ETFs joined a number of existing investment company products, thereby causing some confusion between the traditional products ”investment unit trusts, closed-end funds, and mutual funds ”and this new innovation. It is worthwhile to remember the following:
ETFs have a unique feature relative to mutual funds. Because market makers in ETFs are paid for ETFs with a swap of the underlying shares, no capital gains occur that must be passed on to shareowners. In contrast, mutual fund managers may have to sell shares to pay people who want to leave the fund, thereby generating capital gains. |