) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.: It seems to me that if an investor purchases an exchange-traded fund in a non-registered account and enrolls the units in a dividend reinvestment plan, there would be no need to look out for phantom distributions.
Here’s a key thing to understand: A phantom distribution is nothing more than a bookkeeping exercise for tax purposes. No cash changes hands. Typically, the only thing being “distributed” is a capital gains tax liability. However, cash from the ETF’s capital gains doesn’t actually leave the fund. When an ETF sells a stock, it doesn’t leave the proceeds sitting around, because that would affect the ETF’s performance. Instead, it reinvests the cash internally.