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Subject:  Re: Rydex equal weight S&P ETF Date:  5/16/2004  4:28 PM
Author:  jbking Number:  41017 of 93634

Greetings Joe,

ETFs have extremely low taxable distributions because they exploit a tax loophole for "in kind" trades.

This assumes a certain amount to volume to account for shifts in the portfolio as for the ETF to shift holdings without triggering taxes you have to have a certain amount of creation/redemption events which in some cases hasn't been there.

For a very specific example, let me quote from,2,8745,00.html :
<snip>Because the iShares S&P 500 Index was just launched in May 2000, its portfolio of stocks is still small compared with its older rival, the SPDR. Indeed, when new "in-kind contributions" of stocks representing all the stocks in the S&P 500 were made to the fund in October, it nearly doubled in size. That fact put the iShares' managers in a bind. Although the fund had recently sold off stocks for tax-loss purposes, it couldn't use the losses because of the wash sale rule. That rule states you can't realize a tax loss from the sale of a stock if you repurchase that same stock within 30 days, and in the eyes of the IRS, the fund had essentially repurchased all its shares when it received the large in-kind contributions. Making matters worse is that fact that the reporting period for fund capital gains ends each year on October 31.

Not only could the fund not use tax-loss sales, but because the iShares 500 Index hadn't received many "in-kind redemptions," the managers hadn't been able to offload any gains onto institutional investors. As Jim Ross, who helps manage the SPDR, points out, ETF managers actually look forward to receiving "in-kind redemptions" since they allow an ETF to be more tax-efficient.

Is there some reason why this ETF does not or can not do this?

The equal weight S & P ETF is supposed to be .2% in each of the 500 companies and each quarter has to get back to this from whatever happens to those stocks which would be ALOT more turnover than a market-cap weighted 500 which is somewhat naturally rebalanced except for the share counts that change each quarter. Whether the ETF will have sufficient volume to clear this hurdle is the question that time will tell.

I'd also note that the Mid-cap SPDR had capital gains distributions for its first few years that somehow seems to be ignored by some folks.

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