{"id":1758,"date":"2012-12-12T23:31:34","date_gmt":"2012-12-13T04:31:34","guid":{"rendered":"http:\/\/selfinvestors.com\/tradingstocks\/?p=1758"},"modified":"2018-08-12T01:41:27","modified_gmt":"2018-08-12T06:41:27","slug":"what-makes-etfs-tax-efficient","status":"publish","type":"post","link":"https:\/\/selfinvestors.com\/tradingstocks\/etfs\/what-makes-etfs-tax-efficient\/","title":{"rendered":"What Makes ETF’s Tax Efficient?"},"content":{"rendered":"

By Guest Author Greg Simmons<\/strong><\/p>\n

In the grand scheme of things, ETFs are relative newcomers to the financial world, but they are\u00a0fast becoming a popular component to many investors\u2019 portfolios. This is primarily because of the\u00a0excellent diversity offered by these funds, but another attraction is their potential for excellent tax\u00a0efficiency, and the fact that annual management fees are relatively low. This is especially true when\u00a0you compare ETFs to mutual funds.<\/p>\n

ETF Classification<\/p>\n

One of the main factors that benefits ETFs is that they are generally classified as trusts, meaning the\u00a0ETF is entirely its own entity; it is essentially an investment company in its own right, and therefore\u00a0buying and selling the ETF is just like buying and selling another company.<\/p>\n

The process of creation and redemption is what sets ETFs apart, and makes them particularly tax\u00a0efficient. This procedure means that investors can avoid a considerable chunk of capital gains tax,\u00a0by masking it in the creation and redemption process. ETFs are generally open ended funds, which\u00a0means that authorized participants may trade assets in exchange for shares or vice versa.<\/p>\n

What this means is that shares which were acquired at varying values, meaning there are some\u00a0being held at profit and some at a loss, can be used to manipulate capital gains. Shares with a higher\u00a0cost basis can be exchanged at a capital loss, which can neutralise unrealised gains, helping to avoid\u00a0a good deal of capital gains.<\/p>\n

The main point to consider is that when ETFs redeem their investor\u2019s capital, they do so as an\u00a0exchange, unlike mutual funds which do so in cash terms. Exchanges are not subject to tax, which is\u00a0what makes ETFs so effective in this respect. Hiding capital gains is what this system is all about.<\/p>\n

The key point to remember is that ETFs can fulfil investor redemptions without actually having to sell\u00a0any securities.<\/p>\n

ETFs vs. Mutual Funds<\/p>\n

Of course, ETFs are not completely tax exempt, and it isn\u2019t always possible to veil the capital gains\u00a0through the creation and redemption process. This is the main component of an ETF\u2019s operation\u00a0however, so there is always scope for reducing tax.<\/p>\n

When comparing mutual funds to ETFs, you\u2019ll find that tracking identical indices can potentially yield\u00a05% more of a tax burden, which could potentially mean thousands in lost profit on your typical sized\u00a0portfolio. This does not include potentially higher management costs either.<\/p>\n

ETFs Outside the US<\/p>\n

In reality, ETFs are likely one of the most tax-efficient products on the US market, particularly when\u00a0it comes to forex.<\/p>\n

In the UK and other countries, ETFs are similarly popular, though they are not unique in their low\u00a0tax. They also require offshore banking to fully take advantage of low taxation potential, due to\u00a0corporation tax<\/a>. Spread betting, classed as a form of gambling, is of course illegal in the US, but by\u00a0the same token, is tax-free in the UK. Go to http:\/\/www.cmcmarkets.co.uk\/spread-betting<\/a>\u00a0to find out more\u00a0about spread betting if you reside in the UK. \u00a0Please know it carries considerable risk.<\/p>\n

If you file taxes online<\/a> there are some great web-based software packages available that will help you sort through the maze of tax related investment decisions.\u00a0 I have found that TurboTax is the best.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Guest Author Greg Simmons In the grand scheme of things, ETFs are relative newcomers to the financial world, but they are\u00a0fast becoming a popular component to many investors\u2019 portfolios. This is primarily because of the\u00a0excellent diversity offered by these funds, but another attraction is their potential for excellent tax\u00a0efficiency, and the fact that annual … Continue reading What Makes ETF’s Tax Efficient?<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2608],"tags":[],"class_list":["post-1758","post","type-post","status-publish","format-standard","hentry","category-etfs"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/selfinvestors.com\/tradingstocks\/wp-json\/wp\/v2\/posts\/1758","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/selfinvestors.com\/tradingstocks\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/selfinvestors.com\/tradingstocks\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/selfinvestors.com\/tradingstocks\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/selfinvestors.com\/tradingstocks\/wp-json\/wp\/v2\/comments?post=1758"}],"version-history":[{"count":0,"href":"https:\/\/selfinvestors.com\/tradingstocks\/wp-json\/wp\/v2\/posts\/1758\/revisions"}],"wp:attachment":[{"href":"https:\/\/selfinvestors.com\/tradingstocks\/wp-json\/wp\/v2\/media?parent=1758"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/selfinvestors.com\/tradingstocks\/wp-json\/wp\/v2\/categories?post=1758"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/selfinvestors.com\/tradingstocks\/wp-json\/wp\/v2\/tags?post=1758"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}