question about ETF

[ER_Hopeful]

does ETF generate dividends and cap. gains just like an index fund while I hold it.

Have a few k to invest in a taxable acct. If I buy MF, it'll generate cap. gains. etc and I'll hit with a tax bill at year end. I think ETF will do the same thing but just wanna confirm. thanks

 

[bingybear]

can ETF generate dividends and CG, sure. Will they be as bad as MF? Don't know. MF get hit when they have internal gains and some people sell shares. The selling of shares creates individual taxes for those selling, but will also create internal taxes in the MF by having to sell holdings to pay those pulling out of the fund.


An ETF is different in that. When you sell a share of ETF there is a buyer for it and the ETF does not actually sell shares of the underlying. If the ETF needs more or less shares due to demand, there are Authorized Participants [AP] that can bring a basket of stocks (investments in proportion to the holdings of the ETF and receive ETF shares. Likewise to have less shares the AP can bring ETF shares and get a basket of the internal investment. This is a mechanism to keep liquidity in the market.

Some ETFs will rebalance periodically which can make some distributions occur. ETF (SDY for instance can have extra distributions for reasons like this.
I would expect most will have some distribution during the year and some worse at the end of the year. Same with MF.

I've had MF go from little distribution to greater than 25% distributions in different years. I have not seen that in the ETFs I've owned

 

[Bamaman]

I bought some ETF's 8/2015 and sold them right after 1/1/2016 to buy a house. I got hit with a $7K tax bill for income generated last year.

I guess I should be pleased there was some income at all in this zero percent interest world.

 

[GalaxyBoy]

Check historical data on the ETF(s) you are interested in. That should give you an idea of what they pay out. I'm in BND, for example, and it pays monthly dividends. Since ETFs are bascially stocks, I wouldn't think they would throw off capital gain distributions.

Edit: I looked it up (The Google is your friend!) A few do; most don't, as described in this article from 2013:

For ETFs, Capital Gains Distributions Remain Few and Far Between

 

[LOL!]

does ETF generate dividends and cap. gains just like an index fund while I hold it.

Have a few k to invest in a taxable acct. If I buy MF, it'll generate cap. gains. etc and I'll hit with a tax bill at year end. I think ETF will do the same thing but just wanna confirm. thanks

Yes, but "just like an index fund" is interesting because many index funds (especially from Vanguard) do not generate capital gains, so if an ETF does not generate cap. gains, then that would be "just like an index fund."

You can buy an index fund that does not distribute capital gains and that index fund could be an ETF or a mutual fund.

Index funds typically do generate dividends and that goes for index mutual funds and index exchange-traded funds (ETFs).

So select a tax-efficient index fund that does not generate capital gains distributions AND that only has 100% qualified dividends. But one is supposed to know what one invests in and should read the prospectus and check the historical distributions. We always do that, doesn't everything else do that, too?

 

[ziggy29]

does ETF generate dividends and cap. gains just like an index fund while I hold it.

Yes. But many of them, especially index ETFs, are designed to be very tax-efficient. They will pretty much all generate dividends -- that is unavoidable if they hold stocks that pay dividends -- but they can easily keep turnover very low which reduces (sometimes eliminates) capital gains distributions.

That said under current tax law we're in the 15% marginal federal income tax bracket which means we pay 0% on dividends, so my taxable accounts are loaded up with dividend ETFs. The risk of this is, if that changes I may have to sell and incur capital gains. But at least the reinvested divdends add to my cost basis without adding to my taxes!

 

[ziggy29]

Check historical data on the ETF(s) you are interested in. That should give you an idea of what they pay out. I'm in BND, for example, and it pays monthly dividends. Since ETFs are bascially stocks, I wouldn't think they would throw off capital gain distributions.

But dividends from bond interest are not given preferred treatment as stock dividends are; it's all taxable at your marginal rate. And that makes sense, since there is no double taxation issue concerning dividends that come from bond interest like there is with stock dividends.

Index ETFs generate very little capital gains in a year, and often none. But when indexes are rebalanced or reconstituted, the underlying ETFs may have to do a little buying and selling to match the index. That can generate some capital gains and losses, but usually not much.

 

[bingybear]

I bought some ETF's 8/2015 and sold them right after 1/1/2016 to buy a house. I got hit with a $7K tax bill for income generated last year.

I guess I should be pleased there was some income at all in this zero percent interest world.

was this income the etf paid out? Or was this capital gains due to your selling then holding?

Taxes due due to selling an appreciated investment is not really due to the investment, but due to the trading down with the investment. MF, ETF or stock sold at a gain will cause taxes. Not really a difference in the investment assuming the same return.

 

[Totoro]

They will pretty much all generate dividends -- that is unavoidable if they hold stocks that pay dividends -- but they can easily keep turnover very low which reduces (sometimes eliminates) capital gains distributions.

There's a few ETFs geared at the European market that reinvest dividends instead of paying them out.

It's to avoid dividend tax at the individual level. Corporate withholding still applies internationally, which is why they are usually based in Ireland (for Europe) or the US - lots of treaties pushing it a bit down. Downside is they have slightly higher TERs usually (vs. Vanguard).

Two examples I'm using: EMIM and IWDA. Both are ETFs listed on euronext.

Saves me and DM quite a bundle every year using those.

 

[youbet]

does ETF generate dividends and cap. gains just like an index fund while I hold it.

Have a few k to invest in a taxable acct. If I buy MF, it'll generate cap. gains. etc and I'll hit with a tax bill at year end. I think ETF will do the same thing but just wanna confirm. thanks

You're confusing/mixing the concepts of index fund vs. actively managed fund with MF vs. ETF. A MF or ETF can be either index tracking based or actively managed.

Before you buy anything, do a bit of research and understand those basic terms.