ETF vs Mutual Funds

ETFs create and redeem shares with in-kind transactions that are not considered sales.

Can someone please explain this statement? Let’s say you buy USO (Etf on Crude Oil) at 20 and sell it at 30, you wont be taxed on the $10 you made in the ETF?


I would think it with comparing it with mutual fund, where the manager will have to sell some of the oil position and generating tax liability at fund level - tax liability for all investors in the fund.

This in kind redemption allows the sale / purchase within the fund, hence the liability will only be generated for the specific seller’s share and not the whole fund - as the fund’s overall position remains the same.

So does that mean ETF does not invest in oil, it just tracks an index?

Primarily Oil futures only - check

This is onle of the largest / most traded oil ETF.

So it would mean ETF would buy futures and a mutual fund would buy physical oil?

So it would mean ETF would buy futures and a mutual fund would buy physical oil?

In most cases ETFs and mutual funds would both buy oil futures to gain direct exposure to oil. I don’t think there are any “pure” commodity/energy mutual funds. Most energy related mutual funds invest in “equity-linked commodities” which just means that the funds are buying commodity/energy stocks.

I’m not sure that’s quite the case sunpak. here’s what I think happens…

Mutual Funds: When a new investor buys 100 units of the fund, the fund manager has his traders go out and purchase more of the underlying positions that the mutual fund is replicating. When the investor sells 100 units, the mutual fund sells the underlying positions the fund is replicating. The physical sale of the underlying is a taxable event for the mutual fund.

ETF (warning this doens’t make sense at all). When an investors buys the ETF, the ETF fund manager will arrange a swap with dealers, market makers etc where the swap is the underyling position the ETF is trying to replicate and the dealer/market makers receive cash. When the investor sells from the ETF, the swap is closed and cash is returned.

"Unlike mutual funds, ETFs do not sell holdings in exchange for cash, which would trigger a taxable event. Instead, the ETFs undergo a creation and redemption process in which market makers, authorized participants or large institutional investors swap a basket of securities from the underlying benchmark index for ETF shares, or vice versa.

An authorized participant would borrow shares of stock from an underlying benchmark and put them in a trust to form a so-called creation unit of an ETF. The Trust would provide shares of the ETF that are legal claims on the shares held in the ETF. As such, the authorized participant exchanges the basket of stocks for ETF shares, which are then sold to the public as stocks in the open market."