Only 6% of U.S. exchange-traded funds (ETFs) surveyed think they’ll hand out capital gains in 2025, with a mere 2% expecting to exceed 1% of their net asset value. The leading distributions mainly stemmed from markets limiting spot trading or strategies that rely on swap contracts. Interestingly, ETFs that fall into the alternative and non-traditional stock category had the largest share of those projecting returns tied to derivative-heavy tactics. It seems ETFs have reaffirmed their tax efficiency for 2025.
In a recent survey by Morningstar covering 15 big U.S. ETF providers and around 1,600 ETFs, the results showed that just 6% predicted capital gains distributions. Only 2% anticipated paying out more than 1% of their net asset value.
So, why does it matter when it comes to capital gains distributions? Well, capital gains can emerge at two levels: ETFs and mutual funds. Investors, or their advisors, manage the first level—they determine when to buy or sell shares and face the tax consequences if those shares appreciate. The second level, however, is a bit different. ETFs and mutual funds rack up capital gains when asset managers sell stocks, bonds, or other assets for a profit without offsetting losses. By law, these funds have to distribute profits to investors proportionately. If you’re holding funds in taxable accounts, you have to pay taxes on distributions unless you have offsetting losses. The classification—long-term or short-term—hinges on how long the investor’s held the fund, not the specific assets.
What gives ETFs an edge in tax advantages compared to mutual funds? Well, ETFs usually utilize in-kind redemptions, which help them sidestep capital gains distributions. Rather than selling assets for cash, like mutual funds, ETFs let professional market makers exchange valuable assets in-kind. This method allows ETFs to part with high-value assets without generating a profit on paper.
In 2024, around 40% of U.S. mutual funds distributed capital gains, while only about 5% of U.S. ETFs did. Average ETF capital gains distributions were over a full percentage point lower than those of mutual funds. Essentially, there are fewer ETFs that distribute capital gains compared to mutual funds, and if they do, the amounts are typically minimal—good news for ETF investors, and this trend appears to carry into 2025.
While ETFs generally avoid paying capital gains distributions, there are exceptions. The highest expected distributions for 2025 are detailed in the accompanying chart. Certain countries, like India, prohibit spot trading, leading ETFs such as iShares India 50ETF and Invesco India ETF to often issue larger capital gains distributions. Internationally focused ETFs, including the WisdomTree True Emerging Markets ETF, also anticipate higher distributions in 2025 since countries like Brazil and China don’t allow physical trading either.
Some types of securities, particularly those that are illiquid or complex, may be traded only for cash, which can result in capital gains. Derivatives, for example, often fall into this category. ProShares Ultra Financials ETF employs swap contracts to try to double the daily performance of the S&P Financial Select Sector Index, and since swap contracts aren’t traded on exchanges, they’re generally settled in cash. Most ETFs that rank among the top 10 for expected capital gains distributions have ties to markets that limit physical trading or utilize swap contracts. An exception is JPMorgan Fundamental Data Science Large Value ETF, which transitioned from an investment trust to an ETF in July 2025. The anticipated capital gains distributions likely stem from profits generated while it was still a mutual fund.
In terms of categories, those within the U.S. alternative and non-traditional stocks stand out regarding the number of ETFs predicting capital gains. These include ETFs that frequently lean on derivatives, making physical trading impractical. Historically, from 2020 to 2024, municipal and taxable bond ETFs had the highest percentage of capital gains distributions, though these were generally lower on average. This is because bonds only yield capital gains if sold for more than their face value. While bonds can be traded physically, doing so is often tricky since the market can be fragmented and liquidity varies. Hence, ETFs may resort to cash redemptions, leading to capital gains.
