A majority of investors surveyed recently by BlackRock misunderstood the potential tax implications of exchange traded funds, with 55 percent of respondents saying they were not aware that an ETF could pay capital gains even if the security was not sold at a gain that year.
While 98 percent of ETFs offered by BlackRock's iShares business are not expected to pay capital gains distributions, five bond funds will, according to the study results released Tuesday. Over the last 10 years, iShares, which is the largest ETF manager nationwide with 280 products listed in the United States, has not paid capital gains 98 percent of the time.
Capital gains in mutual funds and ETFs occur because the fund has sold securities at a profit or generated income on holdings at some point during the year. Funds are required to distribute those gains, which are subject to federal taxes, to shareholders by Dec. 31 each year.
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"While ETFs can be highly tax-efficient investment products, many investors are surprised to find out that it's possible to owe taxes on capital gains distributions made by ETFs even if they didn't sell the security at a gain that year," said Patrick Dunne, iShares head of global markets and investments, in a statement. "When it comes to tax efficiency, investors need to be asking the right questions or they may get a surprise in their tax bill at the end of the year."
Here, according to iShares, are the key questions that financial advisors should expect to answer about the ETFs in clients' portfolios:
- What is the track record of my ETF holdings? Have they made capital gains distributions in the past?
- Which asset classes will be most likely to generate capital gains distributions this year?
- How can I find out if my ETF is paying out a capital gain?
- What should I do if I find out my ETF is paying out capital gains?
Five of the 280 iShares ETFs are scheduled to pay capital gains distributions this year:
| Fund (Ticker) |
|
| Estimated Total Cap Gain Distribution ( percent of NAV in basis points) |
|
| Ex Date |
|
| DistributionDate |
| iShares Core Total U.S. Bond Market ETF (AGG) |
|
| 35 – 44 bps |
|
| 12/3/12 |
|
| 12/7/12 |
| iShares Barclays GNMA Bond Fund (GNMA) |
|
| 53 – 65 bps |
|
| 12/3/12 |
|
| 12/7/12 |
| iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) |
|
| 0 – 1 bps |
|
| 12/3/12 |
|
| 12/7/12 |
| iShares Barclays MBS Bond Fund (MBB) |
|
| 19 – 23 bps |
|
| 12/3/12 |
|
| 12/7/12 |
| iShares Financials Sector Bond Fund (MONY) |
|
| 45 – 55 bps |
|
| 12/3/12 |
|
| 12/7/12 |
|
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The survey of 845 end investors was conducted in October by Market Strategies for BlackRock.
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