Posted on September 14, 2005 at 17:24:12:
More and more investors have discovered exchange-traded funds. Like mutual funds, they offer diversification, several securities chosen by professional managers. But the funds, like stocks, trade on exchanges, rather than through the fund company itself.
The ETSs have drawn interest because of their low expense ratios and tax advantages. Because the funds usually hold and rarely turn over their mix of securities, they usually have no trading gains to trigger capital-gains taxes each year. Owners only owe taxes when they sell their shares. Even when the funds alter their portfolios, they make “in-kind redemptions” that do not generate taxable gains. And the funds don’t have to sell securities to cover shareholder redemptions.
Another plus: when selling a stock to realize a loss, one can buy an ETF in the same index without running afoul of “wash-sale” rules. There are transaction costs, but no redemption fees.