Converted ETFs Could Introduce Tax Baggage

Converted ETFs Could Introduce Tax Baggage

Financial advisors must look out for the tax consequences when mutual funds are converted into exchange-traded funds.

Wealth Management Editor
Reviewed by: Staff
Edited by: Mark Nacinovich

Financial advisors preparing for year-end tax-management strategies might want to keep an eye on ETFs that have recently converted from mutual funds. 

While the ETF structure typically protects investors from the kinds of surprise capital-gains distributions that can hit mutual fund investors even in down market years, there are always exceptions.  

According to data-tracking firm FactSet, during the three-year period through 2022, there were 378 ETFs that distributed capital gains to investors. 

To be fair, many of those distributions were minuscule, with 270 ETFs distributing less than a percentage point of capital gains and 108 ETFs distributing less than one-tenth of a percentage point. 

But more than 20 ETFs distributed average capital gains over the period of more than 5%, which could be a year-end shocker to some financial advisors and their clients. 

Converted ETFs 

Elisabeth Kashner, director of exchange-traded fund research and analytics at FactSet, said the trend toward ETF conversions could lead to more surprise capital-gains distributions. 

“I would say that buying a converted ETF in the calendar year of its conversion requires additional due diligence,” she said. “In addition to the usual review [of an ETF], it's important to assess the transferability the investment strategy in the ETF wrapper, the strength of the capital markets team and the potential tax liabilities.” 

According to CFRA, 68 U.S. mutual funds have been converted into ETFs since the first conversion in March 2021 by Guinness Atkinson Asset Management. 

“Most of the mutual funds that have converted are active strategies, and we don’t see the conversion trend stopping,” said Aniket Ullal, head of CFRA’s data and analytics. 

To date, the largest issuers of converted ETFs have been Dimensional Fund Advisors, with seven funds combining for $65 billion in assets under management, JPMorgan with eight funds and $8.7 billion and Fidelity Investments with 11 funds and $7.9 billion. 

The Conversion Kings 

At Dimensional, which entered the ETF business in 2020 and which has grown to 38 ETFs with a combined $100 billion in assets, tax implications played a major role in the conversion strategy. 

According to Mary Phillips, deputy head of portfolio management at Dimensional, all of the converted ETFs were tax-managed mutual funds, and the conversions didn’t trigger any capital-gains distributions. 

“We were pretty intentional in converting our tax-managed strategies,” she said. “We selected these funds because they’re tax managed and felt we could add additional value in an ETF wrapper.” 

According to the FactSet data, which doesn’t include 2023, 15 of the 378 ETFs that distributed capital gains between 2020 and 2022 were converted from mutual funds. 

“While most equity ETFs avoid distributing capital gains, converted ETFs may have realized but undistributed gains on their books,” said FactSet’s Kashner. “If so, anticipate a year-end capital gains distribution.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter 

Jeff Benjamin is the wealth management editor at, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.