The ETF investment tool is also an easy to to achieve instant portfolio diversification at a low cost as they can diminish the individual transaction costs associated with trading individual stock picks.
While ETFs are subject to capital gains and taxes on dividend income, ETFs engage in a tax efficient creation and redemption process through so-called in-kind transactions where large baskets of underlying securities are used to create or redeem ETF shares. Since no cash actually exchanges hands, the in-kind process does not trigger a taxable event. Consequently, ETF investors will see limited capital gains distributions.
“As with any investment, read the prospectus, be aware of the risks, and remember that past performance is no guarantee of what might lie ahead,” TD Ameritrade added.
For more information on ETFs, visit our ETF 101 category.