DEFINITION of 'Exchange Fund'

A stock fund that allows an investor to exchange his or her large holding of a single stock for units in a portfolio. Exchange funds provides investors with a easy way to diversify their holdings, while deferring any taxes from capital gains.

Also known as a "swap fund".

BREAKING DOWN 'Exchange Fund'

Because an investor swaps shares with the fund, no sale actually occurs. This allows the investor to defer the payment of capital gains tax until he or she sells the fund's units.

There are both private and public exchange funds. The former deals with companies that are not publicly traded, providing investors with a way to diversify private equity holdings. The public funds offer investors portfolio shares containing publicly traded firms.

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