ETF Tax Efficiency Report Card: How Did Top Players Fare in 2010?
Michael Johnston submits:When rattling off the advantages that ETFs hold compared to traditional actively-managed mutual funds, most investors usually start with the issue of expenses. The easiest comparison to make involves expense ratios, the fees charged by ETF and mutual fund companies for investing in a product. Though some mutual funds offer single-digit expense ratios, most actively managed products charge in excess of 1% (the average for the mutual fund industry is in the neighborhood of 1.4%). By comparison, the average expense ratio for ETFs is less than 0.60%, and there are more than a dozen funds that charge less than 10 basis points. But the potential cost efficiencies of ETFs relative to actively-managed mutual funds go beyond simple expense ratios. ETFs also have the potential to be more tax efficient, thanks to the unique “in-kind” rules of the creation/redemption process. Whereas mutual fund investors may incur capital gains as a result of redemptions by other investors, the fact that ETFs are traded like stocks - on exchanges between market participants - means that they will generally be more tax efficient. That doesn’t mean that ETFs will allow investors to avoid capital gains taxes, rather, they will generally have more control over when these gains are incurred.Complete Story »