Tax Advantages of ETFs
Tax Advantages of ETFs
There are several advantages to purchasing an Exchange Traded Fund over a mutual fund, a significant advantage is the tax savings; ETFs are more tax efficient than mutual funds, only one of the reasons they’ve been gaining market share.
Most mutual funds distribute 100 percent of income and capital gains each year, which typically occurs in December. Because a mutual fund is a pass-through entity, the shareholder is liable for any tax due on these distributions.
The majority of distributions come in December for mutual funds, so it makes sense not to purchase mutual funds near the distribution dates to escape taxation on the funds.
The overwhelming amount of an ETF’s tax efficiency is due to it being an index fund and its structure, which results in fewer long-term capital gains distributions.
As ETFs continue to grow in popularity, they should continue to capture market share. Despite the similarity in the taxation of mutual funds and ETFs, the structural difference and potential absence of long-term capital gains in ETFs makes them a compelling investment vehicle.
In addition ETFs are continually trading throughout the day, where mutual funds are traded and priced once a day based of the funds closing price.
To summarize, with ETFs you get lower operating costs, better tax treatments, coupled with intraday pricing, daily liquidity and transparency.
Over the past decade, exchange traded funds have certainly grown in popularity and the number of funds have increased as well offering numerous choices.
Final thought – You can find many no-load mutual funds, those not charging a commission however the vast majority of ETFs do carry a commission which does not make exchange traded funds a good vehicle for dollar cost averaging.
As with any investment, do your own research and make sure whatever you decide it makes good economic sense.
Daniel F. Iuculano, AAMS CMFC
Accredited Asset Management Specialist
Chartered Mutual Fund Counselor
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