What are the tax implications of ETFs?
ETFs are required to distribute dividends and capital gains to shareholders, typically at the end of each year or quarter. The redeemer pays taxes when each of the underlying securities are sold, while the fund owes no taxes based on these redemptions. Since ETFs are passively managed, they commonly realize fewer capital gains than actively managed funds. Most ETFs are designed to track a benchmark, which can mean fewer trades and lower portfolio turnover. This reduces the frequency of tax gain distributions.
