The XLK/XLC/XLY Conondrum

Water Cooler Investing
#1

So at the end of September, GICS/S&P are re-shuffling tech, discretionary, and telecom and it’s fking with my mind…someone explain to me where I’m falling astray here…

So let’s say I hold a bunch of XLK…which obviously includes FB (7% of the fund) and GOOG(L) (10% of the fund)…I’ll use just these two as an example,even though there are several more tech names moving. Well at the end of September, these are going to be moved into this new “Communication Services” sector - aka the XLC etf. So how exactly will this work without me getting some sort of enormous tax bill due to the embedded gains in those two names? And how exactly will this work?? Will they simply sell the names that are moving to XLC and use the proceeds to buy the rest of what is staying in XLK? Won’t I be hit with a huge tax billl? The only other thing I could think of is that they will somehow shift the shares out of one pocket (XLK) and into another (XLC)…but then, as a holder of XLK, won’t my market value evaporate as the FBs and GOOGLs leave XLK? I’m sure the folks at S&P & State Street have thought this through but I can’t find any documentation that answers this…

#2

Your cap gains bill still won’t be “huge.” Yes, you will have to pay on FB and GOOG and anything else that’s being reconstituted, but it probably won’t amount to much. It works the same way mutual fund cap gains are paid (though ETFs are much more efficient). Come tax time you’ll get one of those forms with your cap gains info on it.

#3

Yet State Street has come out and said that they don’t expect there to be capital gains distributions as a result of this…says that right in their PDF if you google “XLK rebalance”

…that’s what is not making sense here…how could there not be tax consequences to this?

#4

It seems to mean that they aren’t selling the shares. Where would these shares go? Probably to XLC actually - to make XLC creation units that can be distributed to later investors.