Potential Benefits of an ETF

If you are looking to launch an Exchange-traded fund (ETF), this article will walk you through the advantages of ETFs over traditional open-ended funds, including trading flexibility, lower costs, and tax benefits.

Trading flexibility

Mutual funds are traded only once per day after the markets close, whereas ETFs are bought and sold during the day when the markets are open. For mutual funds, investors must wait until the end of the day when the fund’s net asset value (NAV) is announced before knowing what price they paid for new shares bought that day, as well as for the price when selling shares. The pricing of ETF shares is continuous during normal exchange hours and will vary throughout the day, based mainly on the intraday value of the underlying assets in the Fund. ETF investors know within moments how much they paid to buy shares and how much they will receive when they sell them.

Lower costs

Operating costs for both a mutual fund and an ETF will include portfolio management fees, custody costs, administrative expenses, marketing expenses, and distribution costs to name a few. ETF costs are streamlined compared to a mutual fund. Lower costs are typically a result of not having to staff a call center to answer questions from investors, lower expenses from administrative items, such as monthly statements, notifications, and transfers (mutual funds are required to send statements and reports to shareholders on a regular basis), and lower overhead, all translating to lower overall expenses for an ETF provider.

Tax benefits

There are structural differences between ETFs and mutual funds; therefore, capital gains taxes are different. Mutual funds typically incur higher capital gains taxes than an ETF. Specific to ETFs, capital gains tax is only incurred upon the sale of the ETF by the investor, where mutual funds pass the capital gains tax onto the investors throughout the duration of the portfolio holding. Dividends, however, are a bit different. ETFs issue two kinds of dividends – qualified and unqualified.

Dividends, however, are classified as qualified if the investor holds the ETF for at least 60 days (about 2 months) prior to the dividend payout date. The tax rate for qualified dividends ranges from 5-15% depending on the investor’s tax rate. Unqualified dividends are taxed at the investor’s income tax rate.

Ready to launch?

If you too are looking to launch an ETF, then download our guide below. We will walk you through everything you need to know to get started, including the differences between ETFs and other product offerings, startup costs, necessary service providers, and how to gain assets via distribution.

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How we help

If you are ready to launch an ETF, then contact us today to get started.

Year-over-year, the most well-known global wealth and asset managers continue to choose ACA Foreside to help expand and support their product line up of ETFs. In 2023, our specialists partnered with more than half of the ETF launches in the U.S., and we support 1,000+ ETFs distributed across 275 managers. 

We work with asset management firms throughout the world to facilitate compliance and product distribution through legal underwriting, registered rep licensing and chaperoning, and DTCC/NSCC fund sponsorship. We have experience working with all types of pooled investment vehicles, such as traditional mutual funds, ETFs, alternative products, closed-end interval funds, and private placements.

Once launched, we can further support you with our broad range of advisory, managed services, and regulatory technology solutions, to help you grow and protect your business, while also addressing your compliance, ESG, investment performance, and cybersecurity challenges.