ETF Strategies For Beating The Tax Man This April 15 (Podcast)


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By Jonathan Liss

2018 was a banner year for mutual fund capital gains distributions – and not in a good way. Roughly 79% of mutual funds distributed a total of $540B in capital gains to investors – the largest total ever. By comparison, ETFs were significantly less likely to deliver capital gains and trigger unwanted tax events to investors; only 6% of iShares ETFs have distributed capital gains at any point over the past five years.

The latest episode of Let’s Talk ETFs sees iShares‘ Danny Prince rejoin the podcast to try and help investors save money on their tax bill. One of his key messages is that while ETFs are famously tax efficient relative to their cousins in the mutual fund space, how you use exchange traded funds to tax manage is just as important as the underlying tax efficiency inherent in many of these investing vehicles.

With only two months left in the current fiscal year, we thought the timing was ripe for a conversation on the ins and outs of tax managing with ETFs – with an aim on helping investors save money on their tax bill while they could still do something about it. After all, when it comes to measuring your investing success, it’s not what you make on paper but what you keep that ultimately counts.

Topics covered

  • 3:00 – Why do investors overlook the tax efficiency aspect of ETFs?
  • Understanding how investments are taxed:
    • 7:00 – Capital Gains
    • 9:30 – Qualified vs. non-qualified dividends
    • 11:30 – Tax-deferred vs. non-tax-deferred accounts
  • 14:00 – What do we mean when we say ETFs are “tax-efficient”? And why is this the case?
  • 18:15 – Why are mutual funds much more likely to pay out capital gains than ETFs?
  • 21:30 – 2018 was a record year for mutual fund capital gains payouts; ETFs remained significantly more tax-efficient over the same period
  • Beyond equities: Tax rules for other asset classes and fund structures:
    • 27:00 – What does it mean when a bond fund is listed as being “tax-free”? Muni bond ETFs
    • 28:30 – ETFs that hold physical commodities are generally taxed as collectibles (IAU) (GLD) (SLV)
    • 30:30 – Taxing futures-based ETFs: The 60/40 rule
    • 32:00 – Limited partnership funds and the tax man: Schedule K-1 forms
  • Tax management strategies:
    • 34:30 – Tax-loss harvesting
    • 36:00 – The Wash Sale rule (IVV) (SPY)
    • 38:00 – Knowing which assets belong in tax-deferred vs. non-tax-deferred accounts
  • 40:15 – In summation: Investors need to be more conscious of how taxes can affect their bottom line

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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