Barclays Global Investors said late Wednesday that it's expecting two of a total of 178 iShares exchange-traded funds to pay out year-end capital gains.
That's a pretty good batting average. And the only funds that the industry's dominant provider are estimating will trigger tax bills for investors shouldn't come as that big of a surprise.
The iShares Cohen & Steers Realty Majors Index Fund (NYSE: ICF) should wind up with long-term capital gains of between 35-45 cents per share, according to BGI. Those gains are the same as what the company's estimating the ETF's total capital gains are for the year.
The only other ETF expected to cause tax consequences for investors this year is the iShares Lehman Short Treasury Bond Fund (NYSE: SHV). It's expected to realize short-term gains of 7-10 cents a share. (See chart on next page.)
The figures are based on preliminary calculations and subject to change, due to changes in the number of outstanding shares and certain tax adjustments that may affect final calculations, according to BGI.
"In a challenging year such as this one, taxes matter more than ever and iShares ETFs continue to prove their tax efficiency," said Lee Kranefuss, chief executive of BGI's ETF business, in a statement.
Unique Tax Treatment
In 2006, BGI distributed capital gains on just two of its 115 ETFs, and both were real estate funds, which have a unique (and sometimes unfavorable) tax treatment: A portion of the dividends paid out by REITs can be classified as capital gains under federal tax law.
Last year, six of 156 iShares ETFs distributed capital gains. The highest capital gain was turned in by iShares MSCI EAFE Value Index (NYSE: EFV). It had cap-gains-related distributions of $0.92 per share last year credited to strong market appreciation and a surge in mergers and acquisitions activities.
A short-term bond fund and a fund investing in real estate investment trusts also were forced to make payouts last year.
Bond funds, of course, provide steady streams of dividend income. But SHV is also weighed down in terms of incurring a tax bill since it has handily outperformed its short-government fixed-income category. According to Morningstar data, the bond ETF had returned more than 2.6% heading into Wednesday.
At the same time, the S&P 500 tracking SPDRs Trust (AMEX: SPY) was down 37%-plus on the year. Its chief rival, the iShares S&P 500 Index (NYSE: IVV) was down by the same amount. Neither had capital gains payouts last year.
An interesting factoid is that some 3% of the market value of actively managed mutual funds was paid out via capital gains in 2007, according to Lipper data. But iShares paid out less than 0.02% of the market value of its ETFs last year, says BGI.
"Many actively managed fund investors are likely going to get a double whammy of underperformance and capital gains this year," said Kranefuss. "A lot of the gains are being logged this year as the result of investor redemptions that forced portfolio managers to liquidate positions."
Fund Short- Long- Total Capital Income Distributions Ex-Date Pay Date iShares Cohen & Steers Realty Majors Index Fund (ICF)* $0.00 estimate $0.35- $0.35- 0.74%- N/A N/A* N/A* iShares Lehman Short Treasury Bond Fund (SHV) $0.007- $0.00 estimate $0.007- 0.006%- N/A 12/1/08 12/5/08
iShares Cohen & Steers Realty Majors Index Fund (ICF)*
iShares Lehman Short Treasury Bond Fund (SHV)
*NAV price will not change as the amount has already been distributed and is solely being reclassified as a long-term capital gain
**Based on NAV and outstanding shares as of 11/7/08