Etf's Users Guide

ETF’s Users Guide

ETFs are a different animal altogether, but they're similar to tax-managed funds in one key respect - they too tend to throw off fewer taxable distributions. In the case of ETFs, their tax-efficiency results from two features. First, they're index funds (although some ETFs, admittedly, stretch the definition), which means they buy and hold the securities of a benchmark like the Standard & Poor's 500 or Russell 2000. ETFs also have a unique way of creating and redeeming shares when investors are entering or exiting the fund, and that also boosts their tax-efficiency a bit. The upshot of all this is that tax-managed funds and ETFs allow you to create your own little tax shelter of sorts. You invest your money, let it sit and most of the gains accumulate without the drag of taxes. The longer you postpone selling the bigger the tax benefit. So if you buy and sell these funds frequently, you're giving up much of their tax advantage.I should add that just because you're holding tax-managed funds and ETFs for the long-term doesn't mean that you don't have to monitor them. You should keep an eye on them, but you certainly don't have to do it constantly. I'd say checking their returns vs. that of similar funds once a quarter is plenty enough monitoring. Actually, monitoring isn't much of an issue for the ETFs in that they're following an index. As long as they don't stray drastically from it, there's not a whole lot for you to worry about. Tax-managed funds, however, are actively managed (although some use an indexing approach), so you want to check in to make sure the manager hasn't done anything to screw up the fund's performance. Again, though, checking their returns about once a quarter to make sure they're performing decently versus similar funds is attention enough.