Though few investors know about it, since 2001, The Vanguard Group has utilized a clever scheme to reduce the 澳洲幸运5官方开奖结果体彩网:capital gains reported annually on the U.S. Internal Revenue Service (IRS) 澳洲幸运5官方开奖结果体彩网:Forms 1099-DIV sent to shareholders in some of its most popular 澳洲幸运5官方开奖结果体彩网:mutual funds. The process is completely legal and is even protected by a U.S. patent that blocks competitors from copying it until 2023,💟 but Vanguard has chosen not to publiciz🧸e it.

The table b❀elow outlines the basics of Vanguard's capital gains reduction scheme, per a 2019 story in and a related .

Significance for Investors

Under an obscure provision of the federal tax code, passed by Congress in 1969, if a mutual fund honors a 澳洲幸运5官方开奖结果体彩网:redemption request by giving the investor shares of appreciated stock in lieu of cash, no capital gains tax is due. However, since 澳洲幸运5官方开奖结果体彩网:retail investors expect to receive redemptions in cash, this alternative is rarely used by mutual funds. On the other hand, ETFs employ it🔴 aggressively.

The reason, as Bloomberg explains, is that the number of 澳洲幸运5官方开奖结果体彩网:shares outstanding of an ETF expands or contracts based on deposits or withdrawals made by intermediaries such as banks and 澳洲幸运5官方开奖结果体彩网:market makers. Such transactions typically are made in-kind 𒉰with shares of stock rather than cash, and ETFs can cut the capital gains reported to investors by settling withdrawals with shares of appreciated stock.

To reduce their reported capital gains even more, often to zero, ETFs frequently have these intermediaries deposit some stock for a day or two, then make a withdrawal that is paid out with shares of a different, highly appreciated stock. These so-called "heartbeat trades" (when charted, they show big trading blips reminiscent of a heart monitor) allowed the 183 largest U.S equity ETFs to reduce their reported 澳洲幸运5官方开奖结果体彩网:realized capital gains by about $203 billion in 2018, as 澳洲幸运5官方开奖结果体彩网:Bloomberg described in an earlier detailed article.

Starting in 2000, Vanguard entered the rapidly growing ETF market mainly by adding an ETF share class to some of its most popular existing equity mutual funds. Investors could swap their mutual🌊 fund shares for shares in the sister ETF with no tax currently due. With this structure, Vanguard also has used heartbeat trades to remove appreciated stock from ETFs and their sister mutual funds alike, reducing capital gains tax liabilities for investors in both.

Vanguard led all ETF managers with $129.8 billion of heartbeat trades from 2000 through 2018, per Bloomberg. The largest ETF player worldwide, iShares from BlackRock, is second with $74.5 billion, while all others combined for $125.6 billion. Across all its products, Vanguard had $5.2 trillion in global 澳洲幸运5官方开奖结果体彩网:assets under management (AUM) as of Jan. 31, 2019, per .

Looking Ahead

When Vanguard's patent expires in 2023, other mutual fund companies are expected to copy its process to reduce their investors' tax liabilities. Expect increased scrutiny from the 澳洲幸运5官方开奖结果体彩网:U.S. Treasury Department since the implications for tax revenues are massive. While U.S. equity ETFs control about $3 trillion of assets, U.S. equity mutual funds have more than triple that amount, Bloombꩵerg indicates.