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Author: smith107 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2173  
Subject: What Are the Tax Advantages (If Any) of ETFs? Date: 9/27/2005 2:48 PM
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What are the tax advantages (if any) of ETFs?

I'm seriously looking into ETFs and UITs, but so far I see two disadvantages: commissions and no tax breaks.

Many brokers are parading ETFs as an economical way to invest, because you can invest just small amounts at a time. However, each time you do this, you have to pay the broker a commission. Sounds like a self-serving proposition to me.

According to the Yahoo Investment site:

As luck would have it ETFs are also quite tax-efficient. Because of the way they are created and redeemed, they allow an investor to pay most of his capital gains upon final sale of the ETF, delaying it until the very end. There is no way to avoid capital gains, but delaying it is valuable because the amount that would have been paid to taxes can continue to accumulate wealth. Exactly how much an investor benefits after-tax depends on their marginal tax rate, the return of the investment, and how long they hold the investment. Overall, ETFs are similar to tax managed index mutual funds, slightly more efficient than standard mutual funds, and significantly more efficient than actively managed mutual funds.

Let's look at that again:

Exactly how much an investor benefits after-tax depends on their marginal tax rate, the return of the investment, and how long they hold the investment.

Well, that sort of leaves the field wide open, right? In the end, it depends on your own financial needs and condition.

I'd like to hear other opinions on this subject, because I'm currently interested in short-term finances, but it looks to me like ETFs aren't the answer.
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