The structure of an ETF plays a big factor in how capital gains are treated at tax time. Some are structured as an open-ended fund, a share class of existing mutual funds, grantor trusts or a debt note. Many of these tax gains or distributions at different rates, so it is important to consider this aspect before investing.
Another area of caution for ETF investors are the free trades that have become common. A fee free ETF does not mean that operating costs are also free. In fact, these can add up. Also, the lure of an ETF for free can lead to using a fund that may not be necessary for ones investment objectives. Make sure the fund is high quality, as some brokerages may offer funds for free in an effort to ramp up illiquid products. [ETF Fees: Competition is a Good Thing]
The aforementioned merely scratches the surface on what investors should be researching when investing in ETFs. Proper knowledge of what one is investing in will help investors create an investment strategy using the right ETFs.
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY.