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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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.

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.