Abstract

http://ssrn.com/abstract=300743
 
 

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Exchange Traded Funds: A New Investment Option for Taxable Investors


James M. Poterba


Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

John B. Shoven


Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

February 2002

NBER Working Paper No. w8781

Abstract:     
Exchange traded funds (ETFs) are a new variety of mutual fund that first became available in 1993. ETFs have grown rapidly and now hold nearly $80 billion in assets. ETFs are sometimes described as more 'tax efficient' than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distributions of realized and taxable capital gains than most mutual funds. This paper provides an introduction to the operation of exchange traded funds. It also compares the pre-tax and post-tax returns on the largest ETF, the SPDR trust that invests in the S&P500, with the returns on the largest equity index fund, the Vanguard Index 500. The results suggest that between 1994 and 2000, the before- and after-tax returns on the SPDR trust and this mutual fund were very similar. Both the after-tax and the pre-tax returns on the fund were slightly greater than those on the ETF. These findings suggest that ETFs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low-cost index funds.

Number of Pages in PDF File: 15

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Date posted: February 14, 2002  

Suggested Citation

Poterba, James M. and Shoven, John B., Exchange Traded Funds: A New Investment Option for Taxable Investors (February 2002). NBER Working Paper No. w8781. Available at SSRN: http://ssrn.com/abstract=300743

Contact Information

James M. Poterba (Contact Author)
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
E52-350
Cambridge, MA 02142
United States
617-253-6673 (Phone)
617-253-1330 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
John B. Shoven
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-326-5377 (Phone)
650-328-4163 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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