Why the $5.4 trillion ETF market faces its biggest crisis since inception

Happy Friday! Exchange-traded funds have been referred to as one of the best financial innovations and the greatest success story in markets over the past few decades. There are many solid attributes to ETFs that are enjoyed by individual investors and institutions alike but one important benefit, the tax efficiency, could be stripped away from the funds, delivering a potentially blow to the industry experts told ETF Wrap.
We’re going to talk about the implications of a proposal coming out of Washington, D.C. that has raised the hackles among large and small ETF providers alike. We’ll also touch on a new ETF on offer by Goldman Sachs that our colleague Christine Idzelis is reporting on.
An ETF death knell?
U.S. Senate Finance Committee Chairman Ron Wyden’s proposal aims to tax the ETF industry. As our readers well know, ETFs are a baskets of securities that are as easy to trade as a stock and appeal to average investors for its convenience if not also for its tax efficiency.
ETFs defer taxes with so-called in-kind transactions
The inherent tax efficiency of an ETF, which usually is constructed to mimic the performance of index and tends to be low-cost for that reason, is the direct result of the in-kind redemption of shares and creation of new ones. Currently, in-kind tax treatment is governed by section 852(b) (6) of the Internal Revenue Code, and provides that the creation of new ETF shares and the redemption of old ones isn’t a taxable event.