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Tax Efficiency in Word and Deed

Finding Fidelity

Tax Efficiency in Word and Deed

By Ronald L. DeLegge, Editor - January 3, 2007


The ETF industry likes to remind the investing masses that its investment products produce significantly lower tax bills versus competing mutual funds.


And they supported that claim in 2006.


The Select Sector SPDRs continued their amazing run of no capital gain distributions since 1998.


Not to be outdone, PowerShares Capital Management reported that all of its ETFs also avoided tax gain distributions for 2006. The only exceptions were two Deutsche Bank products, which resemble ETFs, but are actually registered as commodity pools.


A similar trend pervaded with other exchange-traded fund providers.


Barclays Global Investors, manager of the iShares reported tax distributions for only two funds in its entire ETF lineup for 2006. The iShares Dow Jones U.S. Real Estate Index Fund (Amex: IYR) had a distribution of 0.3722 and the iShares Cohen & Steers Realty Majors Index Fund (Amex: ICF) reported a 0.0055 distribution. Likewise, the Vanguard REIT ETF (Amex: VNQ) reported a long term capital gain distribution of 0.3610. Other Vanguard ETFs avoided capital gain distributions in 2006.


ETFs showed the biggest tax advantages in the mid and small-cap categories, where high-turnover strategies among traditional mutual funds often lead to unwanted capital gain distributions.


While taxable distributions don't impact those with funds inside a tax-deferred retirement account, for investors with money in taxable mutual fund accounts, the financial stakes are nothing short of mammoth. According to some estimates, fund investors are expected to forfeit $20 billion in taxes from last year's gains, which is up from $15 billion in 2005. 


When it comes to taxes, ignorance is not bliss.


Will the investing masses take a clue from the tax savings bonanza of ETF shareholders? 


In the meantime, the ETF industry keeps rolling the tax efficiency train in both word and deed.

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