ight a few of them.

Let’s assume you have a small cap mutual fund that has declined $15,000 since its purchase three years ago and you want to apply the capital loss but still want small cap exposure. You could sell the mutual fund and simultaneously invest the proceeds in the iShares Russell 2000 ETF (IWM). The key is to avoid switching to an ETF that is similar but not identical or you may come into conflict of the wash sale rule whereby buying the same or a substantial

While exchange-traded funds (ETFs) are well known for their low cost, transparency and flexibility, the tax efficiency advantage of ETFs oftentimes gets overlooked. As we head into the last month of the year, let’s look at how investors may lower their tax liabilities by converting some positions in their portfolio to ETFs as well as discuss other ETF strategies to reduce tax burdens. Since every investment situation is different, please be sure to consult tax counsel before taking action.

Like higher expenses, tax consequences can negatively impact fund performance. ETFs are more tax efficient than actively managed mutual funds. Some mutual fund managers are prone to selling position late in the year to lock in capital gains. These gains are then distributed to current shareholders on a pro rata basis.

Because ETFs track indexes which generally buy and sell securities far less often than mutual funds, most ETFs rarely distribute any pesky end-of- the- year capital gains distributions that are detailed in those 1099 forms that collect in your tax file. iShares, the largest family of ETFs, has never distributed any capital gains to iShares investors.

In addition, mutual fund shareholders purchase and redeem shares from the fund – which may result in gains distributed to all shareholders. The killer is that these capital gains known in the investment business as “imbedded capital gains” may come from the sale of a mutual fund stock holding that goes back many years – well before the current shareholder invested in the fund. In contrast to mutual fund investors, ETF shareholders buy and sell ETFs on an exchange, a transaction that does not affect other shareholders. ETF investors clearly have better control and transparency of their tax situation.

While you can see the tax advantages of ETFs, you may not be aware of their use as a toll to reduce your tax burden. Let me highlight a few of them.

Let’s assume you have a small cap mutual fund that has declined $15,000 since its purchase three years ago and you want to apply the capital loss but still want small cap exposure. You could sell the mutual fund and simultaneously invest the proceeds in the iShares Russell 2000 ETF (IWM). The key is to avoid switching to an ETF that is similar but not identical or you may come into conflict of the wash sale rule whereby buying the same or a substantiall

king action.

Like higher expenses, tax consequences can negatively impact fund performance. ETFs are more tax efficient than actively managed mutual funds. Some mutual fund managers are prone to selling position late in the year to lock in capital gains. These gains are then distributed to current shareholders on a pro rata basis.

Because ETFs track indexes which generally buy and sell securities far less often than mutual funds, most ETFs rarely distribute any pesky end-of- the- year capital gains distributions that are detailed in those 1099 forms that collect in your tax file. iShares, the largest family of ETFs, has never distributed any capital gains to iShares investors.

In addition, mutual fund shareholders purchase and redeem shares from the fund – which may result in gains distributed to all shareholders. The killer is that these capital gains known in the investment business as “imbedded capital gains” may come from the sale of a mutual fund stock holding that goes back many years – well before the current shareholder invested in the fund. In contrast to mutual fund investors, ETF shareholders buy and sell ETFs on an exchange, a transaction that does not affect other shareholders. ETF investors clearly have better control and transparency of their tax situation.

While you can see the tax advantages of ETFs, you may not be aware of their use as a toll to reduce your tax burden. Let me highlight a few of them.

Let’s assume you have a small cap mutual fund that has declined $15,000 since its purchase three years ago and you want to apply the capital loss but still want small cap exposure. You could sell the mutual fund and simultaneously invest the proceeds in the iShares Russell 2000 ETF (IWM). The key is to avoid switching to an ETF that is similar but not identical or you may come into conflict of the wash sale rule whereby buying the same or a substantial

y end-of- the- year capital gains distributions that are detailed in those 1099 forms that collect in your tax file. iShares, the largest family of ETFs, has never distributed any capital gains to iShares investors.

In addition, mutual fund shareholders purchase and redeem shares from the fund – which may result in gains distributed to all shareholders. The killer is that these capital gains known in the investment business as “imbedded capital gains” may come from the sale of a mutual fund stock holding that goes back many years – well before the current shareholder invested in the fund. In contrast to mutual fund investors, ETF shareholders buy and sell ETFs on an exchange, a transaction that does not affect other shareholders. ETF investors clearly have better control and transparency of their tax situation.

While you can see the tax advantages of ETFs, you may not be aware of their use as a toll to reduce your tax burden. Let me highlight a few of them.

Let’s assume you have a small cap mutual fund that has declined $15,000 since its purchase three years ago and you want to apply the capital loss but still want small cap exposure. You could sell the mutual fund and simultaneously invest the proceeds in the iShares Russell 2000 ETF (IWM). The key is to avoid switching to an ETF that is similar but not identical or you may come into conflict of the wash sale rule whereby buying the same or a substantial

le of a mutual fund stock holding that goes back many years – well before the current shareholder invested in the fund. In contrast to mutual fund investors, ETF shareholders buy and sell ETFs on an exchange, a transaction that does not affect other shareholders. ETF investors clearly have better control and transparency of their tax situation.

While you can see the tax advantages of ETFs, you may not be aware of their use as a toll to reduce your tax burden. Let me highlight a few of them.

Let’s assume you have a small cap mutual fund that has declined $15,000 since its purchase three years ago and you want to apply the capital loss but still want small cap exposure. You could sell the mutual fund and simultaneously invest the proceeds in the iShares Russell 2000 ETF (IWM). The key is to avoid switching to an ETF that is similar but not identical or you may come into conflict of the wash sale rule whereby buying the same or a substantial

ight a few of them.

Let’s assume you have a small cap mutual fund that has declined $15,000 since its purchase three years ago and you want to apply the capital loss but still want small cap exposure. You could sell the mutual fund and simultaneously invest the proceeds in the iShares Russell 2000 ETF (IWM). The key is to avoid switching to an ETF that is similar but not identical or you may come into conflict of the wash sale rule whereby buying the same or a substantially identical security within 30 days after a sale defers the capital loss. You could then apply this $15,000 towards other capital gains distributions to lower your overall tax liabilities.

You could also use this tax loss harvesting to re-balance your overall portfolio. In the above example, you might have wanted to cut back a bit on small cap exposure and allocated more to a large cap ETF like the Vanguard Large Cap ETF.

An investor could also ETFs to take care of a collection of individual stocks which are being held at a loss. For example, an investor with a loss on a portfolio of healthcare stocks could sell the securities and then purchase a sector ETF such as the iShares Dow Jones U.S. Healthcare Sector ETF (IYH).

Switching from a loss position in an actively managed mutual fund to an ETF of course has double barreled tax benefits. First you can take the capital loss without losing the exposure, and secondly, you have a more tax efficient position with a much lower likelihood of future capital gains distributions.

Take some time this month to review your portfolios with your investment or tax advisor. It is a great time to consider expanding your ETF holdings with the bonus of perhaps lowering overall tax liabilities for both this year and for future years.