For Blackrock’s two other “sinning” ETFs, the capital gain represented less than 0.08% of their NAVs, he added.
Meanwhile, “Invesco, Schwab, State Street Global Advisors, and Vanguard had zero equity ETFs that did pass along any capital gains to shareholders. The firms’ lineup includes market-cap weighted XLK, and smart-beta RSP and VIG. Investors in these and other equity ETFs do face tax consequences when they sell their shares,” Rosenbluth said.
“When share sales exceed demand, ETF shares are redeemed through an authorized participant using an in-kind mechanism that allows the fund to reduce the likelihood of capital gains. In addition, index-based equity ETFs typically have lower turnover rates—IVV and XLK have an annual turnover rate of just 4%—than active mutual funds where the management team has discretion to take profits throughout the year. With less trading at the fund level, fewer capital gains are incurred with equity ETFs,” he added.
Dimensional Fund Advisors is also moving to convert a suite of their tax-managed mutual funds to ETFs. “While the company said the six mutual funds being converted have delivered tax efficiency like what is available in the existing ETF market, their conversion will provide an additional tool to manage capital gains, supporting the funds’ goal to deliver higher after-tax returns by minimizing tax impact,” Rosenbluth said.
The movement of assets to ETFs is continuing throughout the marketplace, according to the Investment Company Institute. Equity mutual funds incurred $117 billion of net outflows year-to-date through April 14, while equity ETFs issued $229 billion in new shares, continuing their multiyear market share gains, ICI reported.
“If President Biden and the Democrats successfully raise the capital gains tax rate in 2021 ... even more investors may prefer to control their tax-paying destiny and sell some existing mutual fund positions in exchange for ETFs,” Rosenbluth said.