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Investors underestimate impact of ETF capital gains, says BlackRock


At a time when US tax-payers are facing potential rate increases, many investors still misunderstand the tax implications associated with exchange-traded funds, according to a recent study conducted on behalf of BlackRock.

Of the 845 end investors who own or share household financial investment decision-making responsibilities surveyed, 55 per cent of respondents were not aware that an ETF could pay capital gains even if the security was not sold at a gain that year.

BlackRock also announced today that 98 per cent of ETFs offered by its iShares ETF business are not expected to pay capital gains distributions. iShares is the largest manager of ETFs with 280 products listed in the US. Over the last ten years, iShares has not paid capital gains 98 per cent of the time.

“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,” says Patrick Dunne, iShares head of global markets and investments. “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.”

Capital gains in mutual funds and ETFs occur for the same reason they occur in individual portfolios — 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 taxes by the federal government, to shareholders by 31 December each year.

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