts for more than 40% of the U.S. ETF industry, was close to perfect from a capital gains tax perspective in 2011; 231 of the 233 iShares ETFs did not make capital gains distributions. The two that did were both bond funds, and the distributions made were minor:
State Street, the firm behind the two largest ETFs by total assets, had several ETFs report capital gains payouts for 2011:
- SPDR Barclays Capital Intermediate Term Treasury ETF (NYSEARCA:ITE)
- SPDR Barclays Capital Aggregate Bond ETF (LAG)
- SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (NYSEARCA:SHM)
- SPDR Barclays Capital Mortgage Backed Bond ETF (NYSEARCA:MBG)
- SPDR Barclays Capital Intermediate Term Corporate Bond ETF (ITR)
- SPDR Barclays Capital Convertible Bond ETF (NYSEARCA:CWB)
- SPDR Barclays Capital Short Term Corporate Bond ETF (SCPB)
- SPDR Nuveen High Yield Municipal Bond ETF (NYSEARCA:HYMB)
- SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH)
- SPDR S&P International Consumer Discretionary Sector ETF (NYSEARCA:IPD)
- SPDR S&P International Technology Sector ETF (NYSEARCA:IPK)
- SPDR S&P Health Care Equipment ETF (NYSEARCA:XHE)
- SPDR S&P Emerging Markets ETF (GMM)
- SPDR Emerging Asia Pacific ETF (NYSEARCA:GMF)
- SPDR S&P International Small Cap ETF (NYSEARCA:GWX)
- SPDR S&P International Mid Cap ETF (NYSEARCA:MDD)
- SPDR S&P Emerging Markets Small Cap ETF (NYSEARCA:EWX)
Vanguard, the ETF issuer that led the industry in inflows in 2011, reported capital gains distributions for ten of its bond ETFs in 2011. Vanguard equity ETFs were perfect on the capital gains front, with no capital gains reported:
The PowerShares ETF lineup was also close to perfect on capital gains in 2011; only three of the company’s ETFs–representing less than 1% of franchise assets–reported long-term capital gains:
- Active U.S. Real Estate Fund (NYSEARCA:PSR): Reported $0.0801 per share
- CEF Income Composite Portfolio (NYSEARCA:PCEF): Reported $0.0142 per share
- S&P 500 Buy Write Portfolio (NYSEARCA:PBP): Reported $0.10978 per share
- Brazil Small Cap ETF (NYSEARCA:BRF): Short-term & long-term
- Gaming ETF (NYSEARCA:BJK): Long-term
- India Small Cap Index ETF (NYSEARCA:SCIF): Short-term
- Junior Gold Miners ETF (NYSEARCA:GDXJ): Short-term & long-term
- Latin America Small Cap ETF (NYSEARCA:LATM): Short-term
- Short Municipal Index ETF (NYSEARCA:SMB): Long-term
- LatAm Aggregate Bond ETF (BONO): Short-term
- CEF Municipal Income ETF (NYSEARCA:XMPT): Short-term
The largest provider of leveraged and inverse ETFs reported zero capital gains distributions in 2011.
- WisdomTree Dreyfus Chinese Yuan Fund (NYSEARCA:CYB)
- WisdomTree Dreyfus Brazilian Real Fund (NYSEARCA:BZF)
- WisdomTree Dreyfus Indian Rupee Fund (NYSEARCA:ICN)
- WisdomTree Dreyfus South African Rand Fund (NYSE:SZR)
- WisdomTree Dreyfus Emerging Currency Fund (NYSEARCA:CEW)
- WisdomTree Dreyfus Commodity Currency Fund (NYSEARCA:CCX)
- WisdomTree Emerging Markets Local Debt Fund (NYSEARCA:ELD)
- WisdomTree Managed Futures Strategy Fund (NYSEARCA:WDTI)
- WisdomTree Global Real Return Fund (NYSEARCA:RRF)
Rydex reported no capital gains on its ETFs in 2011.
Guggenheim’s fixed income ETFs were impressive as well; only the BulletShares 2013 High Yield Corporate Bond ETF (NYSEARCA:BSJD), Enhanced Core Bond ETF (NYSEARCA:GIY) and Enhanced Short Duration Bond ETF (NYSEARCA:GSY) paid any capital gains distributions. GIY and GSY became active ETFs during 2011.
EGShares, the only U.S. issuer focusing exclusively on emerging markets, reported zero capital gains distributions for 2011.
ETF newcomer Russell reported zero capital gains for 2011.
Direxion announced distributions on a handful of its 3x and -3x leveraged ETFs for 2011:
- Daily Mid Cap Bull 3x Shares (MWJ)
- Daily Latin America Bull 3X Shares (NYSEARCA:LBJ)
- Daily Developed Markets Bull 3X Shares (NYSEARCA:DZK)
- Daily Retail Bull 3X Shares (NYSEARCA:RETL)
- Daily Real Estate Bull 3X Shares (NYSEARCA:DRN)
- Daily Gold Miners Bull 3X Shares (NYSEARCA:NUGT)
- Daily Healthcare Bull 3x Shares (NYSEARCA:CURE)
- Daily 7-10 Year Treasury Bull 3X Shares (NYSEARCA:TYD)
- Daily 20 Year Plus Treasury Bull 3X Shares (NYSEARCA:TMF)
- Daily Agribusiness Bear 3x Shares (COWS)
- Daily Healthcare Bear 3X Shares (NYSEARCA:SICK)
- Daily Gold Miners Bear 3X Shares (NYSEARCA:DUST)
- Daily Total Market Bear 1X Shares (NYSEARCA:TOTS)
- Daily BRIC Bear 3X Shares (NYSE:BRIS)
Bond fund giant PIMCO reported capital gains on a few of its fixed income ETFs:
- 1-3 Year Treasury Fund (NYSEARCA:TUZ)
- 1-5 Year U.S. TIPS Index Fund (NYSEARCA:STPZ)
- 7-15 Year U.S. Treasury Index Fund (NYSEARCA:TENZ)
- 3-7 Year U.S. Treasury Index Fund (NYSEARCA:FIVZ)
- Enhanced Short Maturity Strategy Fund (NYSEARCA:MINT)
- Intermediate Municipal Bond Strategy Fund (NYSEARCA:MUNI)
- Short Term Municipal Bond Strategy Fund (NYSEARCA:SMMU)
- Build America Bond Strategy Fund (NYSEARCA:BABZ)
- Broad U.S. Treasury Index Fund (NYSEARCA:TRSY)
Charles Schwab reported zero capital gains on its lineup of equity ETFs. On the fixed income side, Schwab was also perfect.
Global X announced capital gains distributions on a small handful of its ETFs:
- FTSE Nordic Region ETF (NYSEARCA:GXF)
- Copper Miners ETF (NYSEARCA:COPX)
- Russell Emerging Markets Value ETF (NYSE:EMVX)
- Fertilizers / Potash ETF (NYSEARCA:SOIL)
Disclosure: No positions at time of writing.
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