Tax Facts

7964 / What are the advantages of ETFs over mutual funds?

ETFs have several advantages over mutual funds, including the following:
  • They are easy to trade: they can be bought and sold anytime through any broker, just like a stock.

  • They are tax efficient: ETFs typically have lower portfolio turnover and strive to minimize capital gains distributions so that investors are only taxed when they initiate a trade. Note: There are special rules for currency, commodity, and metals ETFs that cause them to be taxed in the same way as the underlying class of investment (see Q 7959 to Q 7962).

  • Greater Transparency: ETFs disclose the exact holdings of their funds on a daily basis so the investor always understands precisely what he or she owns.

  • Flexibility: Any action that an investor can take with respect to stock can be accomplished with an ETF. This includes shorting and holding ETFs in margin accounts and placing limit orders.

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