"ztip guy" <dont.spam.me[at]sasktel.net> writes:

- quote -

That's *not* what it said. It did say that on the surface
some might *appear* less tax efficient because of that effect,
but that was the least of the issues.

Most of it was that ETFs can (but don't have to be, especially in a
falling market) be more tax efficient because due to the use of
redemption-in-kind, they can get rid of low-cost holdings rather than
having to sell them and realize gains that have to be passed on to
shareholders.


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On Sun, 23 Jul 2006 08:13:27 -0500, "ztip guy"
<dont.spam.me[at]sasktel.net> wrote:

- quote -

Except for Georgia fans <grin> I suspect most of us would choose the
10% return.

Now, how about giving us a list of next year's investments that will
beat the tax-efficient choices by more than the tax differential?


-HW "Skip" Weldon
Columbia, SC

<
- quote -

Its ludicrous when you really read the article and get to the 'meat' of it.
The argument is that ETFs are less tax efficient because the 'managers',
through the passive investment style of indicies, don't charge much in terms
of fees. Thus, since they don't collect fees, the income that would
ordinarily pay those fees (as with an active fund), ends up being paid out
to the passive ETF holder.

Its pretty false logic. The alternative for an active fund owner, or a
higher-MER index fund owner is to not have that income at all -- that income
ends up in the pockets of the managers. Sure, the owner might end up paying
a lower percentage tax rate (as they receive no dividends from the fund --
they are paid to the managers!), but they lose out on a substantial amount
of returns.

What would *you* rather have? 10% returns and pay 0.5% tax, or 8% returns
and pay 0% tax? The latter scenario is more 'tax efficient', but the total
return is obviously higher in with the former. Taxes aren't bad -- you just
have to keep the overall return in perspective.

Just thought you all might like to read this interesting
article:

http://www.smartmoney.com/etffocus/i...story=20060719

The short story is this - because ETFs can make redemptions
in-kind rather than in cash, they don't have to realize
cap-gains on low-cost shares they've been holding.

(Of course, most open-ended mutual funds theoretically
have the right to do redemptions over a certain size in kind,
too - read your prospectus! - they rarely, if ever, do)

(example language from Vanguard's Index 500 prospectus:
Vanguard reserves the right to pay all or part of a
redemption in kind - that is, in the form of securities -
if we reasonably believe that a cash redemption would
disrupt the fund's operation or performance or that
the shareholder may be engaged in frequent trading.
)

As an interesting thing to think about, inasmuch as
Vanguard's ETFs are just another share class of the
same funds as their regular index funds, I wonder if
through in-kind redemptions, they are using their ETF
class to get rid of some of the low-cost holdings of
their open-ended index funds. Or at least how the
mechanics of that distinction works.

Nevertheless, the SmartMoney article is interesting
reading. Enjoy.

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