This post was written with contributions from Charles Champagne and Martin Dunn. Charles Champagne is the Head of Portfolio Insights and Research Analytics, and Martin Dunn is a Research Analyst in the SPDR Americas Research Team.
It’s that time of year again. No, not the time where everything gets “pumpkin-fied,” but rather the time when investors start making tax-related portfolio decisions. While this year’s tax-loss harvesting may not be as bountiful as last year’s, given the positive market returns for both stocks and bonds, there is still a reason to ascertain the current tax efficiency of a portfolio.
Based on the capital gains dividend trends we have witnessed throughout the years—and which were exemplified last year—when it comes to tax efficiency, ETFs offer greater value than mutual fundsdo. Given the persistency of the trend, a portfolio’s structural on-going tax efficiency is worth considering ahead of capital gain announcements from fund companies this fall.
A continuing trend: Smaller proportion of ETFs than mutual funds paid capital gains in 2018
In 2018, just 6.2% of all US-listed ETFs paid a capital gain, compared to more than 60% of US mutual funds. This is not a one-off occurrence. As shown below, the proportion of ETFs that paid a capital gain hasn’t crossed the 10% mark in the past 10years. On the other hand, more than half of all mutual funds have paid out capital gains in five out of the past six years, with 2018 marking a recent high of 62%.