BUSINESSWEEK ONLINE : OCTOBER 23, 2000 ISSUE
BUSINESSWEEK INVESTOR These Go Easier on Your Tax Bill Unexpected tax bills are a fact of life for mutual fund owners. But a new product, known commonly as an exchange-traded fund, offers ways to keep nasty tax surprises to a minimum. Like index funds, these products track a host of benchmarks. The best known are the SPDRs, or ''Spiders,'' that track the Standard & Poor's 500-stock index. Now, about 80 such funds trade on the American Stock Exchange. ETFs never have to sell stock to meet shareholder redemptions--a common cause of fund distributions. Instead, when an ETF investor wants out of a fund, the cash comes from institutional middlemen. The middlemen sell those ETF shares to an ETF sponsor, receiving the underlying stocks in exchange. Such ''in-kind'' transactions are not subject to taxes. Still, ETFs are not immune to distributions. In fact, this summer, the Canada and Sweden iShares, both ETFs, issued surprisingly large taxable distributions, equal to 23% and 18% of their respective net asset values. Those gains occurred because big runups in Nortel and Ericsson had left the funds with larger positions in a stock than allowed under U.S. securities laws. The funds had to unload highly appreciated shares to get back in balance. A variation on the ETF is Holding Company Depositary Receipts, or HOLDRS. There are 13 of these, which are sold in lots worth $10,000, and each gives investors a fixed basket of stocks in a different industry or sector, such as biotechnology or the Internet. HOLDRS employ the redemptions that make ETFs tax-efficient. But because they are not indexed products, HOLDRS don't have to buy or sell stocks periodically to get back in sync with an index. Moreover, because HOLDRS are not legally mutual funds, they can let their winners run instead of trimming positions to comply with fund concentration rules. To be sure, HOLDRS owners can receive capital gains distributions if a stock inside a HOLDRS is acquired for cash. Still, at least for now, ETFs are as close to tax Nirvana as you will get with fundlike investments. By Anne Tergesen _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Don't Let the Taxman Eat Your Lunch TABLE: Warning: Possible Tax Bills Ahead These Go Easier on Your Tax Bill TABLE: Exchange-Traded Alternatives INTERACT E-Mail to Business Week Online

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