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Tax Advantages of ETFs

ETFs are one of the most attractive investments because of their tax advantages. Because of the way ETFs are created and redeemed, it allows investors to pay taxes upon final sale of the ETF, rather than upon making any return. One must pay taxes, however the money an investor would’ve paid to taxes could be reinvested to accumulate more wealth.

Any benefits or gains are attached to the marginal tax rate along with the ROI and longevity of it. Tax advantages of ETFs resemble that those of tax manages index funds. ETFs are much more advantageous than actively managed funds.

Taxation for typical mutual funds will take accumulated, unrealized capital gains liabilities from all stocks that have risen in value. When investors sell their stocks, the fund takes that calculated tax amount and distributes it proportionally among its membership. ETFs allow that money to be reinvested before paying a capital gain, allowing huge upside for wealth accumulation.

In comparison to actively managed funds both ETFs and mutual funds have modest distribution. It would be important to note that ETFs have significantly less capital gains liability. The more turnover experienced from picking stocks, the more adamantly the fund will enforce tax payment to its investors.

An interesting detail that goes much unknown is that many mutual fund investors end up paying the bill for investors who evade the liability, especially in a soft market. Those who evade the taxes will sell their stock before the day of record and don’t receive a bill while those loyal investors stay, and end up paying for the full liability. ETFs don’t have that same downfall.

A regulatory loophole exists and ETFs are considered to be created by trading equivalent certificates called an in-kind trade. Because they seem like identical items, it does not trigger the IRS to charge a capital gain. Typical mutual funds, which exchange cash for stocks will trigger a capital gain, which creates an advantage for ETFs.

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ETF Assets Now Top $1 Trillion

By the end of 1999 only 33 exchange traded funds existed in the world with assets of $39.6 billion. At the end of 2009 there were a total of 1,939 ETFs worldwide with assets totaling over $1.03 trillion according to research from Black Rock. Due to the recovery of the market it surged to a 45% increase in 2009.

Money poured into the ETFs as the market made a huge comeback from the damaging financial crisis. In 2008 the S&P 500 was up 23% in 2009 after falling 38.5% in 2008. The Nasdaq, made a heroic recovery of 43.5% in 2009 after dropping 40.5% in 2008. ETFs assets appear to be on path to reach $1.2 trillion by the end of 2010, according to Deutsche Bank.

In Europe the number of ETFs grew from 6 to 815 during 2000 to 2009. In the U.S. by the end of 2009 the number of ETFs reached 772. Domestic ETF assets grew dramatically between 1999 and 2009 from $33 billion to over $705 billion.

According to the Wall Street Journal ETF assets could pass that of hedge funds. ETFs have grown faster because investors can gain such quick access to liquidity. Hedge fund assets hit $1.53 billion by the third quarter of 2009 according to Chicago-based Hedge Fund Research of Chicago.

According to Cerulli Associates ETFs already have a great dollar amount of assets than to separately managed accounts which were at $527 billion by the end of third quarter 2009. Another source of quickly growing funds is commodity funds. Separately managed funds grew from $100 million in 2002 to $22.2 billion by year end 2009.

In 2008 when the market condition weakened, investors began looking for other investment options and found ETFs to be among the best. As investors searched out alternative investments they found ETFs offered less risk, more price transparency, liquidity, better product structure, holdings transparency and less cost issues. ETFs have become among the most attractive of investment options.

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Inverse Exchange-Traded Funds

Inverse exchange-traded funds are exchange-traded funds which are traded on the public stock market. This type of ETF is aimed to perform the inverse of whatever index being tracked. These funds work through the use of leveraged investment tips such as futures contracts, short selling, and trading derivatives.

Inverse ETFs give a similar result to short selling the stock in the index, setting aside the impact of fees and other costs and providing over a short period of time results opposite of their benchmark. During bear markets these are very popular, since they are designed to rise in a falling market. For example, an inverse S&P ETF would try and move opposite of that of the S&P. If the S&P falls by 1% the invest ETF is designed to move up 1%.

Unlimited losses can occur to an investor’s stock portfolio through a short sale whether an ordinary share of stock or an ETF. Investors only lose the purchase price with an inverse ETF but retain all other advantages of a short sale. Unlike a short sale, inverse ETFs can be held in an IRA account.

Investors can benefit from several different long-term scenarios from inverse ETFs. When trapped in a bear market, investors can reduce losses by using an inverse ETF. Another strategy is if a long-term investor has a large gain and doesn’t want to pay high taxes they would invest in this fund.

Long-term investors can also avoid paying taxes if they realize a large paper gain by investing in these funds. When investors use inverse ETF strategies they must change their notional daily. Normally, this causes more trading. Some experts have said this has increased volatility, many other experts disagree and say it has no impact.

Inverse ETFs typically have higher costs than that of standard ETFs. Most of these funds are actively managed, which means higher broker commissions. If not closely monitored, costs can get out of control and eat away at gains.

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The Basics of Gold Exchange Traded Funds

Gold Exchange Traded Funds (GETFs) track the price of gold. All major stock exchanges including Paris, New York, Zurich, Mumbai, and London trade GETF’s. Gold ETFs held 1,750 tons of gold as of October 2009.

Another fund which aims to track the price of gold is a closed-end fund (CEFs) and also exchange traded notes (ETN’s). Each gold fund whether it be a CEF, ETN or an ETF has a different structure which is found summarized in their prospectus. These different funds may not physically hold gold. Gold ETN’s for example, traditionally track the price of gold through the use of derivatives.

Benchmark Asset Management Company Private Ltd in India first brought to life the idea of a Gold ETF when filing a proposal with the Securities and Exchange Board of India (SEBI) in May 2002. It took until March 2007 to receive all approvals and formally launch. The Australian Stock Exchange actually beat Benchmark when it launched its fund in March 2003 under Gold Bullion Securities.

Fees for GETFs are very minimal, along with a small storage fee brokers charge no more than 0.4%. Only a fraction of that is charge by brokers in the U.S. Annual costs associated with gold such as storage, selling, management, and insurance are charged by selling a small portion of the gold in a particular portfolio.

Gold ETFs, in many countries, are a way to get out of paying sales tax or the VAT which applies to the actually, physical gold coins and bars. As for the U.S., Gold ETF’s are treated as a commodity. Rather than being the 15% long-term capital gains rate for non-collectibles, gold is taxed at 28% because it’s a commodity.

Gold Exchange Traded Funds are officially sponsored by the World Gold Council. Establish by the world’s leading gold mining companies in 1987, its purpose is to create worldwide demand for gold. The World Gold Council was established in 1987.

Black Sand trading is an online stock trading tool that indicates to online traders where and how to invest their money. Black Sand’s clients have consistently achieved a 53% or greater ROI over the past seven years following Black Sand’s signal. For more information about trading and using Black Sand Trading visit our website.