What is in-kind redemption process of ETFs

What is in-kind redemption process of ETFs ? How does it reduces tax liability -------------------- A primary advantage of the in-kind redemption process of exchange traded funds (ETFs) is that it: A) reduces transaction costs for the investor. B) provides greater liquidity for shares of the ETF. C) encourages investors to adopt a longer investment horizon. D) reduces tax liability.

I would have guessed B, are you saying the answer is D?

as far as I know if you have a sufficient number of etf you can exchange it for the underlying securities. I would assume the answer is D although i am not sure could be A too

Dimes the shares that make up an etf are already very liquid if I know correctly the longer investment horizon doesn’t make to much sense here The way i know is that the main objective is to keep the price of an etf close to the values that compose it. If the price shifts away the big institutional investors could create an arbitrage by buying the etf and changing it for underlying securities for example

Yes. They gave answer as D

The answer is in schweser pg 203 (book 5) if you have it. I’m not sure I fully get it, but apparently it does offer a tax advantage to either the redeemer or the ETF, not sure.

I would assume to the redeemer, it’s probably considered just a transfer not a realized gain or loss since no money is involved just an assumption

That makes sense. It also wouldn’t reduce transaction costs for the investor to have to sell “x” amount of stocks separately.

I think the tax benefit is as compared to mutual funds. From what i rememeber if the redemption pays off in cash, the fund manager will have to liquidate some of the stocks of the fund. The capital gain will then apply to all holders of the fund and not just the redeemer. In kind redemption means that only the redeemer pays the capital gains and not the other investors.