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STRUCTURAL CHARACTERISTICS
ETFs vs. Other Common Investment Vehicles |
ETFs vs. Other Common Investment Vehicles PDF |
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Considering Taxes: Going With the Flow
Cash flows will generally dictate the structure and tax differences
between open-end mutual funds and ETFs.
By their very structure, mutual funds must stand ready each
trading day to sell shares and accept new money from investors
and redeem shares and return money to investors. Each time
a mutual fund manager must sell portfolio securities to meet
redemptions, a capital gain or loss may be triggered. Investors
who stay invested in a fund may find themselves bearing the
tax burden caused by other investors exiting the fund.
ETFs tend to be more tax efficient than mutual funds
because of the in-kind creation and redemption process
explained earlier. That in-kind process usually allows ETFs
to avoid directly selling underlying securities, which could
generate capital gains to investors.
Consequently, ETF investors can have more control over
their own tax situation because a gain or loss is based upon
their own particular transactions, not the cumulative transactions
of the mutual fund manager.
Occasionally, ETF sponsors will need to sell component
securities, such as for portfolio rebalancing purposes, due
to a reconstitution of the underlying index’s components, or
due to corporate actions (company mergers, for example). In
these cases, ETFs may generate capital gains that are taxable to
investors.
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This information is subject to change at any time and should not be construed as a recommendation of any specific security
or strategy.
This information does not constitute tax advice. Please consult your tax advisor and/or state and local tax offices for more
complete information.
Securities are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks,
including the possible loss of the principal amount invested.
RydexShares™ are distributed by Rydex Distributors, Inc., an affiliate of Rydex Investments.
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