MANAGE YOUR TAX COSTS

Investors know that exchange traded funds (ETFs) offer low fees and liquidity, but many overlook another key benefit: tax-efficiency. iShares ETFs can help investors build tax-aware portfolios and keep more of what they earn.

How are ETFs tax efficient?

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Structure

Unlike mutual funds, ETFs generally don’t sell securities to raise cash to meet redemptions. They instead employ an “in-kind” mechanism that allows them to meet redemptions without selling securities and realizing capital gains.

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Strategy

Nearly all U.S. ETFs seek to track the performance of an index. Index funds typically trade less frequently than active strategies, resulting in fewer capital gains distributions than most active funds.

Video 3:40

iSHARES BUILDS ETFs WITH TAXES IN MIND

Amy Whitelaw, Head of Americas iShares ETF Portfolio Engineering, discusses iShares’ differentiated approach to building tax-efficient ETFs.

What does it mean to be tax efficient?

 

For us at BlackRock, being tax efficient is managing portfolios in a manner in which we seek to minimize capital gain distributions from the fund. We deeply understand the need for growth in a client’s portfolio and the importance of minimizing the commensurate capital gain distributions, and therefore the tax drag of an investment is more in control of the investor, in other words, when they buy and sell a fund.

Tax Efficiency also means trying to maximize qualified income where appropriate.

 

What’s behind ETF’s tax efficiency?

 

There are three levels that makes our iShares ETFs tax efficient.

 

The first level is aligned with indexing as a strategy. The vast majority of iShares ETFs are index strategies, which generally speaking has lower turnover.

 

The next level is the structure of ETFs. ETFs are bought and sold on the exchange between buyers and sellers. In other words, investors in the fund are insulated. In the case where buyers and sellers are not in equilibrium, new shares are create or redeemed, generally using an in-kind process. This in-kind mechanism mitigates the buying and selling within the fund potentially reducing taxable events.

 

The last level comes down to what my teams does, manage our funds with a hyper focus on tax efficiency.

 

How does iShares build their ETFs with tax efficiency in mind?

 

From a philosophy prospective, tax efficiency is a continuous focus for us. It starts on January 1 and ends December 31st and continues year over year.  Since we launched the first iShares ETF almost 20 years ago, it’s been a true commitment to manage our portfolios to maximize after tax returns for investors. And the results speak volumes. 94% of our ETFs have not distributed a capital gain over the past 5 years.

 

From a process standpoint, when it comes to managing our ETFs, there are a few areas where I’d argue we have a differentiated and sharp focus.

 

First, our tax lot management leverages real time data and is fully incorporated into an end to end investment process which enables us to effectively manage tax lots to the best extent possible. Second, we proactively use the ability to bank loss losses through tax loss harvesting and have an integrated tool that helps us optimize events such as index rebalances to capitalize on this benefit. Third, we also leverage the ETF structure and the in-kind process to effectively externalize buying and selling activity to further drive tax efficiency.

 

Underpinning our philosophy and process is team of experienced portfolio managers who leverage the scale of BlackRock’s platform at the intersection of our proprietary Aladdin technology. It’s our people, scale and technology that help drive our tax efficiency.

 

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. 

 

Past distributions are not indicative of future distributions.

 

Visit www.iShares.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal.

 

iShares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Trading shares of the iShares Funds will also generate tax consequences and transaction expenses.

 

This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this video or from any other source mentioned. The information provided in this material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice.

 

Shares of iShares ETFs may be bought and sold throughout the day on the exchange through any brokerage account.  Shares are not individually redeemable from the ETF, however, shares may be redeemed directly from an ETF by Authorized Participants, in very large creation/redemption units. Although market makers will generally take advantage of differences between the NAV and the trading price of iShares ETF shares through arbitrage opportunities, there is no guarantee that they will do so.

 

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

 

©2019 BlackRock. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.

Taxes: A bigger drag than management fees

The potential effects of taxes can be more detrimental to portfolio returns than fees. Over the past decade, the average annual fund tax cost for U.S. large cap equity mutual funds was more than double the average fund expense ratio (1.79% vs. 0.89%).¹ Ignoring this tax drag can be costly.

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