How to Give an Exchange-Traded Fund (ETF) as a Gift

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 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.

What Is an Exchange-Traded Fund (ETF)?

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 by using 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 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 of another component which may decline 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.

Types of ETFs

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:

• Equity ETFs: This type of fund provides exposure to a basket of equities, or stocks. Some equity ETFs track broad indexes like the S&P 500, covering a wide range of stocks, while other funds may focus on companies in a specific country or sector. Giving an equity ETF as a gift allows you to decide the segments of the stock market in which your recipient will be invested.
• Bond or fixed-income ETF: A bond or fixed-income ETF invests in a basket of debt securities. Fixed-income assets are an important component of a diversified portfolio. Bond ETFs tend to be less risky than equity ETFs, and they may be an appropriate gift if you hope to provide the recipient with a future source of investment income.
• Commodity ETFs: Commodities such as precious metals, oil, and basic agricultural products also add diversification to a portfolio, but investing in them directly can be complicated for everyday retail investors. Commodity ETFs make it easy to gain exposure to these vital economic resources. However, if you plan to give a commodity ETF as a gift, it’s important to be aware that many of these funds do not directly hold the underlying commodity, depending instead on derivatives to track the asset’s performance, which may add to the risk level of these investments.
• Sustainable ETFs: This type of fund could make a great gift for a socially and environmentally conscious recipient. Sustainable ETFs invest in companies that have been screened based on environmental, social, and governance (ESG) criteria, allowing you to align your investment strategy with your (or your gift recipient’s) values.
• Specialty ETFs: Over recent years, new types of ETFs have emerged to fulfill specific investor demands. Inverse ETFs are designed to increase in value when the underlying index declines, while leveraged ETFs use borrowed money to seek returns that multiply (often doubling or tripling) the results of the underlying index. Potential gift givers should keep in mind that these funds, while offering a chance for outsized returns, also carry higher levels of risk. Leveraged and inverse ETFs are also generally designed for shorter holding periods, making them less suitable for a gift recipient to hold for an extended time.

Giving ETF Shares as a Gift

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.

Three Ways to Gift ETFs

If you want to give an ETF as a gift, there are three primary methods you can use.

Directly from Your Account to Their Brokerage Account

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.

Sell the Shares And Put the Proceeds in Their Account

Another way to gift an ETF is to sell the shares that you own and want to give and to put the proceeds in the recipients account. You simply give them the cash that they need to buy shares in the ETF you want to gift.

Giving a cash gift like this is likely one of the easiest ways to go, but there are a lot of considerations to keep in mind.

For one, when you sell shares in an ETF, you'll trigger capital gains taxes if you sell the shares for a profit. You'll want to consider the cost basis of each share that you own and try to sell the shares that are most tax advantageous. Consider speaking to a financial professional to determine which shares to sell.

Don't forget that you'll also have to consider gift taxes, which could come into play if you're gifting a large amount.

Use a Gifting Service

If you'd rather avoid direct transfers or giving a cash gift, 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.

Disadvantages of Gifting ETFs

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.

Another concern is control. If you give ETF shares to someone else, they're free to do whatever they'd like with those shares, including sell them and use the cash for anything they'd like. Instead of starting them on their investing journey, you might just be handing over the equivalent of a cash gift to someone that will use it for some other purpose.

For More Control, You Can Create a Trust

If you want to give ETF shares as a gift, but don't want the recipient to have full control over the shares, you may consider forming a trust.

A trust is a legal entity that can hold financial assets. The trustor places assets in the trust and then relies on another party, known as the trustee to manage those assets. The trust provides a financial benefit for a third party, the beneficiary.

Trusts can be complicated, but the basic idea is that you can give away assets, such as ETFs, while not giving the recipient full control over them. Instead, you can set rules on how those assets are used.

Given their complexity, if you are considering forming a trust, consult a financial advisor and attorney to determine the best path forward.

Can ETFs Be Gifted Tax Free?

When gifting shares of an ETF, the tax implications 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 2023 tax year, you would not be taxed on an ETF gift unless it was worth more than $17,000—or $34,000 if gifted by a married couple—and above the lifetime gift tax exemption, which is set at $12.92 million.

Possible Tax Consequences for You

The good news for you is that unless you sell your ETF shares to make a cash gift, there are unlikely to be any tax consequences. However, if you sell the shares before gifting, you may pay capital gains taxes or ordinary income depending on how long you had held the ETF shares before selling and the amount of increase from the time of purchase of the shares.

Otherwise, the only thing to watch out for is the the lifetime gift tax exemption. If you give a gift that is greater than the annual limit ($17,000 for 2023) to a single person, any amount over that limit will reduce your lifetime gift tax exemption, which could lead to estate taxes in the future if you exhaust the exemption.

Possible Tax Consequences for the Beneficiary

The recipient of your gift will not have to pay taxes when they receive the gift as the donor is typically responsible for paying any gift taxes. However, they may owe taxes in the future.

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.

The Bottom Line

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.