Saturday, January 31, 2015 07:28pm
North Adams, MA now: 10 °   
Send news, tips, press releases and questions to info@iBerkshires.com
The Berkshires online guide to events, news and Berkshire County community information.
SIGN IN | REGISTER NOW   

Home About Archives RSS Feed
The Independent Investor: ETFs Are Tax Efficient
By: Bill Schmick On: 12:27AM / Friday March 11, 2011
Important
0
Interesting
0
Funny
0
Awesome
0
Infuriating
0
Ridiculous
0

Tax time is drawing closer and as it does, the annual barrage of questions concerning investments, portfolios, dividends and capital gains distributions are keeping financial advisors and accountants quite busy.

"One of the most frustrating issues to me," writes a Long Island investor, I'll call Joey G., "are the mutual fund capital gain distributions."

As a large holder of mutual funds, every year, between November and December, Joey is hit with substantial taxable capital gain distributions from the mutual funds he owns.

"I have no idea how much they are going to be or when they are going to be distributed until it's too late, so there's no way I can plan for them tax-wise."

Joey G. is not alone in voicing this complaint. For readers who are not familiar with mutual funds capital gains distributions, it works like this:

During the year, mutual fund manager try to buy stocks low and sell those same stocks at higher prices, generating capital gains, the more successful the manager the higher the capital gains.

That's the good news.

The bad news is that the fund manager then passes on all these taxable gains to the holder of the fund, in this case Joey G., Depending upon the size of your holdings; this tax bill can be many thousands of dollars. To some this may seem to be a high-class problem since the higher the capital gains distributions, the more expected appreciation in the price of the fund but not always.

There are years such as 2008, when, as the market declined, fund mangers sold stocks they had held for a long time. Those sales generated huge capital gain distributions for their investors. At the same time, because the markets were declining, investors sold out of mutual funds in great numbers sending the price of mutual funds to multi-year lows.

"Not only did I have to pay a huge tax bill that year," laments Joey G., "but the very same mutual funds that gave me this tax bill were now selling at deep discounts to my purchase price."

For those who are tired of these capital gains issues, I would suggest looking at exchange-traded funds or ETFs. Since they are index funds, once their indexes are created, they rarely change (no need to buy or sell) so there are relatively few, if any, capital gains distributions.

On occasion there may be a gain (or loss) generated but only if the underlying index the ETF tracks changes in composition. For example, if you purchased the SPDR S&P 500 (SPY), that ETF tracks the performance of the S&P 500 Index. If at some point the S&P were to replace one or more stocks in the index, the ETF manager of SPY would also do the same. In that case, there could be a gain or loss (and a distribution) in the ETF. Those kinds of changes occur infrequently.

There are exceptions to this rule; however, since not all exchange-traded funds are created equal. There are some "black box" ETFs that are actively managed. Their marketing managers claim that because of their internal strategies, their ETF can out perform whatever index they represent. Sticking with the S&P 500 example, the actively-managed ETF might only select a sub-set of the index, or buy and sell various stocks within the index, in an effort to provide outperformance. The results of these black box beauties are checkered at best. To me, these hybrids rarely fulfill their promise while their expense ratios are higher than plain vanilla ETFs and there can be capital gain distributions as well.

Since more than 75 percent of mutual fund managers fail to outperform the indexes anyway, ETFs make sense on the performance side as well. They are cheaper to own, the tax advantages are clear and the next time you compare an ETF to a mutual fund remember that the mutual fund performance does not include the taxable consequences of capital gain distributions.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: ETFs, capital gains, taxes      
News Headlines
Pittsfield Suns' Hot Stove Features Red Sox GM Cherington
Watertown Tops Berkshire Battalion in OT
Adams-Cheshire Little League Signups Set
MCLA Athletic Training Major Wins EATA Scholarship
Fairview Commons Receives National Award
Senator Downing Hosts Town Hall Forum on Wednesday
2015 Pittsfield 4th of July Parade Theme Announced
Goodwill Offers Soft Skills, Custodial Workshops
Cultural Pittsfield This Week: Jan. 30-Feb. 5
Berkshire County Arc Accepting Applications for 2015 Scholarships

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (158)
Independent Investor (214)
Archives:
January 2015 (9)
January 2014 (1)
December 2014 (7)
November 2014 (4)
October 2014 (9)
September 2014 (5)
August 2014 (7)
July 2014 (2)
June 2014 (6)
May 2014 (9)
April 2014 (8)
March 2014 (6)
February 2014 (6)
Tags:
Fed Crisis Pullback Debt Rally Economy Oil Congress Commodities Metals Markets Energy Europe Japan Jobs Housing Greece Stock Market Banks Deficit Stocks Recession Euro Fiscal Cliff Currency Taxes Europe Selloff Election Stimulus Federal Reserve Retirement Bailout Debt Ceiling Interest Rates
Popular Entries:
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: Will the Municipal Bond Massacre Continue?
The Independent Investor: How Will Wall Street II Play on Main Street?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
Recent Entries:
The Independent Investor: College Savings Accounts Are Not Risk-Free
@theMarket: More Stimuli Equal Higher Markets
The Independent Investor: The European Central Bank Delivers
@theMarket: Tail That Wagged the Dog
The Independent Investor: What's Happening to the Movies?
@theMarket: What Will the New Year Bring?
The Independent Investor: Think twice Before Co-Signing Student Loan
@theMarket: What Will the New Year Bring?
The Independent Investor: Could Greece Upset the Applecart?
@theMarket: Santa Comes to Town


View All
Boys BB: Pittsfield vs Drury
Pittsfield boys basketball team won over Drury 65-51.
BFAIR Family Fun Night
BFAIR hosted a Family Fun Night at Greylock Bowl & Golf...
Girls BB: Drury vs Wahconah
The Wahconah girls basketball team defeated Drury Thursday...
Boys BB: Lenox vs McCann Tech
The Lenox boys basketball team was able to pull away from...
Alpine Ski
Multiple teams at Slalom, Bousquet
Hockey: Mt Everett vs...
The Wahconah hockey team defeated Mount Everett, 3-2,...
Berkshire County UCP Telethon
United Cerebral Palsy of Berkshire County held its 52nd and...
Girls BB: Athol vs Hoosac...
McKenzie Robinson dished out nine assists to help the...
Swimming: Wahconah vs St....
Liz Bernardy won the 100-yard freestyle and 200 individual...
Boys BB: Drury vs Hoosac...
Friday night basketball, Drury boys win over Hoosac Valley...
Girls BB: Lee vs Mount...
Barrett scored a game-high 27 points in Thursday's 57-44...
Boys BB: Smith Academy vs...
The Pittsfield boys' basketball team defeated Smitch...
North Adams Chamber @...
The North Adams Chamber of Commerce held its first...
Hockey: St Mary's vs Wahconah
The Wahconah hockey team defeated St. Mary's Wednesday...
Berkshire Chamber @GFCU
Berkshire Chamber of Commerce held its January networking...
Boys BB: Wahconah vs Drury
The Wahconah boys basketball team was able to pull away and...
Boys BB: Pittsfield vs Drury
Pittsfield boys basketball team won over Drury 65-51.
BFAIR Family Fun Night
BFAIR hosted a Family Fun Night at Greylock Bowl & Golf...
Girls BB: Drury vs Wahconah
The Wahconah girls basketball team defeated Drury Thursday...
Boys BB: Lenox vs McCann Tech
The Lenox boys basketball team was able to pull away from...
Alpine Ski
Multiple teams at Slalom, Bousquet
| Home | A & E | Business | Community News | Dining | Real Estate | Schools | Sports & Outdoors | Berkshires Weather | Weddings
Advertise | Recommend This Page | Help Contact Us | Privacy Policy| User Agreement
iBerkshires.com is owned and operated by: Boxcar Media 102 Main Street, North Adams, MA 01247 -- T. 413-663-3384 F.413-664-4251
© 2000 Boxcar Media LLC - All rights reserved