Bond ETFs Passing On a Tax Burden
Exchange-traded funds are loved by investors for their tax advantages, especially when it comes to capital gains. Because most funds are indexes that track the returns of a subset of stocks/bonds/commodities and rarely buy or sell holdings, capital gains are almost never incurred on the operating end. Usually, a trader will only have to pay taxes when a capital gain is generated on his/her side after the position is sold. Unfortunately, this isn’t exactly true for bond funds, which had to move funds around in a very volatile 2009.
A Who Dun It
The three major players in the exchange-traded fund scene, BlackRock, State Street Global Advisors, and Vanguard all have at least one fund that will pass on the gains to their clients. BlackRock, which now owns iShares, is one of the worst when it comes to passing along taxes. The firm has eight ETFs, all of which will pass on the expense due to the way the ETFs work.
Maturity Date Bond Funds
Maturity Date Bond ETFs are BlackRock’s sore spot. Because of the way the funds work (they hold bonds with a certain time before maturity) the assets in the fund must be churned as the holdings near maturity. As such, these funds experience above average turnover for ETFs, which then creates tax bills for their clients.
Capital Gains Aren’t Cheap
Capital gains tax rates start at 15% for long term positions but go as high as 35% for positions held for less than one year. But besides Uncle Sam, some bond funds are passing on some nasty losses. Vanguard’s Vanguard Extended Duration Treasury ETF (EDV) has generated capital gains worth more than 12% of the fund’s NAV, while also posting a loss of 42% of the funds value in just one year. No one likes to pay capital gains to losing funds, and I’m sure their clients won’t be too happy when they see the bill.
