Taxes: The topic of taxes is boring, which is why you don’t hear much about one of the big problems with the mutual fund structure: capital gain distributions. Mutual fund investors have to endure getting taxed based on what the fund does and then again when they sell shares of the fund. GSLC utilizes the ETF’s brilliantly designed creation/redemption mechanism to eliminate any gains inside the fund. GSLC has made no distributions. The taxes saved by an ETF can seriously compound over time, creating what some refer to as “tax alpha.”
Tax efficiency, check.
Add it all up and it doesn’t really matter that GSLC will likely outperform by a small margin in some periods and underperform in others. The product is so powerful and interesting because it is essentially an active strategy that isn’t dependent on returns to rake in assets.
So, after Vanguard and BlackRock are done ravaging active mutual funds, human managers will have to do battle over what is left with a new breed of ETFs such as GSLC.
Good luck with that.
This column was provided by Bloomberg News.