Ian Salisbury for the Wall St Journal writes: Vanguard Group has an unusual message for potential investors: Tax advantages of exchange-traded funds, including its own fast-growing line, aren't nearly as significant as many think.
Exchange-traded funds, typically index mutual funds that trade on an exchange like a stock, have won fans among investors and collected nearly $1 trillion in U.S. assets. One of the key selling points is a special legal structure that helps funds avoid recognizing stock trading profits and thus triggering unwanted capital-gains tax bills for investors.
But to fund giant Vanguard, ETFs' structural advantages loom too large in many investors' minds. ETFs' tax efficiency stems more from a passive investing style than from unique legal attributes, the company contends.
"A lot of times the way the tax story is being told is: We are more tax-efficient than mutual funds," said Vanguard Principal Joel Dickson. That story is a kind of fiction, he said. "It's not that the ETF structure is obviously more tax-efficient. It's how you manage it."
As the fund firm often points out, its own conventional stock-index funds rarely pass out capital gains.
To a certain extent, the ETF industry has benefited by making an apples-to-oranges comparison, Mr. Dickson added. ETF firms are fond of comparing their vehicles with mutual funds broadly rather than making a more-precise comparison to index funds, which would make ETFs' advantages look much less impressive. "There is a wishy-washy picture being drawn," Mr. Dickson said.
Vanguard, the Malvern, Pa., company that pioneered passive investing a generation ago, has to walk a fine line. It has $650 billion in conventional index fund assets as well as $148 billion in ETF assets. In dollar terms, its ETF family was the fastest-growing in the U.S. last year, raking in $39 billion.
Mutual funds and ETFs risk generating tax bills for investors whenever they sell stocks in a fund's portfolio at a profit. Investors can be liable for taxes on those capital gains even though they themselves won't reap the benefit until they sell their fund shares. Index funds, both conventional index funds and ETFs, keep tax bills low in large part because they almost never trade.
ETFs do have an additional advantage. Because investors can trade ETF shares themselves, ETFs don't need to let small investors redeem fund shares for cash like conventional mutual funds do. Instead, ETFs deal with only large investors, and when these investors do redeem ETF shares, they get stocks in exchange for fund shares, not cash. Because of a quirk in the tax law, such exchanges don't prompt capital gains.
Yet as Vanguard likes to point out, conventional funds also can use this technique to unload shares, and sometimes do so with large investors like pension funds. Also, Vanguard's own ETFs and index funds are actually separate share classes of the same fund, so it can pass shares once bought by its index funds on to investors that are cashing out ETF shares. That means its conventional index funds can share any extra benefit enjoyed by its ETFs.
One recent study by fund researcher Morningstar Inc. found ETFs do have an edge in tax efficiency. Index funds that followed 27 different benchmarks across different stock-market categories distributed gains amounting to 2.5% of their value over a five-year span, compared with just 0.01% for ETFs, Morningstar found. Funds that tracked broad, turbulent areas of the stock market, such as small-company or emerging-markets stocks, were more likely to make distributions than funds that tracked large company U.S. stocks, said analyst Scott Burns.
Still Vanguard's own index funds are better than most. For instance, the $146 billion (trading symbol VTSMX) hasn't handed any capital gains to investors since 2000. The $55 billion (VEIEX) hasn't made a distribution since its inception in 1994.
"By and large, their index funds are as tax-efficient as ETFs," said Mr. Burns.
0 comments:
Post a Comment