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Investors Underestimate The Impact Of ETF Capital Gains

At a time when U.S. tax-payers are facing potential rate increases, many investors still misunderstand the tax implications associated with exchange traded funds (ETFs) according to a recent study conducted on behalf of BlackRock, Inc. (NYSE: BLK). Of the 845 end investors who own or share household financial investment decision-making responsibilities surveyed, 55 percent of respondents were not aware that an ETF could pay capital gains even if the security was not sold at a gain that year. 1

BlackRock also announced today that 98 percent 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 United States. Over the last ten years, iShares has not paid capital gains 98 percent of the time. 2

“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 & 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 December 31 each year.

Key questions to ask your financial advisor about the ETFs in your portfolio:

  • 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?

Dunne continued, “In a year when many ETF providers are paying out capital gains, including a significant number of bond ETFs, iShares has once again delivered professional quality products with a high level of tax efficiency which ultimately benefits our investors.”

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