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Financial Products & Services / Exchange-Traded Funds (ETFs)
|Subject: Re: What Are the Tax Advantages (If Any) of ETFs||Date: 9/27/2005 3:12 PM|
|Author: jbking||Number: 1058 of 2203|
What are the tax advantages (if any) of ETFs?
Compared to what is my initial thought.
Variable annuities are the master of tax efficiency since you don't pay taxes until withdrawal and thus if you absolutely loathe taxes these may make sense. However, as an insurance product these generally have higher fees than alternatives which may take some time to compensate for in the tax-deferral department.
Mutual funds can be better, worse or tie with an ETF, IMO:
ETF Better: ETFs are better in that given their creation/redemption mechanism this reduces capital gains distributed to shareholders which can be a nice boost, so that you could take the Mid-cap SPDR instead of say Vanguard's Mid-cap Index fund(VIMSX) as the SPDR can offload embedded gains.
Same: There are some ETFs that are just another share class of an existing fund. Vanguard Total Stock Market VIPER(VTI) is just a different share class of Vanguard Total Stock Market(VTSMX, VTSAX) fund. In this case, if one gets capital gains they all do.
ETF Worse: There are some tax-managed funds which would actively harvest losses and thus may be slightly better than the ETF which can have those Ooopsy moments as noted in http://news.morningstar.com/doc/news/0,2,8745,00.html?_QSBPA=Y :
"In reality, investors who plunked their money into some of the iShares will end up paying taxes on capital gains they'll receive this year. A number of the iShares MSCI funds paid large distributions in August 2000."
Individual stocks can vary depending on what happens with the stock. If the stock is acquired for cash this is different than say the behemoth that payeth no dividends, e.g. BRK.A.
Exactly how much an investor benefits after-tax depends on their marginal tax rate