Switch From Mutual Funds To ETFs - The Finance Forums: Financial planning, debt help, loans, mortgages, retirement and 401k, investment, and general finance discussion forums

nyjay · #1 (**permalink**) 02-08-2008, 07:50 PM

Hi,

A little background...

I’ve owned several (about 11) mutual funds with one of the big investment companies for many years now. The is a taxable brokerage account.
They are good 4 & 5 star rated funds, and have performed relatively well in the time I’ve owned them. Up to now, I’ve only added to these funds and paid the taxes on them every year. I’ve done some selling and transferring between the funds, but haven’t withdrawn any proceeds.

I’ve just completed my 2007 taxes... YIKES!! 2007 wasn’t a bad year for returns on these funds, they did well until December - BUT now I’m paying a really “nice” size tax bill for gains that have been COMPLETELY wiped out with the current market down turn. That’s fine, I fully understand the risk associated with this type of equity investment.

I’m becoming very interested in ETFs, and in fact have found some really great ETFs that would be excellent alternative investments to the current funds I own.
Does it make any sense to start selling these funds and moving the proceeds to a like investment ETF? It is more tax efficient? The gyrations of some of these mutual funds, always turning over one stock for another – that’s definitely got to be effecting the size of this tax bill I have to pay every year.

As I noted above, this is a taxable account. I want to hold stocks, bonds and cash in it, but I want to make it as tax efficient as possible. Any info on making the switch from mutual funds to ETFs would be greatly appreciated!

Thanks for your time,
Jay in NY

fl18 · #2 (**permalink**) 02-08-2008, 11:22 PM

First, ETFs are pretty much under the same obligation to distribute capital gains so this wipes the tax advantage. But, many ETFs come in the form of index funds, which don't trade often, meaning they might have less gains to distribute.

The turnover in your funds definitely raises the tax bill and it also creates additional expenses for the funds. Are they actually providing results above the benchmarks for this extra trading?

There's no reason not to hold your own stocks or bonds if you think it would help your returns. The tax consequences are about the same given that funds must distribute most of their capital gains each year. Just watch your commissions and how much you trade, plus how comfortable you are with stock selection.