ETF Tax Efficiency Report Card

by on December 22, 2010 | Updated April 25, 2013 | ETFs Mentioned:

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.