An interesting fact that demonstrates one of the advantages of ETF to mutual funds for an investor operating in the US market. Tax implications (peeped by Meb Faber).
If one investor decides to sell, for example, an ETF on the S&P-500 index, he passes through a broker to the secondary market and sells it to the buyer. Accordingly, the tax consequences arise directly from the investor-seller (if there is profit). Thousands of other owners of the same ETF are not affected.
If the investor decides to return his stake in the mutual fund, the fund manager will have to sell part of the fund’s shares in order to free up cash to pay the investor. In this case, in the case of profit, the tax will apply to the entire fund. Accordingly, each shareholder of the fund will feel a negative impact on the profitability of even a long-term “buy and hold” investor, who did not even think of selling anything. This effect will not be very noticeable, since the share of an individual investor in a large fund is microscopic. But, first, why pay extra, even if it is a penny, and secondly, on long horizons «pennies» can turn into a noticeable amount.
This does not mean that mutual funds should not be considered as a tool at all. Simply put, their choice should be approached more responsibly and understand that the alpha of active controls must be high enough to cover the possible negative infrastructure. If there is no such understanding, then working with ETFs can be beneficial to most ordinary investors.