A majority of investors surveyed recently by BlackRock misunderstood the potential tax implications of exchange traded funds, with 55% of respondents saying they were not aware that an ETF could pay capital gains even if the security was not sold at a gain that year.
While 98% of ETFs offered by BlackRock's iShares business are not expected to pay capital gains distributions, five bond funds will, according to the study results released Tuesday. Over the last 10 years, iShares, which is the largest ETF manager nationwide with 280 products listed in the United States, has not paid capital gains 98% of the time.
Capital gains in mutual funds and ETFs occur because the fund has sold securities at a profit or generated income on holdings at some point during the year. Funds are required to distribute those gains, which are subject to federal taxes, to shareholders by Dec. 31 each year.
"While ETFs can be highly tax-efficient investment products, many investors are surprised to find out that it's possible to owe taxes on capital gains distributions made by ETFs even if they didn't sell the security at a gain that year," said Patrick Dunne, iShares head of global markets and investments, in a statement. "When it comes to tax efficiency, investors need to be asking the right questions or they may get a surprise in their tax bill at the end of the year."
