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.
