Year-End Fund Distributions – Not For ETFs

Exchange traded funds (ETFs) are looking better to investors everyday. Actively managed mutual funds will be paying out the largest year-end distribution in 6 years and shareholders aren’t expecting it.  Eileen Ambrose of Chicago Tribune reports that  "the tax holiday is ending. Investors can expect more capital gains to be passed through to them this year." The wave of distribution will add to the challenges already facing the mutual fund business.

ETFs are much more tax efficient. The structure of an ETF allows it to shelter investors from capital gains when others pull out, and any capital gain is the responsibility of the individual investor leaving the ETF.  Because ETFs can be traded like stocks throughout the day, frequent trading can pile up transaction costs and trigger short-term capital gains.