Moreover, ETF investors should look at the way the ETF investment vehicles is constructed as it helps lessen tax consequences.
“There are some mechanisms by which ETFs can try to lessen the tax impact in the portfolio, mainly through this process called in-kind redemptions, which is when redemptions occur from an ETF portfolio, they tend to be done in securities rather than cash and that can provide some tax advantages in the portfolio,” Dickson added.
Through in-kind redemptions, ETFs swap securities for other securities and would not cash out positions to incur a taxable event. [Creation and Redemption]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.