How to Give an Exchange-Traded Fund (ETF) as a Gift – Investopedia
When you’re buying gifts for the holiday season or another special occasion, you have no shortage of options. For one thing, ecommerce makes it easier than ever to have presents delivered from around the world. However, except for some collectibles, not many gifts have a chance of growing in value.
If you’re looking for a gift with longer-term financial benefits, you might choose to give someone an investment asset like an exchange-traded fund (ETF). Rather than representing a stake in a particular company like a stock or a specific debt instrument like a bond, an ETF is a pooled security, comprising a basket of different investments. When you give an ETF as a gift, this means that your recipient becomes an investor in a slice of the financial markets.
With funds available that track almost any area of the market or type of asset you can think of—from broad stock indexes to niche segments, from commodities to bonds—there are many ETFs that you could consider giving as a gift.
An exchange-traded fund (ETF) represents a basket of various securities wrapped up into a single investment asset. Unlike mutual funds, which generally trade only at the end of the day, ETFs have the advantage of trading directly on stock exchanges, allowing investors to buy and sell shares through their brokerage accounts in real time throughout the trading day. This also allows ETF investors to carry out different types of transactions, such as stop orders and limit orders, providing more control over buying and selling prices.
ETFs are also transparent investments, with most of them disclosing their holdings every day. In addition, ETFs may offer tax advantages over other types of investments such as actively managed funds, where more frequent turnover in the fund may generate more capital gains taxes. Perhaps most importantly, ETFs offer the advantage of built-in diversification, with exposure to multiple securities offsetting the risk if one component declines in value.
Since ETFs took off starting in the 1990s, they have become an increasingly important part of many investors’ portfolios. With their capacity to target different parts of the market, ETFs allow investors to pursue many types of investment strategies. Given these benefits, perhaps it is no surprise that ETFs have seen massive growth throughout their decades on the market. According to Fidelity Investments, there were 2,955 ETFs and other exchange-traded products (ETPs) trading in the United States with assets of $6.64 trillion as of the end of May 2022.
With so many funds to choose from, selecting an ETF for your portfolio or deciding on the best one to give as a gift can be a bit overwhelming. Most ETFs are designed to track a specific index—a group of securities designated to measure the performance of a particular area of the market. ETFs generally attempt to match the performance of their underlying index by investing in all of the assets on the index or holding a well-defined sample of the included securities.
If you’ve decided on an ETF as a suitable gift, selecting the best fund to give will depend on what type of investment you would like to pass on to the recipient. Here are some of the most popular types of ETFs:
Gift giving used to involve searching for the right wrapping paper and greeting card before sending or delivering the item to its recipient. Of course, things are different if your gift is a financial asset—particularly in the age of digital investing, with many online tools available for efficiently transferring ownership of securities. If you decide to give an ETF as a gift, you will have to determine the best way to get the asset into the hands—or the investment account—of your recipient.
Assuming that you are already an investor, your own broker or brokerage platform may be a good place to start if you want to give an ETF as a gift. In many cases, you can buy an ETF with your brokerage account and then fill out a form to request that your brokerage transfer the asset to the recipient. You will need to know some personal information about your recipient, likely including their full name, Social Security number, and address.
If you are going to give shares of an ETF as a gift by transferring them from your brokerage account, the recipient will need to have their own brokerage account where they can hold the asset. This means that if you are giving ETF shares to somebody who is new to investing, they may need to open an account before they can receive their gift. Transferring ownership of the ETF shares may be even easier if the recipient has an account with the same broker or platform as the gift giver.
In addition to using your brokerage, there are a variety of online gifting services that can help you give the gift of an ETF or another financial asset. With some of these services, it’s as easy as typing in a dollar amount and the ticker of the ETF you want to give. However, your recipient may need to open an account with a brokerage platform associated with the gifting service to receive the gifted assets.
You also may be able to give ETF shares as a gift directly through ETF issuers such as BlackRock and Vanguard. You will likely need to have your own account with the ETF issuer, and depending on the platform and account where you’ll be transferring the shares to the recipient, there may be a varying amount of paperwork involved.
Giving an ETF as a gift can be a great way to help a loved one get started on their investing journey or take a step forward in meeting their financial goals, but there are some drawbacks to ETFs that gift givers should keep in mind. First and foremost, there’s no guarantee that the investment performance of the fund you give as a gift will play out as expected. This makes it important to research the risks associated with the specific fund you’re giving.
The tax implications of your gift are another important thing to keep an eye on. For instance, if you make a gift that is worth more than a threshold defined by the Internal Revenue Service (IRS), you may be responsible for paying the gift tax. Fortunately, for the 2022 tax year, you would not be taxed on an ETF gift unless it was worth more than $16,000—or $32,000 if gifted by a married couple—and above the lifetime gift tax exemption, which is set at $12.06 million.
Given these limits, many ETF gifts likely will be exempt from the gift tax, but there is another tax consideration to be aware of: If things go as planned and your gift appreciates in value, your recipient will be responsible for paying capital gains taxes on their investment profit when they eventually sell the ETF shares. The amount of this tax liability will depend on how long the recipient held the asset, their tax bracket, and the amount that the ETF increased in value over the purchase price.
Financial assets are some of the only types of gifts you can give that have the potential to increase in value. Also, giving a financial gift can be a great way to introduce younger people or those without investment experience to the importance and value of investing for the future. Exchange-traded funds (ETFs) in particular may be a suitable gift because they offer built-in diversification and a possibility to gain exposure to many different types of assets, targeting a broad or specialized slice of the financial markets.
There are several avenues you can choose to give an ETF as a gift. You may be able to buy the shares using your own brokerage account and then transfer them to the recipient. You could also opt for an online gifting platform that facilitates the process of buying and gifting ETF shares. Finally, ETF issuers may allow you to gift shares of their products. In all cases, the recipient will need to have a brokerage account where they can hold the gifted shares.
Like all investment assets, ETFs come with their own disadvantages and risks. Some downsides to ETF investing include the potential commissions and trading costs associated with buying and selling the shares, the possibility that the bid-ask spread of certain funds may limit your investment gains, and the chance that the fund’s performance may diverge from the results of its underlying index because of a variety of factors.
If you want to give a gift with the potential to make a lasting impact on the recipient’s finances, ETFs may be worth adding to your shopping list. With the huge variety of ETFs on the market, you should be able to find a fund that can play a role in helping the recipient achieve any type of financial goal. You may be able to give ETF shares as a gift through your own brokerage, an online gifting service, or directly from the ETF issuer.
Fidelity Investments. “ETFs 101.”
BlackRock. “Different Types of ETFs.”
ETF.com. “3 Ways to Gift ETFs This Holiday.”
Internal Revenue Service. “Estate Tax.”
Internal Revenue Service. “Frequently Asked Questions on Gift Taxes.”
Internal Revenue Service. “Topic No. 409 Capital Gains and Losses.”
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