Language is an area where precision matters. Move one letter in a word and everything changes.
For instance, let’s consider EFT and ETF. To my thinking, one is talking about moving, the other about staying. One letter changes, and you get a completely opposite meaning.
Most of us are familiar with the electronic funds transfer, or EFT. This includes direct deposit of paychecks, electronic bill pay and direct debit. These are wonderful modern conveniences that enable us to move our money with a minimum of effort. These tools have been with us for decades.
Exchange Traded Funds (ETFs) also have been on the scene for some time now. Fewer among us, however, may know exactly what they are and how they operate. It may be worth your time to take a closer look at them.
ETFs are similar in many ways to mutual funds, which many are all familiar with. In the same way, ETFs offer the ability of getting diversified exposure to an asset class or classes.
There are some critical differences however. First, unlike a mutual fund, an ETF is traded on an exchange. This feature is the primary reason behind the incredible tax efficiency of ETFs. Along with the fact that most are passive, the exchange feature means that stock ETFs almost never pay a capital gain; it is retained in the fund and reflected in the increasing share price. ETF share transactions occur on the exchange among investors.
Why is this important? Because there is a minimal need for the fund to sell underlying holdings to meet redemption requests.
There are no sales of underlying holdings – no capital gains to distribute to fund shareholders. It is very rare for an equity ETF to distribute any capital gains, unlike mutual funds, which must distribute all of their gains on an annual basis. This saves you on taxes and gives you the power over when to realize gains, allowing you to keep more of what you make.
A second advantage is that most ETFs are passive investment vehicles, meaning they have very low expenses, resulting in more money in your pocket.
Other advantages have been of particular historical importance to institutional investors, but, increasingly, the benefits are becoming apparent to retail investors. There are intraday trading capabilities – mutual funds offer end-of-day pricing, which means with a purchase, you do not pay the current price, but the price at the end of the trading day, which may be higher or lower.
There also are precise, transparent allocations. When we manage portfolios we believe there is a tremendous advantage in knowing exactly what we own and the price we paid for it. We believe this helps us manage portfolios better, leading to better risk management and potentially better returns
What does it all mean? Continue using the EFT to efficiently move your money as needed. And consider using ETFs to potentially enhance returns, save on fees and reduce taxes, enabling you to keep more of your money and watch it grow.
Hapanowicz & Associates is an investment and wealth management firm based in downtown Pittsburgh, whose clients reside in the Pittsburgh region and other areas of the country.
This article provided by NewsEdge.