If you are looking for a tax efficient investment that tracks a specific market index, then the exchange traded fund (ETF) may be an interesting alternative. An ETF bears some similarities to a mutual fund but also possesses some significant differences.
An ETF holds a portfolio of securities designed to deliver investment results that, before fees and expenses, generally correspond to the price and yield performance of the benchmark index that it tracks.
Investors can buy an ETF that tracks a broad stock index, such as the S&P 500, or an index that tracks a particular sector of the market, such as the financial sector. ETFs can also track various corporate and government bond indexes, real estate
investment trusts, and international stocks.
Like an index mutual fund, an index-based ETF uses a passive investment style. As such, the performance of a particular ETF is likely to be no better than the performance of the index it mirrors.
An investor can buy and sell ETFs throughout the day at current market prices. An index mutual fund’s share price, on the other hand, is based on the asset value of the fund. This value is calculated using the closing prices of the securities in
the fund portfolio on the day the investor buys or redeems the shares. Therefore, you don't know how much you will pay for the fund when purchasing or how much you will receive when selling.
Standard index mutual funds periodically distribute capital gains to their investors, triggering a tax bill for those investors who own their funds in a taxable account. Capital gains distributions are likely to be less with an ETF since it does not have
to sell securities to raise cash for redemptions.
Be sure to read the prospectus carefully before you invest in an ETF or any other investment. We can help with all of your investment needs. Call us at 866.238.0082.
First Merchants Private Wealth Advisors products are not FDIC insured, are not deposits of First Merchants Bank, are not guaranteed by any federal government agency, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency. This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.
