Although taxes and April 15th may not be on the top of your "to do" list, it’s not too soon to think about 2007 and how exchange traded funds (ETFs) could help you out. ETFs are an efficient way to cut down capital gains because the tax you incur is applied to the sale, reports Jesse Emspak of Investor’s Business Daily. Unlike with mutual funds, when a shareholder gets out of the fund, the other shareholders are left with the tax payment. This does not mean you will not have capital gain distributions with ETFs; this depends on the provider and their ability to manage the transactions.
ETFs are tax efficient because they have the potential to make smaller gains than mutual funds. This is because ETFs are created and redeemed with stock that is traded "in-kind". So when the ETF takes the new stock, they get higher cost-basis stock and when they redeem they use the lower cost-basis stock. This in turn lowers the capital gain exposure. Mutual funds don’t work with "in-kind" transfers, they must sell securities to raise cash for those redeeming shares.
Most investors think of investing and what their portfolio can return. But the tax consequences should also be part of the equation when looking into an new investment.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.