Four “ultra” ProFunds exchange-traded funds, which aim to produce 200% of their stock benchmarks, paid out capital gains distributions of $3.80 to $6.80 a share last week, The Wall Street Journal reports.
While it may seem that those gains are cause for celebration, they will cost investors hefty tax bills, and they are unusual for ETFs. In addition, because these are short-term capital gains, investors will have to pay taxes at the rate of ordinary income, whereas long-term capital gains are taxed at a rate of 15%. On top of this, investors will also have to pay taxes on the ETFs’ dividends.
“It is totally atypical for exchange-traded funds to make large distributions,” said Morgan Stanley ETF analyst Paul Massilli. “iShares have not paid capital gains distributions in five years.”
Steve Cohen, managing director at ProFunds, explained that because the funds aim to double the returns of their benchmarks, the funds use instruments other than stocks, including futures contracts and swaps, which have different tax characteristics.
In addition, the funds are only six months old, giving them a short period in which to adjust their tax positions. Few redemptions have also meant that the managers haven’t been able to sell many assets with embedded gains. Finally, the stock market has been strong in recent months.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.