Why are advocates of ETFs picking on the capital gains distributions that are made by mutual funds? Because ETFs have a feature that allows them to be free of embedded capital gains and, it is claimed, they generally pay out fewer capital gains distributions than their mutual fund brethren. I think I’m getting into making the overly-generalized statements that I usually loathe. Not all ETFs are free of the distributions.
In any event, what would happen if mutual fund investors were no longer forced to pay tax on capital gains distributions? That’s exactly what has been proposed. The Committee on Capital Markets Regulation released a report recommending that most investors be free of the distributions and only pay tax upon sale of the mutual funds.
This issue has been battled before but, if you’re a mutual fund investor, stand up and applaud the efforts -- and then write your congressman.