Sunday, April 27, 2008
ETF redemption -- exhchange for underlying wo tax efficient
An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks or bonds. An ETF holds assets such as stocks, bonds, or futures. Institutional investors can redeem large blocks of shares of the ETF (known as "creation units") for a "basket" of the underlying assets or, alternately, exchange the underlying assets for creation units. This creation and redemption of shares enables institutions to engage in arbitrage and causes the value of the ETF to approximate the net asset value of the underlying assets. Most ETFs track an index, such as the Dow Jones Industrial Average or the S&P 500. An index mutual funds redemption when fund sell actual shares for investors with tax implications. But ETF usually just exchange shares without tax implications. Hence ETF is more tax efficient.