Taxes can erode even the best fund's returns. Generally, when an investment
does not require investors to pay taxes during the ownership period, the
investment is potentially more tax efficient. Because of their unique
structure, ETFs may serve as a tax-efficient investment tool for
shareholders who wish to defer capital gains until the point of sale.
Frequently asked questions
Why are ETFs tax efficient?
Unlike traditional mutual funds, the majority of buying and selling by
shareholders takes place on an exchange and not directly with the ETF. As a
result, the ETF does not need to make purchases or sales in its portfolio in
response to these shareholder trades, and with a lower volume of portfolio
sales there is a lower likelihood of the ETF realizing gains on its
portfolio.
ETFs work directly with authorized participants (APs) which are typically
large institutions to create and redeem existing fund shares typically
through an "in-kind" process. APs have a legal agreement in place with an
ETF trust and their custodial bank allowing them to create or redeem shares
of the ETF in large blocks of shares known as creation units. When
redemptions are processed "in-kind", the Fund delivers a specific basket of
portfolio securities in return for the AP surrendering shares of the ETF.
Due to specific provisions of the Internal Revenue Code, an "in-kind"
redemption does not result in a taxable realized gain or loss to the ETF.
Thus, this structure may create a meaningfully different after-tax return
experience between an ETF and another type of investment vehicle — even if
both track the same index.
Please visit our
Education Center
for more information on tax efficiency and a pictorial representation of
creation/redemption process.
What circumstances might make an ETF more likely to have capital gains
distributions?
Common events that may cause an ETF to incur capital gains include:
Corporate Actions: A corporate action is an event that
causes material change for a company which could affect its shareholders.
With a corporate action, a Fund may be required to surrender a specific
portfolio holding to the issuer, or a transaction by the issuer of the
holding may result in a realized gain or loss to the Fund, despite the
Fund not initiating a transaction.
Derivative instrument gains: Realizing gains on
derivative instruments or collateral such as options or futures that
settle or expire with a net gain to the fund.
Non-in-kind Portfolio Transactions: There may be
situations where an in-kind transaction is not available or appropriate
and therefore the Fund may sell securities for cash as opposed to
delivering them "in-kind". These types of sales will give rise to a
taxable realized gain or loss to the Fund.
There are risks involved with investing in ETFs including possible loss of
money. Index–based ETFs are not actively managed. Actively managed ETFs do
not necessarily seek to replicate the performance of a specified index. Both
index–based and actively managed ETFs are subject to risk similar to stocks,
including those related to short selling and margin maintenance. Ordinary
brokerage commissions apply.
While it is not Invesco Invesco Capital Management LLC intention, there is
no guarantee that the Funds will not distribute capital gains to its
shareholders.
Invesco and Invesco Distributors, Inc. and their affiliates do not provide
tax advice. Please note that (i) any discussion of U.S. tax matters
contained is this communication cannot be used for the purpose of avoiding
tax penalties; (ii) this communication was written to support this promotion
or marketing of matters addressed herein; and (iii) you should seek advice
based on your particular circumstances from an independent tax advisor.
The information in this communication is not a complete analysis of every
material aspect relating to tax harvesting. This communication is for
educational purposes only. Tax consequences will vary between individuals
and each individual should carefully evaluate his or her tax position with
an independent advisor.
Invesco acquired Guggenheim's exchange-traded fund business on April 6, 2018
and May 18, 2018. Invesco is not affiliated with Guggenheim.
The Invesco DB and CurrencyShares Funds are not mutual funds or any other
type of Investment Company within the meaning of the Investment Company
Act of 1940, as amended, and are not subject to regulation thereunder.
Shares in the Invesco DB Funds are not FDIC insured, may lose value and
have no bank guarantee.
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