ETFs Could Offer a Tax Shelter

Over the last few years, a new breed of mutual fund has become available to traders looking for liquidity and reduced costs. These funds, known as exchange-traded funds (ETFs), trade on the major exchanges and behave much like shares, with the exception that they offer comparable diversification and expert management accessible in conventional finances. More than 700 different exchange-traded funds at the moment are accessible, and the quantity is continuing to grow.

ETFs may be helpful for traders seeking to seize capital losses at year-end. For a hypothetical instance, presume that you simply have stock in a particular engineering business. The stock cost has dropped precipitously because you got in, but you feel this is only momentary. However, you want to to realize a capital loss on the stock while it is trading in its present range. However you must be careful for the "wash sale" rule as dictated by the IRS prohibiting the repurchase of any stock sold for a loss for a minimum of 31 days following the sale. As a result, an alternative could be to sell the stock and purchase shares of the suitable related exchange-traded technology fund. Even if this fund actually has your former stock as one of its core holdings, it is still regarded as a independent security by the IRS and the Sec. Hence the wash sale guidelines won't apply-a tax shelter. Moreover, you have diversity within the technology field, while keeping exactly the same liquidity as before. The expansion of exchange-traded funds now enables you to realize a loss with one fund and then jump into another in case you desire.

And when is it best to sell a stock and purchase the ETF symbolizing the asset type to which the stock belongs? The obvious answer is when you have capital gains or other income and taking a loss would assist shelter that income. A capital loss may be declared against the quantity of any gain obtained, plus $3,000 of normal income per yr.

A tax shelter that arrives along with ETFs is usually low turnover. Simply because most ETFs aim to replicate an index rather than beat it, the ETF doesn't have to do a lot of purchasing and selling as most actively managed mutual funds do. A small quantity of purchasing and selling indicates reduced capital gains and the resulting taxes-a tax shelter of ETFs.