In article <xjvYb.26890$zM3.2318[at]newssvr25.news.prodigy.com> , Tad Borek wrote:
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Correct.

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I thought that spiders are not redeemable at all. This means to me
that I can sell it to other investors, but not to the spider trust
company.


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That's nice. It seems that redemptions happen in a roundabout way.

i

Ignoramus25700 <ignoramus25700[at]NOSPAM.25700.invalid> writes:

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Yes, they are an ETF. That doesn't make them non-redeemable.

Read the prospectus -- they are createable from stock baskets and
redeemable in stock baskets (in something like 50,000 share blocks).
Heck, AMEX even boasts about how this will help make sure SPDRs will
trade virtually at NAV virtually all the time.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Tad Borek <borekfm[at]pacbell.net> writes:

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True, but not limited to ETFs. Take a good look at the prospectus
for your plain, old open-end mutual fund. Lots of them give the fund
the option to redeem fund shares in securities.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Ignoramus25700 wrote:
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I may have misunderstood your question. There's talk sometimes about the
possibility of being hit with capital gains tax as a result of mutual
fund redemptions, and should that happen an ETF could have an advantage.

Let's say half of the investors cash out of a fund...the fund needs to
sell stocks to raise cash by selling its holdings and doing so might
release capital gains. Shareholders who stay put are hit with the tax -
and the fund may have even declined in value for them. This is a general
concern, not just index funds. Actually it's more of a concern with the
"fund of the week" kinds of funds - happened a lot during the dot-com crash.

In theory ETFs have an escape hatch, because buried in their prospectus
is a section that allows the funds to provide shares of stock (ie the
fund's holdings) in-kind to satisfy a dissolution demand. This BTW is
getting into arcane stuff that happens a level removed from individual
investors. It has to do with the actual creation & dissolution of the
ETF units that are traded on the exchange. In a nutshell: as more people
buy Spiders, more Spiders are created, in very-large blocks, by an
intermediary that is purchasing the stocks in the S&P 500 index and
creating new SPY units. These SPY shares trade on the exchange with
pricing set by demand and, as you noted, arbitrage between the units and
the underlying stocks keeping it close to fair value.

So far we've only seen the creation of units because Spiders have been
growing like crazy (more dollars in them, net creation of SPY shares).
But there is the possibility of reversing that - which might never come
to pass, but it's possible. In the reversal of that process, i.e. a
sudden flood of sales, the intermediary can dissolve units and hand over
the stocks that made them up, rather than doing the typical market-maker
role which would be to fulfill the trade in exchange for cash.

In doing that, any capital gain is realized not within the ETF but by
the recipient of the basket of stocks, who would then sell them. So
remaining SPY shareholders aren't affected.

Contrast the S&P 500 mutual fund. To raise cash for mass redemptions, at
some point a fund with a pent-up tax liabilty would need to realize some
capital gains. The remaining shareholders would then receive taxable
gain distributions even though their fund has dropped in value (assuming
the two go together, which is reasonable - I don't see mass redemptions
tied to market peaks!).

While these panic-like redemption scenarios seem a bit farfetched for
the S&P 500 funds, they may be a concern for indices with much smaller
followings. A simple change in sentiment towards a country fund for
example might result in a flow of money out. There, the ETF has a
hypothetical tax advantage.

As far as I know this hasn't been tested yet.

-Tad

In article <cAuYb.26865$Lv3.6678[at]newssvr25.news.prodigy.com> , Tad Borek wrote:
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I thought that spiders were not redeemable, they were a closed end
fund of sorts, an ETF. So the underlying trust never has to sell,
except when the composition of the index changes.

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It seems to me that the value of spiders is linked to the underlying
index because of arbitrage.

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That's true and important, yes, although I am used ito dealing with odd
lots. Godo point.

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True. It seems that the advantage of ETFs comes when Itruly want to
hold them for a very long period, and buy in large chunks. Say, if
I buy $10,000 worth of ETFs with a $9.99 commission, that would be
0.1% "load" for buying and when Isell, it would be 0.1% for selling,
assuming the value of my investment does not change over that time.

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Understood.

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This is a thought that I never considered and I like it.

I once had a tax loss in Berkshire Hathaway, when it was merging with
General Re, so I sold Berkshire, realized the loss and bought shares
of General Re (which later converted to Berkshire shares). I think that
it was kosher from the IRS standpoint because the transaction was not
yet approved, even though it seemed quite likely.

Next time I have a tax loss on something that I want to sell, Imay
follow your suggestion.

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Right. I am not a tech investor, but your comment applies to other
sectors, as well.

I appreciate your thoughtful post.

i

The advantage of the SPDR is as you described: no unplanned tax
consequences. The disadvantage is transaction costs: commissions on buying
and selling. Personally, the fund seems simpler than the ETF.

Mike
CFP in Tennessee

--
To reply by e-mail, remove twangtown and substitute earthlink.

"Ignoramus10160" <ignoramus10160[at]NOSPAM.10160.invalid> wrote in message
news:c0pfl5$8t4$0[at]pita.alt.net...
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Ignoramus10160 wrote:
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I focus on transaction costs rather than that issue. I don't think the
major S&P 500 funds have a lot of pent-up tax liability at the moment so
it may be more of a hypothetical issue than a genuine risk. At some
point of course that could change, but I wonder if Spiders would have
similar concerns in a mass-redemption scenario. The exchange mechanism
that allegedly protects it from that doesn't seem feasible to the extent
retail investors are selling shares (though I guess it's an
institutional exodus that would cause the problem?).

As to transaction costs, traditional mutual funds have a lot of
advantages. You can invest & withdraw cash in any amount rather than
needing to trade even numbers of shares and getting whatever dollar
amount results. Often, you can rebalance among several funds at no cost,
vs. multiple round-trip commissions with the ETFs. The fund company
(hopefully) tracks cost basis, and you can use average-cost when selling
(may or may not be an advantage). And hopefully, it's no load...even
discount-broker commissions rule out small SPY investments - why pay a
5% commission to save 0.06 in operating costs?

Big chunks, invested for long periods - there I look to ETFs. Ongoing
contributions/wdls, smaller amounts - mutual funds really make a lot
more sense absent some kind of wrap/commission-free type of account.


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You might for curiosity's sake check out all the sector ETFs (from
Amex/iShares) that are out there these days. If you're actively
investing they can be very helpful in connection with tax-loss sales
(avoiding a wash). Sell the stock, buy the sector ETF, wait your 30
days, sell, replace the stock. Not complete insurance but as
sector/market moves heavily influence stock prices it can help.

Also to the extent your stocks focus on certain sectors you can round
out the rest of the market with these. Say you're a tech-stock investor,
you can essentially buy the S&P 500 ex-tech, or something close to it.

-Tad

Would it be correct to say that buying SPDR's (depositary receipts of
an S&P investment trust) is a better idea than investing into a good
S&P 500 index fund? It would seem that a mutual fund could face
redemptions and therefore it could impose a capital gain tax liability
on me, even if I personally do not sell anything. Whereas SPDRs do not
have this issue as the underlying amount of money is fixed.

To date, I have been actively investing, but perhaps time will come
when an index fund purchase would make more sense.

i