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Why ETFs are ‘more tax efficient’ than other funds

State Street Global Advisors, SSGA, State Street, Thomas Reif, ETF, Managed fund,

Recent years have seen investors increasingly move into exchange-traded funds (ETFs) for a host of reasons, according to State Street Global Advisors, with one major advantage being the different way ETF tax is computed.

Thomas Reif, one of State Street Global Advisors portfolio managers, says investors stand to benefit from being aware of the ways in which their investments are taxed.

Mr Reif said ETFs are a “more tax efficient vehicle” than other traditional managed funds because an ETF unit-holder pays their own tax.

“That might sound like a bit of a surprise. Surely you pay your own tax on all investment schemes? Well, that’s not the case,” he said.

In traditional managed funds, the capital gains tax that needs to be paid when another investor chooses to redeem their units is paid for from the shared pool of capital invested in the fund, meaning those who do not redeem their units will indirectly pay taxes for those who do.

“If you buy an ETF at a certain price, let’s call it a dollar, and you sell it subsequently for $1.10, you pay tax on the ten cents of capital gains,” Mr Reif said.

“In mutual funds, or a traditional investment scheme, you may pay tax, but it depends on what other capital gains are earned by other investors.”

Additionally, ETFs that invest in Australian will benefit from the franking credits of their underlying shares, further adding to their tax advantages, Mr Reif said.

Why ETFs are ‘more tax efficient’ than other funds
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