Tax and Expense Advantages of Index Funds
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Tax and Expense Advantages of Index Funds
The holdings in an index fund are not traded often because they are held to match an index. Most index funds are passively managed. Managers of actively managed funds trade their securities more often. This results in capital gains and capital losses. When a fund has net capital gains, its shareholders must pay taxes on the capital gain distributions, even if they are reinvested. Most index funds have little capital gain distributions subject to tax. Some investors think of this characteristic as a tax advantage.
Things To Know
- Taxes and fees are relatively lower due to less trading.
Why the fees are lower
Since most index funds are managed passively, management expenses are lower compared to actively managed mutual funds. Two funds composed of the same securities will perform the same. However, the one with lower expenses has an advantage.
