Tom Konrad CFA
My recent article, In
Clean
Energy,
Active
Management
Pays, started a bit of a
controversy. Rafael Coven, the Index Manager for The Cleantech
Index (^CTIUS), which is the index behind the Powershares
Cleantech Portfolio (PZD), left
a
comment
on
Barrons and sent me an email saying, 'Your
comparison of funds and ETFs ignores the tax efficiency differences
which are very significant.'
Rafael is right that it's important for many investors to consider
taxes before making an investment decision, and that ETFs
are
often
more
tax
efficient
than
mutual funds. But are the
differences in the particular case of clean energy funds really "very
significant"? I had my doubts, so I decided to look at the
numbers and find out.
Why ETFs are Usually More Tax Efficient
ETFs are generally considered more tax efficient because they make
fewer capital gains distributions. A mutual fund or ETF that
sells a position at a profit is required by law to return a prorata
share of any net capital gains to the fund's investors every
year. Positions held less than a year produce short term capital
gains, while positions held more than a year produce long term capital
gains. When these gains are returned to investors, they are
taxable as short or long term capital gains, regardless of whether the
funds are reinvested.
In general, actively managed mutual funds trade much more often than
ETFs, which passively track an index. While many mutual funds
trade much of their portfolio once or more a year, most ETFs only
trade a tiny fraction of their portfolio in order to keep up with
changes in the underlying index.
Hence a mutual fund with a Turnover Ratio of 100% (meaning that, on
average, 100% of the funds holdings are traded each year) will, on
average, only hold a position for a year, and will distribute the
majority of capital gains to shareholders every year, much of which
will be in the form of short term capital gains, which are typically
taxed at a higher rate than long term capital gains. In
contrast, an ETF with a Turnover Ratio of 10% will, on average, hold a
position for ten years. This allows time for significant
undistributed capital gains to build up, and when those capital gains
are distributed, they almost always come in the form of long term
capital gains, which are usually taxed at a lower rate.
Who Needs to Worry About Tax
Efficiency, and Who Doesn't
Not all investors need be concerned about the tax
efficiency. Most obviously, investors who are investing in
a non-taxable account, such as an IRA and a 401(k). Tax exempt
institutions, such as charities, also need not worry about tax
efficiency. Finally, people in lower tax brackets need be less
concerned than those with high incomes, since the taxes on capital
gains distributions will be lower for them.
Undistributed Gains
Most renewable energy stocks are down significantly over the last three
years (roughly the same period as the track record of most of the
ETFs.) This means that, at least in the short term, many mutual
funds and ETFs will not have any capital gains distributions no matter
how well they perform, because previous year's capital losses will be
available to offset future gains. (While funds are required to
distribute realized capital gains, they have no way of distributing
realized capital losses, except for offsetting future gains.)
The Numbers
Morningstar has data on most fund's tax efficiency, including
adjusted returns assuming distributions are taxable, and potential
capital gains exposure (undistributed capital gains as a percentage of
net assets.) The following two tables and charts compare the ETF
and mutual fund three year returns on both tax adjusted and unadjusted
basis, along with potential capital gains exposure and fund
turnovers. Where possible, I used no-load mutual fund shares
because I feel they are more comparable to ETFs than load shares,
despite the fact that long term mutual fund buyers should generally
prefer load shares because of their lower annual expense ratios.
| ETF | 3yr pretax total return | 3yr tax adj total return | Potential Cap Gains Exposure | Turnover |
| QCLN | -43.34% | -43.34% | -52% | 40% |
| PZD | -28.31% | -28.38% | -40% | 31% |
| PBD | -56.22% | -56.28% | -98% | 62% |
| GEX | -64.96% | -65.03% | -198% | 50% |
| PBW | -59.90% | -59.90% | -234% | 42% |
| ICLN | insufficient track record | -64% | ||
| Mutual Fund | 3yr pretax total return | 3yr tax adj total return | Potential Cap Gains Exposure | Turnover |
| WGGFX | -38.09% | -38.76% | -46% | 93% |
| NALFX | -36.19% | -39.81% | -25.00% | 34% |
| CGACX | -61.73% | -61.73% | -110% | 61% |
| AECOX | -48.72% | -51.72% | -68% | 39% |
| GAAEX | -66.23% | -67.52% | -241% | 47% |
| WRMSX | -42.70% | -42.88% | -260% | 114% |
| SRICX | 15.43% | 12.65% | 0.60% | 190% |
| ALTEX | -33.01% | -33.01% | -22.18% | 41% |
As you can see from the tables, the ETFs have indeed been more
tax-efficient than the mutual funds, but the differences are so
marginal that they are difficult to detect in the charts.
More striking are the extremely large negative
capital gains exposures of many mutual funds and ETFs. The DWS
Climate
Change
Fund
(WRMSX), Guinness
Atkinson Alternative Energy Fund (GAAEX), Van
Eck
Global Alternative Energy Fund (GEX), and the PowerShares
Clean
Energy (PBW) all have undistributed capital losses equal to
multiples of the funds' current values (260%, 241%, 234%, and
198%).
That means that all the holdings in each fund's portfolio could be sold
for three or more times their current value and the funds would still
not have
to distribute any capital gains. Tax efficiency will remain
a moot point for years to come, at least for these four funds, as well
as for the PowerShares
Global
Clean Energy Portfolio (PBD) and the Calvert
Global Alternative Energy Fund (CGACX).
The only fund for which I can really call tax efficiency a concern is
the Gabelli
SRI
Green Fund (SRICX). Why does the Gabelli fund stand out
as having a "problem" with tax efficiency? Because the Gabelli
fund
actually managed to turn a decent profit over the last three
years, while their clean energy mutual fund and especially ETF rivals
lost money hand
over fist. I recently interviewed
John
Segrich, CFA, the lead fund manager at the Gabelli SRI Green fund,
and he explained in part how they did it.
When it's a sign you're making money, tax inefficiency seems like a
good "problem" to have.
Turnover
It's also worth noting the fairly high Turnover ratios of all of the
ETFs, ranging from 30% to over 60%. That means that, on average,
the
holdings of Clean energy ETFs trade once every 2-3 years, which is not
enough time to build up substantial unrealized capital gains, although
the majority of capital gains distributions are likely to be in the
form of long term capital gains. In fact, the New
Alternatives
FD Inc (NALFX) has a lower turnover ratio than all but
one of the clean energy ETFs.
Even when we return to an environment where most of these funds are
habitually making gains, and the negative capital gains exposures of
many of the funds are exhausted, these ETFs will have less of an
advantage in tax efficiency over the clean energy mutual funds than
broad market ETFs have over their peers, unless the ETF turnover ratios
fall faster than those of the mutual funds.
Conclusion
While Clean
Energy
ETFs are a little bit more tax efficient than Clean
Energy
Mutual Funds, the difference is not currently significant.
Clean
Energy is a very young sector with high volatility and quickly changing
industry structure. The changeable nature of the clean energy
landscape means that a lot of the usual rules do not apply. Not
only do active
managers
have a significant advantage over passively managed funds like
ETFs, but passive clean energy funds also have much less
significant
tax advantages than passive broad market funds.
DISCLOSURE: No Positions. GAAEX is an
advertiser on AltEnergyStocks.com.
DISCLAIMER: The information and
trades provided here are for informational purposes only and are not a
solicitation to buy or sell any of these securities. Investing involves
substantial risk and you should evaluate your own risk levels before
you make any investment. Past results are not an indication of future
performance. Please take the time to read the full disclaimer
here.
Tidak ada komentar:
Posting Komentar