Complete Guide To 2012 Cap Gain Payouts
December 31, 2012
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(The following story and the accompanying table will be updated to reflect new data calculations, and fresh information from a number of fund sponsors, notably ETF Securities and Exchange Traded Concepts.)
The low payout ratio—just 7.7 percent of the broader universe—is a clear reaffirmation of the tax efficiency of ETFs, and is just 2 basis points more than the 7.5 percent rate recorded in our survey last year, the "Complete Guide to 2011 ETF Cap Gain Payouts."
The record for ETFs wasn't perfect, however, and varied by asset category, with equity funds coming in with relatively few capital gains distributions, while bond fund managers had considerably less success dodging the tax man as they struggled against the bullish flavor in bond markets in the anxiety-ridden aftermath of the 2008 market meltdown.
The most impressive performance came in traditional equity ETFs, where just 33 of 936 equity ETFs, or 3.6 percent of U.S.-listed equity funds, paid distributions. These payouts, however, included funds with some of the bigger distributions of any index equity ETF this year: the 10.95 percent by the Market Vectors Biotech ETF (NYSEArca: BBH).
Another similarly large distribution comes from Deutsche Bank's db-X MSCI EAFE Currency Hedged Equity Fund (NYSEArca: DBEF). It totaled more than 10 percent of the fund's net asset value at the end of 2012.
Active funds seemed to distribute capital gains a bit more frequently than index strategies, as payouts from both AdvisorShares and Columbia Funds suggest. That's not a huge surprise since portfolio turnover on active funds is usually much greater than on index funds.
Fixed Income Takes It On The Chin
Fixed income fared far worse than equities. Seventy-nine of 224 such ETFs paid out distributions, or about 35 percent of all nonleveraged ETFs. The payouts were small—68 of 79 paid out gains totaling less than 1 percent of each of the fund's net asset value.
Nonetheless, the number of payouts was rather high.
That pattern essentially reflects the post-crisis environment that has featured investors piling into fixed income in flight-to-safety, one-way traffic that has limited many managers' ability to offset cap gains through sales of readily available low-cost-basis securities at the portfolio level.
The challenge is rendered more difficult because bonds—unlike stocks—mature, forcing fund managers to realize gains at that time. Moreover, bond ETF creations and redemptions can occur in cash, which is less tax advantageous than the in-kind transactions that prevail in the world of equities.
Of the top three ETF sponsors, Vanguard and State Street Global Advisors had a fairly large number of bond funds with capital gains distributions, though iShares, the world's biggest ETF provider, had relatively few.
Additionally, Pimco, the world's biggest bond fund manager, declared cap gains distributions on 14 of its 19 ETFs.
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