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Someone told me that index funds occur yearly taxable events and ETF only occur when you decide to sale?
If you are holding in a normal taxable brokerage account account for the long term 20+ years. Is it that big of a deal or would ETF be better so year to year? So, I don't have to worry about gains. I just don't like ETF's because I'm investing a set dollar amount and I don't want to buy a whole ETF share every month. Any advice greatly appreciated.
Etfs are a double edge sword ....they can create a massive tax torpedo to deal with down the road .
Mutual funds have to distribute capital gains yearly so besides taxes on dividends which both get you have capital gain distributions too .
Etfs can be more volatile since they are traded like stocks all day and can be sold short .
They can have a discount or premium to assets unlike the mutual funds ..there can be spreads between bid and ask ...
Etfs have had issues in volatile markets ..we had a flash crash where a popular etf DVY lost sync with its assets and traded down 35% while the assets were down 5% ...it took a few minutes to fix itself but investors got burned .
Fidelity lets you buy fractional etf shares but not all brokerages do .
Getting back to the taxes , etfs can be very tax efficient, but the negative is you can end up with 30 years of gains to pay taxes on if you want to make changes .
I totally went a different route for retirement in 2007 ....so being I had funds and paid taxes over the decades it was a painless change ...but if I had 30 years of taxes pent up in etfs I would have had to spread the changes over years ...I would have run right in to 2008 .
Etfs have had issues in volatile markets ..we had a flash crash where a popular etf DVY lost sync with its assets and traded down 35% while the assets were down 5% ...it took a few minutes to fix itself but investors got burned .
Etfs are a double edge sword ....they can create a massive tax torpedo to deal with down the road .
Mutual funds have to distribute capital gains yearly so besides taxes on dividends which both get you have capital gain distributions too .
Etfs can be more volatile since they are traded like stocks all day and can be sold short .
They can have a discount or premium to assets unlike the mutual funds ..there can be spreads between bid and ask ...
Etfs have had issues in volatile markets ..we had a flash crash where a popular etf DVY lost sync with its assets and traded down 35% while the assets were down 5% ...it took a few minutes to fix itself but investors got burned .
Fidelity lets you buy fractional etf shares but not all brokerages do .
Getting back to the taxes , etfs can be very tax efficient, but the negative is you can end up with 30 years of gains to pay taxes on if you want to make changes .
I totally went a different route for retirement in 2007 ....so being I had funds and paid taxes over the decades it was a painless change ...but if I had 30 years of taxes pent up in etfs I would have had to spread the changes over years ...I would have run right in to 2008 .
So no one can tell you what is right for you
Thank you for that explanation. the way you explained it definitely makes sense. I think I'm going to do the index fund. I love how you can buy fractions. instead of waiting until you can afford one etf share. Also with the tax cost basis it definitely seems more logical to pay a few small capital gains over the years than 20yrs from now when the balance is much higher and get it with some massive tax bill.
I like ETF's.
One reason is you can use can set the price you want to buy and sell at where as a mutual fund is sold or purchased the day you place the order.
So lets say you need to sell ETF's for this years income. You could set up several sales at increasing prices if the market is going up instead of sell a mutual fund at what ever the price was on the day you sold.
Remember the taxes you did not pay are also earning money for you.
I like ETF's.
One reason is you can use can set the price you want to buy and sell at where as a mutual fund is sold or purchased the day you place the order.
So lets say you need to sell ETF's for this years income. You could set up several sales at increasing prices if the market is going up instead of sell a mutual fund at what ever the price was on the day you sold.
Remember the taxes you did not pay are also earning money for you.
Maybe do some of both?
I like etfs for that reason too but those reasons can lead to some crazy price abnormalities as well as paying more for the etf then the shares are worth .
The short selling and high frequency trading adds to volatility as well.
At the end of the day paying more taxes later and less now may be better or worse for some ....etfs can create quite a tax torpedo at retirement.
I have an older s&p 500 etf in a taxable account .I would have liked to sell it and use the managed funds I do but there is so much in pent up gains that it could take years to sell it all without effecting my Medicare premiums and tax rates .
When I made changes in my models pre retirement I was glad I paid taxes in my managed funds along the way .
I revamped the portfolio totally for retirement from my growth model ...it was not to bad since taxes were paid along the way.
I try to keep as much of the assets that can have big gains in my ira ...things like Tlt , Gld and stocks can have huge gains
Most funds (be they mutual or ETF) have times when they are paying divs and cap gains. I have a mixture of both.
The advantage of ETFs for me is being able to buy in at a price point of my choosing and an exit of my choosing, as one would with stocks. They also don't have the kinds of trading restrictions as mutual funds do. And their expense ratios *can* be lower, but that is not always true, so you have to compare.
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