Morningstar Spotlights Tax Pitfalls in Private Asset ETFs
- Editor
- Mar 27
- 2 min read
What's New
Morningstar's latest analysis reveals that ETFs containing private assets may surrender the tax advantages that typically make ETFs attractive to investors, while simultaneously commanding premium fees that far exceed traditional index-tracking alternatives. Industry experts consider this development particularly problematic as it undermines the two primary benefits that have fueled the ETF revolution: tax efficiency and low costs.
Why It Matters
This trend represents fund providers' strategic response to a market dominated by low-cost giants, creating novel products where they face less price competition. However, by compromising the fundamental advantages that drove investors to move $1 trillion from mutual funds to ETFs last year, these hybrid vehicles risk disappointing investors who may not fully understand the tradeoffs they're making when purchasing these seemingly innovative products.
Big Picture Drivers
Competition forces mutual fund providers to create novel products as they cannot compete with established Vanguard and BlackRock low-cost index ETFs
Structure limitations force private asset ETFs to revert to mutual fund-like cash transactions that trigger capital gains, compromising tax efficiency
Access expands to smaller investors who previously couldn't meet multi-million dollar minimums required for private equity and credit markets
Limitation regulations cap private assets at 15% of ETF holdings, reducing their overall impact on fund performance
Resources gap exists as wealthy investors employ dedicated experts while retail investors lack tools to evaluate private asset risks
By The Numbers
0.75% annual fee for ERShares Private-Public Crossover ETF (XOVR) versus fractions of that for comparable index ETFs
$500 billion exited actively managed mutual funds in 2024 as investors sought lower-cost alternatives
$1 trillion+ flowed into ETFs during the same period, with three Vanguard/BlackRock funds capturing nearly 25%
15% maximum allocation to private assets permitted in ETFs under current regulations
Key Trends to Watch
Fee pressure will intensify as more private asset ETFs launch, potentially driving costs down but likely remaining higher than index alternatives.
Regulatory changes could alter the 15% private asset cap, fundamentally changing the risk profile of these hybrid vehicles.
Tax efficiency improvements might emerge through structural innovations that help preserve the ETF advantage.
Performance tracking will become crucial as these funds build track records that reveal whether their higher fees deliver corresponding value.
The Wrap
While expanding access to private markets has merit, current private asset ETFs represent more marketing innovation than investment breakthrough, with their compromised tax benefits and high fees directly contradicting why most investors choose ETFs in the first place.
Excerpt
Comentarios