Complete Guide To Investment Companies, Funds And REITs

AAA

Exchange-Traded Funds - Taxes

ETFs offer tax advantages to investors. As passively managed portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds. ETFs are more tax efficient than mutual funds because of the way they are created and redeemed. For example, suppose that an investor redeems $50,000 from a traditional Standard & Poor's 500 Index (S&P 500) fund. To pay that to the investor, the fund must sell $50,000 worth of stock. If appreciated stocks are sold to free up the cash for the investor, then the fund captures that capital gain, which is distributed to shareholders before year-end. As a result, shareholders pay the taxes for the turnover within the fund. If an ETF shareholder wishes to redeem $50,000, the ETF doesn't sell any stock in the portfolio. Instead it offers shareholders "in-kind redemptions," which limit the possibility of paying capital gains.

Related Reading:

Measuring Performance
comments powered by Disqus
Related Articles
  1. 3 ETF Signals You May Use For Confirmation
    Economics

    3 ETF Signals You May Use For Confirmation

  2. Are All ETF Correlations Barreling Towards ...
    Mutual Funds & ETFs

    Are All ETF Correlations Barreling Towards ...

  3. Why Did ETFs Become So Popular?
    Markets

    Why Did ETFs Become So Popular?

  4. How Bitcoin Casinos Work
    Investing Basics

    How Bitcoin Casinos Work

  5. How To Invest In The Nikkei 225
    Mutual Funds & ETFs

    How To Invest In The Nikkei 225

Trading Center