Yes, these are taxable events because the ETF isn't paying the taxes on the dividends which would taxed at a corporate rate which isn't what most people would want I believe. Though there is a bit more to the picture looking from
As you know, one of the main benefits of ETFs is the tax advantage it
holds over mutual funds. However, when it comes to paying taxes on ETF
dividends, the story is a little different.
Qualified ETF Dividends
There are two kinds of dividends that the stocks in an ETF may issue.
Qualified dividends and unqualified dividends. In order for an ETF
dividend to be taxed as qualified, the equity in the fund paying the
dividend must be owned by the investor for more than 60 days during
the 121-day period that begins 60 days before the ex-dividend date.
Also, it cannot be on the unqualified dividend list and it must be
paid by a U.S. or qualified foreign corporation.
The tax rate on qualified dividends is anywhere from 5% to 15%,
depending on your income tax rate. If you have an income tax rate of
25% or higher, then your qualified dividend is taxed at 15%. If your
income tax rate is less than 25%, then your qualified dividends are
taxed at 5% So far, so good.
Unqualified ETF Dividends
Unqualified dividends are those payouts that do not meet the
qualifications discussed above. In other words, they are dividends
that the government does not consider true dividends. Some examples
include dividends on money market accounts, dividends on short term
mutual fund capital gains, interest from your credit union, dividends
in your IRA, and dividends from REITs (real estate investment trusts).
In the case of unqualified dividends, these payouts are taxed at your
normal income tax rate. So if you have unqualified dividends from the
ETFs in your portfolio, then they will have a heavier tax burden than
the normal qualified dividends from these securities.
Keeping track of your Dividends
Knowing the difference between qualified and unqualified dividends is
very important in regard to ETFs. After you understand the concept,
you will need to put that knowledge to use as you track the dividend
payouts for all the stocks in your dividend ETFs (a spreadsheet may be
helpful). Once you have it all figured out, you can fill out your tax
forms correctly and file your return. Or you can do what most
investors do and hire a good tax accountant. Hopefully your gains will
cover his fee.
Hopefully that helps answer the question.
Generally, the fund will keep track over each quarter and make the distribution amongst the shares in the proper amount for the dividends it held. Initially, the "Unit Investment Trust" strategy used by the SPDRs of old, there wasn't any buying or selling within the trust and creation/redemption units would have to be done to change the portfolio. That has changed more recently and I'm not totally sure what mechanisms are now used though I do believe there isn't that much buying and selling within the fund as that would trigger capital gains which can be avoided through the creation/redemption mechanism within an ETF.
Don't forget that the quote you give doesn't state that there aren't additional shares of the ETF being purchased with the distribution and that would be a taxable transaction. While the broker may not charge to re-invest the distribution, the giving it out is taxable as this happens with mutual funds.