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ETFs

Few ETFs Are Paying Out Capital Gains in 2023

It’s looking like a year for tax efficiency.

Key Takeaways

  • Very few ETFs are estimated to pay out capital gains in 2023, and those that do will not distribute much.
  • Thirty-eight percent of distributing ETFs belong to the sector-equity category group, which suffered strong outflows this year.
  • Outflows and the inability to trade securities in-kind in some foreign markets are the main reasons for ETFs’ capital gains in 2023.

Another year, another tax win for exchange-traded funds. Very few ETFs are estimated to distribute capital gains in 2023. And for the ones that will, their tax bills are nowhere near as large as those of mutual funds. Despite the market’s healthy rally in 2023, most ETFs were shielded from capital gains distributions by their legal structure and strong inflows throughout the year.

As of October 2023, 15 of the biggest ETF sponsors had reported their estimated capital gains distributions for the year. These firms back a combined 1,854 ETFs, holding nearly $6.7 trillion of investors’ assets. Among those funds, just 24 (1.3%) are expected to distribute capital gains to investors in 2023. This is the lowest number we’ve seen in the past five years, which tends to hover around 5% to 7% of surveyed ETFs.

Which ETFs Are Paying Capital Gains This Year?

ETF capital gains distributions are modest this year. Even the fund with the largest distributions as a percentage of its net asset value, iShares MSCI Taiwan ETF EWT, is only dispersing 8.5% of its NAV. This is much lower than the typical largest distribution of the past few years, with some reaching past the 20% mark.

The 10 Largest Estimated Capital Gains Distributions As % Of NAV

Fund
Ticker
Estimated Capital Gains (% NAV)
AUM ($ Mil)
Inception Date
Morningstar Category
Category Group
iShares MSCI Taiwan ETFEWT8.51%2,906.226/20/2000China RegionInternational Equity
Global X Interest Rate Hedge ETFRATE5.65%3.077/5/2022Nontraditional BondTaxable Bond
iShares Breakthrough Environmental Solutions ETFETEC4.07%3.203/28/2023TechnologySector Equity
Global X Health Care Covered Call & Growth ETFHYLG3.27%2.5811/21/2022Derivative IncomeNontraditional Equity
iShares MSCI Water Management Multisector ETFIWTR3.05%5.089/20/2022Natural ResourcesSector Equity
Global X PropTech ETFPTEC2.80%2.444/11/2023Miscellaneous SectorSector Equity
Global X Metaverse ETFVR2.59%2.134/26/2022CommunicationsSector Equity
VanEck Robotics ETFIBOT2.05%2.464/5/2023TechnologySector Equity
ProShares UltraPro Short 20+ Year Treasury ETFTTT1.74%110.453/27/2012Trading—Inverse DebtMiscellaneous
FT Cboe Vest S&P 500 Dividend Aristocrats Target Income ETFKNG1.56%1,459.963/26/2018Large ValueU.S. Equity

Source: Morningstar Direct, ETF sponsors. The midpoint of capital gains estimates is used when a range is provided. Assets and NAV data as of Oct. 31, 2023.

A usual culprit drove EWT’s distributable capital gains: ETFs investing in foreign markets that do not allow in-kind creation/redemption are unable to benefit from the tax efficiency of the ETF wrapper. Without the tax benefits of in-kind redemptions, every realized gain becomes a taxable event, similar to a mutual fund. Major foreign markets that do not allow in-kind transactions include, but are not limited to, Brazil, China A and B shares, India, South Korea, and Taiwan. Investors can also look through the risk section of their fund’s prospectus for more details (usually under “Cash Transactions Risk”).

A quick glimpse through the list of the largest ETFs paying out capital gains shows a similar story. Single-country ETFs investing in Taiwan and India dominated the rankings this year.

The 10 Largest ETFs Distributing Capital Gains

Fund
Ticker
AUM (mil)
Estimated Capital Gains (% NAV)
Inception
Morningstar Category
Category Group
Global X U.S. Infrastructure Development ETFPAVE4,842.630.2%3/6/2017InfrastructureSector Equity
iShares MSCI Taiwan ETFEWT2,906.228.5%6/20/2000China RegionInternational Equity
Xtrackers MSCI USA Climate Action Equity ETFUSCA2,110.540.1%4/3/2023Large BlendU.S. Equity
FT Cboe Vest S&P 500 Dividend Aristocrats Target Income ETFKNG1,459.961.6%3/26/2018Large ValueU.S. Equity
WisdomTree India EarningsEPI1,367.940.2%2/22/2008India EquityInternational Equity
iShares India 50 ETFINDY683.230.3%11/18/2009India EquityInternational Equity
iShares MSCI India Small-Cap ETFSMIN468.390.4%2/8/2012India EquityInternational Equity
WisdomTree Interest Rate Hedged U.S. Aggregate BondAGZD209.680.7%12/18/2013Nontraditional BondTaxable Bond
Invesco India ETFPIN172.051.4%3/5/2008India EquityInternational Equity
WisdomTree Artificial Intelligence and InnovationWTAI132.450.1%12/7/2021TechnologySector Equity

Source: Morningstar Direct, ETF sponsors. The midpoint of capital gains estimates is used when a range is provided. Assets and NAV data as of Oct. 31, 2023.

Sector-Equity ETFs Had a Rough Year

Half of this year’s heavy distributors are thematic ETFs that belong to the sector equity category group. Indeed, this category group topped the 2023 list for both the number of ETFs distributing capital gains and the number of ETFs distributing more than 1% of their NAV. Much of this can be blamed on the $22.6 billion exodus from sector-equity funds for the year to date compared with the positive inflows that most other broad category groups have enjoyed.

Estimated Capital Gains Distributions by Category Group

Category Group
Number of ETFs
Number of ETFs Estimating Cap Gains
% of ETFs Estimating Cap Gains
Number of ETFs Estimating Cap Gains >1%
% of ETFs Estimating Cap Gains >1%
Sector Equity37492.41%51.34%
International Equity40761.47%20.49%
U.S. Equity39330.76%10.25%
Taxable Bond33230.90%10.30%
Nontraditional Equity2428.33%14.17%
Miscellaneous10210.98%10.98%
Alternative91----
Municipal Bond58----
Allocation39----
Commodities34----
Total1,854241.29%110.59%

Source: Morningstar Direct, ETF sponsors. The midpoint of capital gains estimates is used when a range is provided. Assets and NAV data as of Oct. 31, 2023.

ETF Shops Distributing Capital Gains in 2023

Several of Global X’s thematic ETFs are expected to pay out capital gains in 2023, sending it to the top of the provider list [1]. IShares and WisdomTree also had a couple of thematic ETFs with estimated capital gains and a couple of single-country ETFs to boot. Firms with a lineup of well-diversified funds are not seeing much of a tax bill this year. Vanguard, Schwab, and Dimensional don’t have any ETFs distributing capital gains in 2023.

Two of Global X’s distributing ETFs are actively managed, but most of the ETFs paying out gains this year are passive funds.

ETF Sponsors’ 2023 Capital Gains Report Card

Firms
ETF AUM ($Bil)
Number of ETFs
Number of ETFs Estimating Cap Gains
% of ETFs Estimating Cap Gains
Number of ETFs Estimating Cap Gains > 1%
% of ETFs Estimating Cap Gains > 1%
Global X38.36114108.77%43.51%
iShares2,264.2248251.04%30.62%
WisdomTree67.047833.85%--
Xtrackers18.834424.55%--
Invesco391.6022010.45%10.45%
First Trust135.3222810.44%10.44%
ProShares57.8514110.71%10.71%
VanEck56.518611.16%11.16%
Vanguard2,042.9982----
State Street1,032.57141----
Charles Schwab278.8730----
J.P. Morgan119.6664----
Dimensional96.4538----
Fidelity36.0664----
Goldman Sachs29.4342----
Total6,665.751,854241.29%110.59%

Source: Morningstar Direct, ETF sponsors. The midpoint of capital gains estimates is used when a range is provided. Assets and NAV data as of Oct. 31, 2023.

Why Are ETFs Tax-Efficient?

Unlike their mutual fund counterparts, ETFs’ legal structure allows for in-kind transactions, or the ability to swap ETF shares for individual securities and vice versa without realizing capital gains. This can avoid triggering taxable gains driven by investor redemptions and trades by portfolio managers. In previous articles, we explained the structure and tax efficiency of ETFs in further detail.

While it’s true that ETFs are generally more tax-efficient than mutual funds, it’s important to remember where these advantages come from. ETFs’ tax benefits aren’t airtight, and taxable investors will still get a bill for regular distributions of income. But most do a very good job of helping investors defer capital gains taxes, allowing them to pay the taxes they owe when they choose and not when others might stick them with the bill, as can be the case for mutual fund investors.

1) Global X posted two separate estimated capital gains distribution documents. The September list features the majority of the funds distributing capital gains this year.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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