BY STEVE DINNEN
If you’ve seen your managed money drifting from mutual funds toward ETFs (Exchange Traded Funds), chalk it up to the switch to tax efficiency, and the investing experience of 2018 for the markets.
Last year was pretty much a dud for stocks, especially the last quarter of the year. Many mutual funds ended up losing value. But earlier in 2018 they chalked up some decent capital gains, which they paid out at year-end because that’s the way mutual funds operate.
Mutual fund owners, then, saw the value of their investment sag while they still got nicked with a tax bill due to the payout.
“This was an insult to injury year,” said Kent Kramer, chief investment officer at Foster Group.
Exchange Traded Funds don’t have this tax problem, said Kramer. While ETFs and mutual funds are cousins, in that they both own stocks, or indexes, their tax treatment is different. A capital gain created when an ETF disposes of a security is treated as a like-kind redemption and makes no dent on an owner’s tax form. A capital gain (or loss) occurs only when the ETF is sold.
Kramer also favors ETFs because of their liquidity. If you sell one at 10 a.m. on a Tuesday, the transaction occurs then. With a mutual fund, the trade occurs at the end of the day.
