ETF Tax Advantage Could be Lost if Democrats Win Senate

  • If the Democrats win control of the Senate in January’s run-off elections, they may reverse a capital gains tax exemption that currently gives exchange-traded funds (ETFs) an advantage over mutual funds, The Financial Times reported.
A stock market ticker tape that reads "ETFs." representing international etfs
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  • Morningstar research in 2018 revealed that over the previous five years, on average, less than 6% of U.S.-domiciled stock ETFs paid capital gains to shareholders. This compared to 58% of comparable mutual funds.
  • The average five-year capital gain for the ETFs was 0.86% of net assets, versus 1.45% for mutual funds.
  • Christine Benz, personal finance director at Morningstar, said mutual fund payouts might be particularly solid this year, due to strong performance as well as redemptions by investors who are moving from mutual funds to ETFs.
  • Some funds managed will make distributions equivalent to double-digit percentages of their net assets, Benz said.
  • Some analysts suggest the differential tax treatment is why so many U.S. fund managers are launching active ETFs.
  • InvestorPlace contributor Chris Markoch last week noted that ETFs “have become one of the most popular investment vehicles over the last 10 years.”

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