Topic · Income and option ETFs
Are the 'tax-efficient income' ETFs actually tax-efficient?
A category that grew from about $6 billion to $175 billion in five years, sold on yield and tax words. Compared with the index each fund wraps, the tax case is thin and the return gap is real.
Start here3 reads · 12 min
The few ideas everything else rests on.-
Income ETFs are income products, not tax products
Option-income funds grew from about $6 billion to $175 billion in five years, sold on yield and tax words like 60/40 and return of capital. Against the index each one wraps, the tax case is thin.
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Return of capital comes out of your own cost basis
A return-of-capital payout is not taxed when received. It lowers your cost basis, so the tax arrives when you sell. At a 14% payout the basis is gone in about seven years; then every payout is a gain.
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Where cash from stocks costs least: 14 cents, 35, or 52
Take $14,000 from an income ETF and the tax is 52 cents per dollar now, or 35 cents later. Sell $14,000 of index-fund shares with a 40% gain and it is 14 cents, with the rest still compounding.
How it works2 reads · 6 min
The mechanics and the numbers behind them.-
Every large income ETF trails its index
Since launch, the biggest covered-call funds have returned 4 to 11 points a year less than the index each one wraps. The premium is real; it is paid for with the rallies the fund sells away.
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The label predicts nothing; the filing does
Two funds with the same 'covered call' label paid 99.6% return of capital and 74% ordinary income in the same year. The monthly notices said otherwise. Only the year-end filing counts.
Go deeper1 read · 3 min
Edge cases, products, and what could change.-
The new ETFs built on one tax right, and the regulator watching
A $14 billion fund that turns T-bill interest into deferred gain. A fund that never receives a dividend. Both lean on the in-kind rule behind every index ETF, and Treasury has said it is looking.