Reduce Capital Gains Taxes by Owning ETFs

Vern Sumnicht CEO | CIO |

ETFs (Exchange-Traded Funds) and mutual funds differ in how they are structured and traded, which can have implications for their tax treatment. Unlike mutual funds, ETFs trade on an exchange like a stock, and their shares can be bought and sold throughout the trading day by investors. When an investor wants to redeem their shares of an ETF, they can simply sell them on the exchange to another investor, rather than selling them back to the fund manager.

This means that the fund manager does not have to sell stocks in the fund to meet redemption requests, because the redemption happens on the exchange between investors, rather than directly with the fund. The fund manager will only have to sell stocks in the fund if there is a large net outflow of shares and they need to adjust the fund's holdings to maintain its investment strategy.

On the other hand, mutual funds are structured as "redeemable" securities, meaning that when an investor buys or sells shares of a mutual fund, they are transacting directly with the fund manager. When investors redeem shares of a mutual fund, the fund manager may have to sell securities in the fund to raise cash to meet the redemption, which can trigger capital gains taxes for all investors in the fund, even those who did not redeem shares.

In addition, ETFs may have other tax advantages over mutual funds, such as the ability to use in-kind transfers to manage capital gains and losses within the fund, and the ability to create and redeem shares with institutional investors, which can help to manage the tax implications of large inflows and outflows.

It's always a good idea for investors to consult with a tax professional to understand the tax implications of investing in a particular fund.

To learn more about how iSectors uses ETFs in our Allocation models visit our or call us at 1-800-iSectors.