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

You May Also Like

Related Articles
  1. Investing

    Investing Strategies For The Millennial ...

  2. Stock Analysis

    Playing the Rising Robotics with the ...

  3. Options & Futures

    A Detailed Look Into China's Options ...

  4. Investing

    Reassessing Your Approach To Bond Investing

  5. Stock Analysis

    Why This Bond Fund Should Be in Your ...

Trading Center