Tax efficiency is a much-touted virtue of exchange-traded funds, a distinguishing trait that gives ETFs an edge over traditional mutual funds. But 2014 has ushered in a handful of noteworthy reminders that the tax advantages ETFs boast aren’t shared universally. Investors in some popular international ETFs in particular might be surprised this year to receive heftier capital gains than in previous years.

Most ETFs don't pay out capital gains at all, except in rare cases, and even these are generally well below 1% of assets. The main reason ETFs are so tax-efficient is their structure. Mutual fund managers usually need to sell shares to raise cash to meet investor withdrawals or invest in new stocks-those sales often result in a taxable gain that gets passed on to the investor. ETFs work very differently. To cope with investor supply and demand, ETF shares are created or eliminated at an institutional level, as the ETF provider and specialised dealers swap shares for baskets of the ETF's underlying securities in transactions that aren't taxable to the end investor.