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Rich Americans Fleeing Tax Hikes May Turbocharge Shift to ETFs
- zaptheimpaler 5y agoI don't understand. Even in an ETF, don't you have to sell (and incur capital gains) when you actually need the money?
- rsj_hn 5y agoThe issue is not that the investor selling their shares incurs a tax liability, but that other investors who do not sell their shares incur some liability. Scenario A: You own mutual shares in the apple tree mutual fund. When a new investor enters the apple tree fund, the fund uses the proceeds to buy another apple tree. When an existing investor exits the fund, the fund sells an apple tree and gives the money back to the investor. But that is also a transaction recorded in the fund, and the fund itself may recognize a profit or loss. Moreover, if the investor is not buying an entire apple tree but only part of an apple tree, the fund may be forced to sell off an entire apple tree. Thus the apple tree fund has to have some cash and it is constantly buying and selling apple trees, as there is a churn of inflows and outflows, which means it is constantly incurring taxable events. Scenario B: if there an apple-tree ETF, then one share of the apple tree ETF corresponds to an ownership state of 1 apple tree. When you buy the ETF, you are not entering a fund, you are buying from an existing holder of the ETF. When you sell your ETF, you are selling your ownership share to a future holder. These may be taxable events for you, but they are not taxable events for the fund management or for other ETF holders.