Last year's bear-market drop meant large gains for short or inverse performing ETFs. By design, these types of ETFs rise in value when stocks or bonds fall.
As a result, these types of ETFs paid out the largest capital gains distributions in 2008. Fast forward to today. Because of surging stock prices, the opposite has occurred.
The largest capital-gains distributions for this year will likely be for leveraged long ETFs. Investors with these types of ETFs inside their portfolios should be especially vigilant in avoiding the coming tax hit.
Should this year's outsized gains in 2x and 3x long leveraged ETFs hold, a large tax liability likely awaits those that own these funds through their respective ex-dividend dates. To avoid the tax hit, your clients will either need to hold these ETFs inside a tax-deferred account like a regular or Roth IRA or sell the funds before their ex-dividend date.
As 2009 concludes, do not count on ETF providers of short and leveraged ETFs to give you early warnings about large tax gain distributions. Don't be surprised if announcements of ex-dividend dates are given just days ahead of their actual distribution. Stay alert and be vigilant.