Retirement & Financial Planning Report

Exchange-traded funds (ETFs; see above) don’t make capital gain distributions so they don’t create tax pain for buy-and-hold investors. With mutual funds, on the other hand, taxation can be a problem. In addition, some investors prefer ETFs to index mutual funds because the former can be bought on margin, sold short and traded subject to limit orders. ETF trades are done instantly; with a mutual fund, transactions are not priced until the end of the day. Some observers express concern that a market break could lead to a surge of redemptions in index funds, in which case the ability to immediately trade out of an ETF could be a plus.