No Cash Please: Understanding the In-Kind Transaction
Next, the basket of stocks (Creation Unit) is delivered to the
AP via the Custodian Bank. There are no trading costs for
the portfolio and all of the transaction costs for the portfolio
are covered by the AP. This transaction establishes the cost
basis or tax basis for these new securities, now included
in the overall portfolio. And since common stock is exchanged
for fund shares, and because no cash is exchanged, this is
considered an “in-kind” transaction. The unique in-kind
transaction plays an important role in the potential for
enhanced tax efficiency for shareholders, especially during
the redemption process¹.
Open for Business
Once the AP obtains the ETF shares, it is free to sell them on
the open market. From that point on the ETF shares are sold
and resold among investors.
¹ This information does not constitute tax advice. Please consult your tax advisor
and/or state and local tax offices for more complete information.
ETFs are subject to risks similar to those of stocks and may not be suitable for
all investors. Investment returns and principal value will fluctuate so that when
shares are redeemed, they may be worth more or less than original cost.
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.
Rydex Investments 9601 Blackwell Road Suite 500 Rockville, MD 20850
800.820.0888 Send us your comments
For more complete information regarding Rydex funds, call 800.820.0888 or click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund's prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.
Key Points to Remember
It all begins with the
Authorized Participant— only the Authorized
Participant can create or
redeem shares of an ETF.
When creating an
ETF, common stock is
exchanged for ETF shares.
No cash is exchanged for
ETF shares, making this
an in-kind transaction.
An ETF’s shares are exchanged in-kind for
equal value, so there are
no taxable gains on the
transaction—enhancing
an ETF’s tax efficiency.
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