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COPYRIGHT 2002 Consumers Union of the United States, Inc.
INDEX FUNDS YOU CAN TRADE
Halloween spirits can't be blamed for the shivers most investors are experiencing. With the stock market in a downward spiral, many people have seen years of accumulated wealth evaporate.
But there are worse things than getting spooked by the market. Like getting spooked by the market and then whipped by taxes. In 2001, mutual funds paid out some $14 billion in taxable capital gains--a figure likely to be dwarfed by 2002 capital gains. Those gains will come from sales that stock funds make to cover redemptions from fleeing investors. Because remaining investors get stuck with the tax bill, people who keep their money in taxable accounts, as opposed to tax-deferred 401(k)s and Individual Retirement Accounts, can expect the heebee-geebees next April.
As a countermeasure, financial planners and brokers recommend spiders (SPDRs), VIPERs, DIAMONDs and other, less colorfully named exchange-traded funds (ETFs) for year-end tax planning. ETFs, introduced in 1993, are similar to stock-index mutual funds but offer a few extras, among them protection against those unwanted capital-gains distributions.
But ETFs come with two major drawbacks: You have to buy from a broker and therefore pay a commission and, if you trade them frequently, they could generate more gains--just what you're buying them to avoid.
What they are. In essence, ETFs are index mutual funds that trade on exchanges, like stocks and bonds. They are a genus comprising many species. Various types of SPDRs track components of the Standard & Poor's 500 Index (S&P 500); DIAMONDs follow the Dow; and VIPERs (ETFs created by the Vanguard Group, the mutual-fund giant, follow a variety of indexes, including one that...
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