The Heartbeat Of ETF Tax Efficiency

January 03, 2018

By contrast, here are flows from rebalance weeks in 2015-2017. Shares created and redeemed range from 1 million to 9 million, dwarfing the day-to-day flows. 

 

The pattern is clear: inflows a few trading days ahead of time, outflows on rebalance Monday.

The benefit is enormous: MOAT turned over 25% of its portfolio in the September 2017 rebalance. The realized gains could be significant, especially in the current hot equity market. That could make for a hefty tax bill come year end, an unhappy holiday gift.

Enter The Happy Trade

Somehow, someone created 4.5 million shares on September 14, a 14% increase in shares outstanding. While we cannot know the exact source of the creation, the pattern of outsized creations and redemptions above suggests that MOAT’s portfolio manager could count on a 4.5 million share redemption on rebalance day. That’s a huge opportunity to in-kind away low-basis stock, at no cost to the fund holders.

I wish I knew who created and redeemed those shares, and how that transaction was funded, if only to offer thanks on behalf of MOAT’s longer-term shareholders.

MOAT is hardly the only fund to display the “heartbeat” flows pattern. Other prominent funds with a similar pattern include the PowerShares S&P 500 Low Volatility Portfolio (SPLV), First Trust Morningstar Dividend Leaders Index Fund (FDL-US), and the Vanguard Russell 1000 Value ETF (VONV).

Here are three years of flows through December 8, for SPLV:

 

ETFExplainerXLB

For a larger view, please click on the image above.

 

And VONV:

 

ETFExplainerXLB

For a larger view, please click on the image above.

 

VanEck is but one of many issuers whose rebalance date fund flows look like an EKG. When I looked for funds with outsized, quick turnaround flows repeated at intervals, I found examples at nearly every large ETF issuer, and many smaller ones, sometimes for nearly every fund and sometimes used quite selectively.

 

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