Exchange-traded funds (ETFs) track market indexes and trade like stocks. With these characteristics, they can be valuable to investors, especially in certain situations:
- Tax-loss harvesting. You might sell a mutual fund that has dropped, to take the capital loss, even though you still like the fund. If so, you can go right into an ETF in that asset class, to maintain your exposure. After 31 days, once the “wash-sale” rules no longer apply, the ETF can be sold and the original fund can be repurchased, if you wish.
- “Equitizing” cash. If you get a sizable amount of cash from some source (an inheritance, for example) and you’re not ready to pick stocks or mutual funds right away, you can put the money into an ETF as a quick way to get market exposure. You might do the same thing if you’re waiting for a particular stock to drop to a price where you’ll be buying. Rather than go into low-yielding cash, your money can go into ETFs until a buying opportunity comes up.
