When rattling off the advantages that ETFs hold compared to traditional actively-managed mutual funds, most investors usually start with the issue of expenses. The easiest comparison to make involves expense ratios, the fees charged by ETF and mutual fund companies for investing in a product. Though some mutual funds offer single-digit expense ratios, most actively managed products charge in excess of 1% (the average for the mutual fund industry is in the neighborhood of 1.4%). By comparison, the average expense ratio for ETFs is less than 0.60%, and there are more than a dozen funds that charge less than 10 basis points.
But the potential cost efficiencies of ETFs relative to actively-managed mutual funds go beyond simple expense ratios. ETFs also have the potential to be more tax efficient, thanks to the unique “in-kind” rules of the creation/redemption process. Whereas mutual fund investors may incur capital gains as a result of redemptions by other investors, the fact that ETFs are traded like stocks–on exchanges between market participants–means that they will generally be more tax efficient. That doesn’t mean that ETFs will allow investors to avoid capital gains taxes, rather, they will generally have more control over when these gains are incurred [see Why ETF Really Stands For Efficient Tax Features].
It’s important to note that while ETFs have the potential to offer increased tax efficiency, they aren’t guaranteed to avoid generating capital gains for investors. While the success rate is generally very high, a handful of ETFs will generate capital gains this year, sticking investors with a potentially undesirable tax liability. But for the most part, 2010 was yet another tax efficient year for the ETF industry, with most issuers reporting few capital gains distributions (and a few even reporting perfect results). Below, we highlight the tax efficiency reported for several of the largest ETF issuers this year:
iShares
With more than $400 billion in AUM, iShares is by far the largest player in the U.S. ETF industry (current market share is around 45%). The company wasn’t perfect on capital gains in 2010, but came pretty darn close; only five out of 219 ETFs will pay capital gains distributions this year, all of them bond ETFs. Those funds making distributions will deliver very minor payouts; aside from MBB, the other four funds are making total distributions equal to less than 0.25% of NAV (MBB’s capital gains distributions come in at about 2.3% of NAV):
| Ticker | ETF | ST Dist. | LT Dist. | Ex-Date |
|---|---|---|---|---|
| AGG | Barclays Aggregate Bond Fund | $0.2027 | $0.0593 | 12/7/2010 |
| CFT | Barclays Credit Bond Fund | - | $0.027 | 12/7/2010 |
| CIU | Barclays Intermediate Credit Bond Fund | $0.0321 | $0.0468 | 12/7/2010 |
| CSJ | Barclays 1-3 Year Credit Bond Fund | - | $0.0422 | 12/7/2010 |
| MBB | Barclays MBS Bond Fund | $2.4996 | $0.0179 | 12/7/2010 |
State Street
State Street, the issuer behind the two largest ETFs by total assets (SPY and GLD) announced that it will be making capital gains distributions for a handful of its ETFs this year:
| Ticker | ETF | ST Dist. | LT Dist. | Ex-Date |
|---|---|---|---|---|
| SLY | SPDR S&P 600 Small Cap ETF | $0.042619 | - | 12/17/2010 |
| XPH | SPDR S&P Pharmaceuticals ETF | - | $0.201611 | 12/17/2010 |
| KME | SPDR KBW Mortgage Finance ETF | - | $0.2413 | 12/17/2010 |
| IPK | SPDR International Technology ETF | $0.091732 | - | 12/17/2010 |
| GMM | SPDR S&P Emerging Markets ETF | $0.404792 | $0.237502 | 12/17/2010 |
| GMF | SPDR S&P Emerging Asia Pacific ETF | - | $2.612483 | 12/17/2010 |
| MDD | SPDR S&P International Mid Cap ETF | $0.330384 | $0.139467 | 12/17/2010 |
| EWX | SPDR S&P Emerging Markets Small Cap ETF | $1.174954 | $0.271909 | 12/17/2010 |
| RBL | SPDR S&P Russia ETF | $0.10984 | - | 12/17/2010 |
Vanguard
Vanguard has seen its share of the U.S. ETF market surge this year, thanks in large part to its ultra-competitive expense ratios. In terms of tax efficiency, Vanguard ETFs also did pretty well in 2010; only one equity ETF is scheduled to make a capital gains distribution. Additionally, 12 fixed income ETFs will make capital gains distributions:
| Ticker | ETF | ST Dist. | LT Dist. | Ex-Date |
|---|---|---|---|---|
| EDV | Extended Duration Treasury ETF | $0.03 | $0.21 | 12/22/2010 |
| VSS | FTSE All World ex-US Small Cap ETF | $0.37 | $0.45 | 12/22/2010 |
| BIV | Intermediate Term Bond ETF | - | $0.40 | 12/27/2010 |
| VCIT | Intermediate Term Corporate Bond ETF | $0.28 | - | 12/27/2010 |
| BLV | Long Term Bond ETF | $0.16 | $0.51 | 12/27/2010 |
| VCLT | Long Term Corporate Bond ETF | $0.27 | - | 12/27/2010 |
| VGLT | Long Term Government Bond ETF | $0.07 | - | 12/27/2010 |
| VMBS | Mortgage Backed Securities ETF | $0.82 | - | 12/27/2010 |
| BSV | Short Term Bond ETF | $0.10 | $0.20 | 12/27/2010 |
| VCSH | Short Term Corporate Bond ETF | $0.07 | - | 12/27/2010 |
| VGSH | Short Term Government Bond ETF | $0.0. | - | 12/27/2010 |
| BND | Total Bond Market ETF | $0.12 | $0.24 | 12/27/2010 |
| VGIT | Intermediate Term Government Bond ETF | $0.66 | - | 12/27/2010 |
PowerShares
PowerShares also came close to perfection on capital gains in 2010, announcing zero long-term distributions on 109 pf 112 equity and fixed income ETFs for 2010 (figures that don’t include the commodity products offered in partnership with Deutsche Bank. The three funds that will pay long-term capital gains are:
| Ticker | ETF | ST Dist. | LT Dist. | Ex-Date |
|---|---|---|---|---|
| PKOL | Global Coal Portfolio | - | $0.21 | 12/28/2010 |
| PSAU | Global Gold and Precious Metals Portfolio | - | $0.66 | 12/28/2010 |
| PLK | Active Low Duration Fund | - | $0.04 | 12/28/2010 |
PowerShares has also indicated that two additional funds, the S&P 500 BuyWrite Portfolio (PBP) and CEF Income Composite (PCEF) may make capital gains distributions this year.
ProShares
ProShares, the largest provider of leveraged and inverse ETFs, announced last month that none of its 99 equity and fixed income ETFs will pay any 2010 capital gains distributions. “A goal of ProShares is to provide investors with opportunities to manage risk and seek returns while also providing them with tax efficiency,” said Michael L. Sapir, Chairman and CEO of ProShare Advisors LLC. “As a result, we are pleased to announce that we expect no capital gain distributions this year.”
Van Eck
Van Eck, known for a number of products focusing on commodity intensive equities, announced distributions on a handful of funds for 2010:
| Ticker | ETF | ST Dist. | LT Dist. | Ex-Date |
|---|---|---|---|---|
| BRF | Brazil Small Cap ETF | $1.472 | $1.158 | 12/23/2010 |
| BJK | Gaming ETF | - | $0.016 | 12/23/2010 |
| EMLC | Emerging Markets Local Currency Bond Fund | $0.003 | - | 12/23/2010 |
| HYD | High Yield Municipal Index ETF | $0.173 | $0.086 | 12/23/2010 |
| ITM | Intermediate Municipal Index ETF | $0.012 | $0.015 | 12/23/2010 |
| PRB | Pre-Refunded Municipal Index ETF | $0.001 | $0.053 | 12/23/2010 |
| SMB | Short Municipal Index ETF | $0.016 | $0.039 | 12/23/2010 |
WisdomTree
New York-based WisdomTree, the only publicly-traded pure play ETF issuer, also aced its capital gains test for 2010; none of the company’s 34 equity ETFs delivered short-term or long-term capital gains during the year. “We are pleased to report zero capital gains distributions across our entire family of equity ETFs,” said President & COO Bruce Lavine in a press release. “When investors focus on the costs and tax treatment of their investments they will find ETFs can offer meaningful advantages over traditional products.”
Direxion
Leveraged ETFs are often less tax efficient than traditional ETFs, but Direxion–which offers a number of 3x and -3x products–did a pretty good job in 2010. Twelve of the company’s products incurred short-term capital gains, and only two of those will make long-term capital gains distributions:
| Ticker | ETF | ST Dist. | LT Dist. | Ex-Date |
|---|---|---|---|---|
| TYD | Daily 7-10 Year Treasury Bull 3x Shares | $2.10 | $0.28 | 12/14/2010 |
| CZM | Daily China Bull 3x Shares | $1.38 | - | 12/14/2010 |
| DZK | Daily Developed Markets Bull 3x Shares | $2.91 | - | 12/14/2010 |
| LBJ | Daily Latin America Bull 3x Shares | $2.13 | - | 12/14/2010 |
| TMF | Daily 20 Year Plus Treasury Bull 3x Shares | $0.91 | $0.08 | 12/14/2010 |
| MWJ | Daily Mid Cap Bull 3x Shares | $1.06 | - | 12/14/2010 |
| BRIL | Daily BRIC Bull 2x Shares | $0.47 | - | 12/14/2010 |
| RETL | Daily Retail Bull 3x Shares | $0.49 | - | 12/14/2010 |
| INDL | Daily India Bull 2x Shares | $0.29 | - | 12/14/2010 |
| BRIS | Daily BRIC Bear 2x Shares | $0.02 | - | 12/14/2010 |
| LHB | Daily Latin America Bear 3x Shares | $0.94 | - | 12/14/2010 |
| SOXS | Daily Semiconductor 3x Shares | $0.71 | - | 12/14/2010 |
PIMCO
Bond fund giant PIMCO will make capital gains distributions for about half of its fixed income ETFs this year, including two active products and five passive funds:
| Ticker | ETF | ST Dist. | LT Dist. | Ex-Date |
|---|---|---|---|---|
| STPZ | 1-5 Year U.S. TIPS Index Fund | $0.0139 | - | 12/8/2010 |
| TIPZ | Broad U.S. TIPS Index Fund | $0.31477 | - | 12/8/2010 |
| TENZ | 7-15 Year U.S. Treasury Index Fund | $1.04821 | - | 12/8/2010 |
| FIVZ | 3-7 Year U.S. Treasury Index Fund | $0.73624 | - | 12/8/2010 |
| MINT | Enhanced Short Maturity Strategy Fund | $0.28609 | - | 12/8/2010 |
| MUNI | Intermediate Municipal Bond Strategy Fund | $0.08551 | - | 12/8/2010 |
| CORP | Investment Grade Corporate Bond Index Fund | $0.04851 | - | 12/8/2010 |
Schwab
Charles Schwab was perfect for its eight equity ETFs, and declared zero capital gains distributions for its three bond funds as well.
Global X
New York-based Global X will make capital gains distributions on five of its ETFs, including the ultra-popular Colombia ETF:
| Ticker | ETF | ST Dist. | LT Dist. | Ex-Date |
|---|---|---|---|---|
| GXG | Colombia ETF | $0.0439 | $0.1068 | 12/29/2010 |
| CHIB | China Technology ETF | $0.1277 | - | 12/29/2010 |
| BRAZ | Brazil Mid Cap ETF | $0.0214 | - | 12/29/2010 |
| BRAQ | Brazil Consumer ETF | $0.0022 | - | 12/29/2010 |
| LIT | Lithium ETF | $0.0.83 | - | 12/29/2010 |
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Disclosure: No positions at time of writing.
