Working Paper: NBER ID: w8781
Authors: James M. Poterba; John B. Shoven
Abstract: Exchange traded funds (ETFs) are a new variety of mutual fund that first became available in 1993. ETFs have grown rapidly and now hold nearly $80 billion in assets. ETFs are sometimes described as more 'tax efficient' than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distributions of realized and taxable capital gains than most mutual funds. This paper provides an introduction to the operation of exchange traded funds. It also compares the pre-tax and post-tax returns on the largest ETF, the SPDR trust that invests in the S&P500, with the returns on the largest equity index fund, the Vanguard Index 500. The results suggest that between 1994 and 2000, the before- and after-tax returns on the SPDR trust and this mutual fund were very similar. Both the after-tax and the pre-tax returns on the fund were slightly greater than those on the ETF. These findings suggest that ETFs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low-cost index funds.
Keywords: Exchange Traded Funds; Tax Efficiency; Investment Returns
JEL Codes: H24; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ETFs (redemption in kind) (G23) | lower capital gains distributions (D33) |
| lower capital gains distributions (D33) | after-tax returns for investors (G11) |
| ETFs (G23) | after-tax returns for investors (G11) |
| mutual funds (G23) | after-tax returns for investors (G11) |
| ETFs (SPDR Trust) (G23) | smaller distributions of realized and taxable capital gains than mutual funds (D39) |
| higher capital gain distributions from mutual funds (D33) | lower after-tax return (H29) |