Anyone here familiar with exchange funds?
Somebody told me that you can trade individual stocks for an exchange fund, allowing you to avoid paying a capital gains tax. It sounds too good to be true. I did a Web search and found this They talk about tax deferred capital gains taxes without going into much detail, but deferred implies that taxes will eventually have to be paid.
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Sure, it just diversifies your risky stock for a less risky one. It only becomes taxable when you cash out and realize the gains.
In theory, of course. A badly run fund can still lose your money.
It is an interesting way to diversify one’s portfolio, especially if you have been saving through an employee Stock Ownership Program (ESOP).
Many people retire with a large ESOP holding, and the process of diversifying that large block of stock can be expensive in taxes and commissions.
As always, talk to both a financial planner and a tax specialist.
I’ve never looked into it, because I thought the minimum requirements were very high.
You probably know that you can grow your investments tax free in IRA’s 401K’s SEP’s, and Simple IRA’s, depending on your situation.
Also, real estate has great exchange tax benefits to avoid taxes. Real estate has exchange for investment properties and of course tax free with no purchase necessary for primary residence after holding two years.
Lastly, if you are at a lower income level your capital gains might be zero tax. I think it is under $75k there is no tax? I remember looking it up when I was selling some real estate, but then my husband took a job and ruined my plan.
A couple of points – some of the information given above is simply incorrect.
1) an Exchange Traded Fund is synthetic (i.e. made up) as a collection of individual stocks usually in a particular area (industrial, transportation, retail, etc.) that have been collected by the fund manager. The ETF – as i said, totally invented by the manager – is assigned its own stock symbol and trades just like any other stock.
But that ETF doesn’t have any assets of its own (for example, Ford has factories and real estate, Bank of America has assets and customers and bank accounts) – the ETF is simply a mélange of all of the underlying stocks that were picked. That’s why it is synthetic – its price is based on the combined prices of the different stocks in the ETF.
2) ETFs are most similar to the old fashioned Mutual Funds, in terms of how stocks are selected and managed. Very similar. The difference is that mutual funds have a whole different set of rules and regulations, laws, taxation rules, etc. – while ETFs are treated as a stock. (Example: Look at all of the different available ETFs in the transportation area: https://etfdb.com/etfs/industry/transportation/ compared with Transportation Mutual Funds. https://www.investopedia.com/articles/investing/100715/top-4-transportation-mutual-funds.asp)
3) As far as I know, selling a stock and buying an ETF is not tax free – you’ll sell the stock and take your gain (or loss) and then go and buy the ETF shares. But there are tax implications when you sell the stock.
Then what is the difference between an EFT and a mutual fund?
The most major one, @LostInParadise, is that mutual funds price sets once a day, after the stock market closes (around 5–6pm). ETF prices are real time, like any stock, and you get the best price at that exact moment. So it’s real-time pricing, attuned to the market during the day.
And as I mentioned above, there are different federal laws on mutual funds than there are on ETFs. Mostly having to do with management, goals, governance, etc. Mutual fund have a hundred year history of legal protection from taxation.
@elbanditoroso ETFs do have assets: shares in the underlying basket of stocks that comprise the index upon which the ETF is based.
ETFs are required to “create” or “redeem” a basket every time they hit a threshold of assets under management, usually whenever there is open interest of at least 5,000 ETF shares.
@zenvelo yes, but the assets remind me a lot of the whole debt crisis issue (2008–2009), in which the collateral debt obligations (CDOs) were basically made-up sets of theoretically valuable assets that were in fact, lousy mortgages.
Yes, there are assets, but they’re imaginary (or maybe I should say non-physical) ones.
@elbanditoroso The assets are actual shares of the stock or other actual securities. This is much different from the 2008 crisis.
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