Increasing After-Tax Return with Exchange-Traded Funds

Gardner, Randy; Welch, Julie
June 2005
Journal of Financial Planning;Jun2005, Vol. 18 Issue 6, p30
Academic Journal
The article provides information on the difference between index mutual funds and exchange-traded funds (ESF). Investment in mutual funds has grown rapidly over the years. The growth was fueled primarily by investors seeking high returns from actively managed diversified portfolios and the conveniences offered by mutual funds, such as dividend reinvestment, custodial arrangements, and quarterly reports. From a tax point of view, disadvantages of investing in mutual funds became apparent. Mutual funds were popular because: (a) income passed through to the investor; (b) income retained its character as taxable or nontaxable and capital or ordinary; and (c) when fund shares were sold, the investor had some control over the amount of gain or loss recognized by specifically identifying the shares sold or using averaging techniques that were not available with the sale of stocks and bonds. funds. An ETF is a basket of securities owned by an investment company, similar to a mutual fund. But ETF differ from traditional mutual funds in how their shares are issued, traded, and redeemed. ETF shares are created by an institutional investor depositing a specified block of securities with the EFT.


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