Twelve Things You Need to Know About ETFs

By Ben Steverman - 2012-02-27T22:16:37Z

Illustration by Dennis Pacheco

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How can ETFs affect my tax bill?

Because of how ETFs handle capital gains, most can lower tax bills more effectively than mutual funds. Municipal bond ETFs provide tax-free returns just like individual muni bonds and muni mutual funds do.

Some ETFs may increase tax bills. Many commodity ETFs are set up as partnerships, and so shareholders must report partnership income, for example. ETFs can also become a tax hassle if they close down unexpectedly. "It's very easy to open an ETF but harder to keep an ETF up and running," particularly if it doesn't attract more than about $30 million, Jennings warns. Investors in liquidated ETFs will get their money back but might need to pay taxes on gains at an inconvenient time.

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