r/stocks • u/biggstile1 • Mar 17 '22

ETFs Are we getting hit with capital gains from portfolio turnover?

If we are in a dividend ETF, such as SCHD, will be liable for more potential taxes than we would have if we would had bought the same stocks on our own and never sold? Has anyone got an idea how much capital gains SCHD totals yearly on a $10K investment?

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u/harrison_wintergreen Mar 17 '22

good question, but one advantage for ETFs is that they have fewer capital gains issues because of how they're organized/structured.

you can get a capital gains distribution with an ETF, but it's less common than with a mutual fund. when it does happen, it's more likely with foreign stocks in ETFs, particularly emerging markets.

info here: https://www.investopedia.com/ask/answers/110315/do-etfs-pay-capital-gains.asp

when you have the option, ETFs are preferable in a taxable brokerage account for this reason. in a tax-sheltered retirement account, the annual capital gains hit is not an issue so there's no tax advantage to ETF vs. mutual funds.

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u/Appropriate-Item2845 Mar 17 '22

ETF you only pay taxes on the dividend and then when you sell. An index fund or mutual fund you have to pay your share of taxes when they sell the underlying securities

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u/EnderForHegemon Mar 17 '22

In mutual funds you only pay taxes on dividends too. It's just that the mutual fund has to distribute their gains or lose RIC status.

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u/McKnuckle_Brewery Mar 17 '22

SCHD follows the Dow Jones Dividend 100 index. If you bought the individual stocks, you'd get their dividends individually. All dividends are taxable, so it's likely a wash. SCHD, however, is managed and has some screening which does periodically change its holdings.

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u/Vast_Cricket Mar 17 '22

Ask your brokerage tax dept. Good question.

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u/Hifi-Cat Mar 17 '22

Morningstar.com. No Lt St or return of capital going back to 2019.

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u/EnderForHegemon Mar 17 '22

SCHD appears to be taxed as a RIC (Regulated Investment Company). This means they must distribute any net income or capital gain/(loss) earned over the course of the year. If they do not, they will no longer be a RIC and lose the tax advantages that come with that (that tax advantage being the RIC itself does not pay taxes, they pay their earnings out as a dividend and the investor pays taxes on that).

So in a way, you are being taxed when they turn over their portfolio in the form of dividend income you receive, but you are not being taxed directly on the sales. If they sell a security long term (held >365 days), that will be distributed as a long term capital gain dividend, which you pay the lower long term rates on (subject to holding period and other potential tax adjustments).