Broker Check

ETF Tax Efficiency Revisited

| December 05, 2019
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While many of you are starting to look forward to the holidays ahead: Thanksgiving, Christmas, Hanukkah….  we’re busy thinking about December 31st.  As part of our on-going planning, we’re reviewing the tax-efficiency of our clients’ portfolios.  In the coming weeks, Mutual Fund managers will announce their estimated capital gain distributions.   Given that the US equity markets are up over 20% YTD (**As of 10/30/19), it is not surprising that some portfolio managers might be taking gains & reinvesting the proceeds.

For example, if a Portfolio Manager held Microsoft (MFST) in their Mutual fund – which also happens to be the largest position in the S&P 500 -- perhaps they decide they’re going to reduce their exposure and sell some shares.  In doing so, they may trigger long-term capital gains.  If there aren’t enough losses in the portfolio to offset these gains – which is something we’d expect in a year where most sectors are performing well – these gains get passed down to the clients holding the fund at the time the distribution is paid.  In a year where we expect potentially large capital gains distributions, it puts a renewed focus on the tax efficiency of exchange-traded funds (ETFs). 

An ETF is a collection of stocks, bonds, and/or commodities. ETFs are traded like stocks on major stock exchanges such as the Nasdaq.  EFTs both provide diverse investments, with a potentially lower required initial investment to similar products in the market place.

With ETFs, capital taxes are only incurred when the whole investment is sold.  Even if individual stocks in an ETF are sold, capital gain taxes are not charged until the entire fund is sold.  ETFs are worthy of consideration for their potential tax benefits alone, especially in strong markets like this year.


Registered associates of Bluestone Wealth Partners are registered representatives of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Bluestone Wealth Partners is not an affiliate of Lincoln Financial Advisors Corp. Lincoln Financial Advisors does not provide legal or tax advice.


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