Wed, Jul 29, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Survey finds alternative ETFs among least efficient at managing tax position

Tuesday, January 03, 2012
Opalesque Industry Update - A report published by IndexUniverse found that US sourced alternative ETFs, based on hedge fund replication, long/short ETFs and other alternative strategies saw nine out of 49 ETFs or 18%, paying capital gains distributions, making them among the least efficient in terms of tax management.

The survey explains that ETFs are designed to be tax efficient. The major part are index funds with low turnover which lends itself to greater tax efficiency than other mutual funds and the design of the ETF’s creation and redemption processes allows most ETFs to continually cleanse their portfolios of positions with embedded capital gains.

The report found that only 84 of the 1,370 ETFs, some 6% of the whole universe, trading in the United States are paying capital gains distributions this year. The numbers include 202 exchange-traded notes.

The survey found that the record for ETFs wasn’t perfect, however, and varied by asset category. Traditional equity ETFs, where just 19 of 756 ETFs paid distributions were among the most successful at managing their tax position.

Fixed income, however, fared far worse. Thirty-seven of 156 fixed-income ETFs paid out distributions, or nearly 24% of all nonleveraged ETFs. The payouts were small—31 of 37 funds paid out gains totaling less than 1% of each of the fund’s net asset value. Nonetheless, the number of payouts was high.

Leveraged and inverse ETFs also saw significant distributions, with 25 of 259 geared ETFs on the market paying out distributions, or 10%.

Currency ETFs and Asset Allocation ETFs, however, were perfect, with zero payouts among a combined 51 funds.

The payouts in bond funds gained particular attention this year.

Of note, all the capital gains distributions reported by the three-biggest U.S. ETF sponsors—iShares, State Street Global Advisors and Vanguard Group—were in fixed-income ETFs. Bond funds face various challenges in terms of tax efficiency. For starters, unlike equity ETFs, some use a cash-based redemption mechanism, which generates more internal turnover and can lead the funds to generate capital gains.

According to some experts, the bigger factor this year was market conditions.

IndexUniverse’s data mining also found the divergent story lines from the two major U.S. purveyors of inverse and leveraged funds, ProShares and Direxion. On the one hand, ProShares didn’t report any capital gains distributions in 2011. That in itself is noteworthy, as any fund prospectus from either ProShares or Direxion clearly warns that the turnover required by daily-rebalanced portfolios should create a greater likelihood of capital gains distributions.

The report says: “Direxion, however, had payouts in 25 of its 50 leveraged and inverse funds. One important variable may be that Direxion specializes in triple-exposure funds, while ProShares focuses on double-exposure funds. The triple-exposure component may make Direxion’s challenge a bit more significant. The Direxion distributions do include a number of bullish Treasury funds, which dovetails with what Dickson of Vanguard spoke about. But the capital distributions at Direxion also extend to a host of equity investments, including a bull and bear pair of ETFs focused on gold mining companies, which is more of a mystery. In any case, a Direxion official who spoke to IndexUniverse on condition of anonymity stressed that it’s always the company’s aim to minimize such distributions”.

Beverly Chandler

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Bridgewater turns bearish on China[more]

    Komfie Manalo, Opalesque Asia: The world’s biggest hedge fund Bridgewater Associates and one of the most vocal of China’s potential is now turning its back against the world’s second largest economy as it joins a growing list of high-profile investors who are challenging China’s potentials.

  2. Launches - Ex-Brevan Howard star Rokos builds team for new fund, Former Och-Ziff manager’s firm starts health care hedge fund, Industry veterans launch commodity investment firm Aron Capital Management, Nikko Asset Management launches two UCITS funds, Capital Group plans to debut Asian investor targeted fund[more]

    Ex-Brevan Howard star Rokos builds team for new fund From WSJ.com: Chris Rokos, a former star trader at Brevan Howard Asset Management LLP, has hired an economist from Nomura to join the team he’s assembling for his much anticipated hedge fund launch. Mr. Rokos, whose firm is due to b

  3. Institutions - Pension fund dismisses Texas consultant, Rhode Island pension fund gets 2.2% investment return, far below assumed rate of 7.5%, New Jersey pension investments see a drop-off in returns[more]

    Pension fund dismisses Texas consultant From Sandiegouniontribute.com: The county retirement board on Thursday terminated the Texas consultant who was given the reins of the $10 billion pension fund, and whose investment picks left many employees and retirees feeling taken for a ride.

  4. SWFs - Sovereign wealth funds paid around $14 billion in fees[more]

    From SWFinstitute.org: When it comes to the financial sector, asset management is one of the most profitable industries in the world. The Boston Consulting Group put out a 2014 figure saying there is US$ 74 trillion worth of professionally-managed assets. One of the fastest growing institutional inv

  5. Investing - Carlyle teams with TCW in push for ordinary investors[more]

    From Bloomberg.com: Carlyle Group LP isn’t backing down from its goal of offering alternative strategies to the masses, despite early setbacks. The Washington-based firm is teaming up with TCW Group, which is majority owned by Carlyle funds, to offer three vehicles that give ordinary investors acces

 

banner