Are wash sale rules different for stocks and ETFs / Mutual Funds?
What JoeTaxpayer means is that you can sell one ETF and buy another that will perform substantially the same during the 30 day wash sale period without being considered substantially the same from a wash sale perspective more easily than you could with an individual stock. For example, you could sell an S&P 500 index ETF and then temporarily buy a DJIA index ETF. As these track different indexes, they are not considered to be substantially the same for wash sale purposes, but for a short term investing period, their performance should still be substantially the same. No, there's nothing special in mutual funds or ETFs. Wash sale rules apply to any asset. "The IRS rules are actually the same.  26 U.S. Code § 1091 - Loss from wash sales of stock or securities In   the case of any loss claimed to have been sustained from any sale or   other disposition of shares of stock or securities where it appears   that, within a period beginning 30 days before the date of such sale   or disposition and ending 30 days after such date, the taxpayer has   acquired (by purchase or by an exchange on which the entire amount of   gain or loss was recognized by law), or has entered into a contract or   option so to acquire, substantially identical stock or securities,   then no deduction shall be allowed... What you should take away from the quote above is ""substantially identical stock or securities."" With stocks, one company may happen to have a high correlation, Exxon and Mobil come to mind, before their merger of course. With funds or ETFs, the story is different. The IRS has yet to issue rules regarding what level of overlap or correlation makes two funds or ETFs ""substantially identical.""  Last month, I wrote an article, Tax Loss Harvesting, which analyses the impact of taking losses each year. I study the 2000's which showed an average loss of 1% per year, a 9% loss for the decade. Tax loss harvesting made the decade slightly positive, i.e. an annual boost of approx 1%."
Contrary to what you might have heard, moving money between mutual funds, whether or not in the same family of funds, is a taxable event, assuming, of course, that the funds are not in tax-deferred retirement accounts. About the only thing that is not taxable is moving funds between share classes in the same mutual fund, e.g. a conversion from what Vanguard refers to as Investor Shares to Admiral Shares in the same fund. In some cases, the Admiral Shares may have a considerably different price (for example, Vanguard Health Care Fund Investor Shares (VGHCX) and Admiral Shares (VGHAX) are priced at $215.83 and $91.04 respectively and so changing from one class to the other changes the number of shares owned considerably while the net value of the investment remains unchanged. "I wonder if ETF's are further removed from the actual underlying holdings or assets giving value to the fund, as compared to regular mutual funds. Not exactly removed. But slightly different. Whenever a Fund want to launch an ETF, it would buy the underlying shares; create units. Lets say it purchased 10 of A, 20 of B and 25 of C. And created 100 units for price x. As part of listing, the ETF company will keep the purchased shares of A,B,C with a custodian. Only then it is allowed to sell the 100 units into the market. Once created, units are bought or sold like regular stock. In case the demand is huge, more units are created and the underlying shares kept with custodian.  So, for instance, would VTI and Total Stock Market Index Admiral Shares be equally anchored to the underlying shares of the companies within the index? Yes they are. Are they both connected? Yes to an extent. The way Vanguard is managing this is given a Index [Investment Objective]; it is further splitting the common set of assets into different class. Read more at Share Class. The Portfolio & Management gives out the assets per share class. So Vanguard Total Stock Market Index is a common pool that has VTI ETF, Admiral and Investor Share and possibly Institutional share. Is VTI more of a ""derivative""? No it is not a derivative. It is a Mutual Fund." My memory served me correctly. I remember this because it was on my Series 7, so that link is misleading if you are studying for the 7. Here is the exception:  &gt; Transactions to Which the Rule is Not Applicable (Proposed FINRA Rule 2121(d)) Consistent with the initial proposal, FINRA Rule 2121(d) provides that FINRA Rule 2121 is not applicable to: (1) **the sale of securities where a prospectus** or offering circular must be delivered and the securities are sold at the specific public offering price, based on NASD IM-2440-1(d); and (2) a transaction in a non-investment grade debt security with a QIB that meets the conditions set forth in proposed FINRA Rule 2122(b)(9), which is described below.  If you're studying for the 7, you will know that every mutual fund sale requires the delivery of a prospectus. An index fund is inherently diversified across its index -- no one stock will either make or break the results. In that case it's a matter of picking the index(es) you want to put the money into. ETFs do permit smaller initial purchases, which would let you do a reasonable mix of sectors. (That seems to be the one advantage of ETFs over traditional funds...?) @BlackJack does a good answer of addressing the gains and when you are taxed on them and at what kind of rate. Money held in a brokerage account will usually be in a money-market fund, so you would own taxes on the interest it earned.   There is one important consideration that must be understood for capitol Losses.  This is called the Wash Sale Rule.  This rule comes into affect if you sell a stock at a LOSS, and buy shares of the same stock within 30 days (before or after) the sale.  A common tactic used to minimize taxes paid is to 'capture losses' when they occur, since these can be used to offset gains and lower your taxes.  This is normally done by selling a stock in which you have a LOSS, and then either buying another similar stock, or waiting and buying back the stock you sold.   However, if you are intending to buy back the same stock, you must not 'trigger' the Wash Sale Rule or you are forbidden to take the loss. Examples.  Lets presume you own 1000 shares of a stock and it's trading 25% below where you bought it, and you want to capture the loss to use on your taxes. This can be a very important consideration if trading index ETF's  if you have a loss in something like a S&P500 ETF, you would likely incur a wash sale if you sold it and bought a different S&P500 ETF from another company since they are effectively the same thing.  OTOH, if you sold an S&P500 ETF and bought something like a 'viper''total stock market' ETF it should be different enough to not trigger the wash sale rule.  If you are trying to minimize the taxes you pay on stocks, there are basically two rules to follow.  1) When a gain is involved, hold things at least a year before selling, if at all possible.  2) Capture losses when they occur and use to offset gains, but be sure not to trigger the wash sale rule when doing so. What might make more sense is to 'capture' your losses.  Sell out the funds you have, move into something else that is different enough that the IRS won't consider it a wash sale, and you can then use those losses to offset gains (you can even carry them forward)   You would still be in the market, just having made a sort of 'sideways move'.  A month or two later (once you are clear of wash sale rules) you could shift back to your original choices.  (this answer presumes you are in the US, or somewhere that lets you use losses to offset gains) "This is the sad state of US stock markets and Regulation T. Yes, while options have cleared & settled for t+1 (trade +1 day) for years and now actually clear ""instantly"" on some exchanges, stocks still clear & settle in t+3.  There really is no excuse for it. If you are in a margin account, regulations permit the trading of unsettled funds without affecting margin requirements, so your funds in effect are available immediately after trading but aren't considered margin loans.  Some strict brokers will even restrict the amount of uncleared margin funds you can trade with (Scottrade used to be hyper safe and was the only online discount broker that did this years ago); others will allow you to withdraw a large percentage of your funds immediately (I think E*Trade lets you withdraw up to 90% of unsettled funds immediately). If you are in a cash account, you are authorized to buy with unsettled funds, but you can't sell purchases made on unsettled funds until such funds clear, or you'll be barred for 90 days from trading as your letter threatened; besides, most brokers don't allow this.  You certainly aren't allowed to withdraw unsettled funds (by your broker) in such an account as it would technically constitute a loan for which you aren't even liable since you've agreed to no loan contract, a margin agreement.  I can't be sure if that actually violates Reg T, but when I am, I'll edit. While it is true that all marketable options are cleared through one central entity, the Options Clearing Corporation, with stocks, clearing & settling still occurs between brokers, netting their transactions between each other electronically. All financial products could clear & settle immediately imo, and I'd rather not start a firestorm by giving my opinion why not. Don't even get me started on the bond market... As to the actual process, it's called ""clearing & settling"". The general process (which can generally be applied to all financial instruments from cash deposits to derivatives trading) is: The reason why all of the old financial companies were grouped on Wall St. is because they'd have runners physically carting all of the certificates from building to building.  Then, they discovered netting so slowed down the process to balance the accounts and only cart the net amounts of certificates they owed each other.  This is how we get the term ""bankers hours"" where financial firms would close to the public early to account for the days trading.  While this is all really done instantly behind your back at your broker, they've conveniently kept the short hours." The ETF supply management policy is arcane.  ETFs are not allowed to directly arbitrage their holdings against the market.  Other firms must handle redemptions & deposits.  This makes ETFs slightly costlier than the assets held. For ETFs with liquid holdings, its price will rarely vary relative to the holdings, slippage of the ETF's holdings management notwithstanding.  This is because the firms responsible for depositing & redeeming will arbitrage their equivalent holdings of the ETF assets' prices with the ETF price. For ETFs with illiquid holdings, such as emerging markets, the ETF can vary between trades of the holdings.  This will present sometimes large variations between the last price of the ETF vs the last prices of its holdings. If an ETF is shunned, its supply of holdings will simply drop and vice versa. "For a non-ETF mutual fund, you can only buy shares of the mutual fund from the mutual fund itself (at a price that the mutual fund will reveal only at the end of the day) and can only shares back to the mutual fund (again at a price that the mutual fund will reveal only at the end of the day). There is no open market in the sense that you cannot put in a bid to buy, say, 100 shares of VFINX at $217 per share through a brokerage, and if there is a seller willing to sell 100 shares of VFINX to you at $217, then the sale is consummated and you are now the proud owner of 100 shares of VFINX. The only buyer or seller of VFINX is the mutual find itself, and you tell it that you ""want to buy 100 shares of VFINX and please take the money out of my checking account"". If this order is entered before the markets close at 4 pm, the mutual fund determines its share price as of the end of the day, opens a new account for you and puts 100 shares of VFINX in it (or adds 100 shares of VFINX to your already existing pile of shares) and takes the purchase price out of your checking account via an ACH transfer. Similarly for redeeming/selling shares of VFINX that you own (and these are held in an account at the mutual fund itself, not by your brokerage): you tell the mutual fund to that you ""wish to redeem 100 shares and please send the proceeds to my bank account"" and the mutual fund does this at the end of the day, and the money appears in your bank account via ACH transfer two or three days later.  Generally, these transactions do not need to be for round lots of multiples of 100 shares for efficiency; most mutual fund will gladly sell you fractional shares down to a thousandth of a share. In contrast, shares of an exchange-traded fund (ETF) are just like stock shares in that they can be bought and sold on the open market and your broker will charge you fees for buying and selling them. Selling fractional shares on the open market is generally not possible, and trading in round lots is less expensive. Also, trades occur at all times of the stock exchange day, not just at the end of the day as with non-ETF funds, and the price can fluctuate during the day too. Many non-ETF mutual funds have an ETF equivalent: VOO is the symbol for Vanguard's S&P 500 Index ETF while VFINX is the non-ETF version of the same index fund.  Read more about the differences between ETFs and mutual funds, for example, here." ETrade allows this without fees (when investing into one of the No-Load/No-Fees funds from their list). The Sharebuilder plan is better when investing into ETF's or stocks, not for mutual funds, their choice (of no-fees funds) is rather limited on Sharebuilder. "A mutual fund could make two different kinds of distributions to you: Capital gains: When the fund liquidates positions that it holds, it may realize a gain if it sells the assets for a greater price than the fund purchased them for. As an example, for an index fund, assets may get liquidated if the underlying index changes in composition, thus requiring the manager to sell some stocks and purchase others. Mutual funds are required to distribute most of their income that they generate in this way back to its shareholders; many often do this near the end of the calendar year.  When you receive the distribution, the gains will be categorized as either short-term (the asset was held for less than one year) or long-term (vice versa). Based upon the holding period, the gain is taxed differently. Currently in the United States, long-term capital gains are only taxed at 15%, regardless of your income tax bracket (you only pay the capital gains tax, not the income tax). Short-term capital gains are treated as ordinary income, so you will pay your (probably higher) tax rate on any cash that you are given by your mutual fund. You may also be subject to capital gains taxes when you decide to sell your holdings in the fund. Any profit that you made based on the difference between your purchase and sale price is treated as a capital gain. Based upon the period of time that you held the mutual fund shares, it is categorized as a short- or long-term gain and is taxed accordingly in the tax year that you sell the shares. Dividends: Many companies pay dividends to their stockholders as a way of returning a portion of their profits to their collective owners. When you invest in a mutual fund that owns dividend-paying stocks, the fund is the ""owner"" that receives the dividend payments. As with capital gains, mutual funds will redistribute these dividends to you periodically, often quarterly or annually. The main difference with dividends is that they are always taxed as ordinary income, no matter how long you (or the fund) have held the asset. I'm not aware of Texas state tax laws, so I can't comment on your other question." Mutual funds (that are not exchange-traded funds) often need to sell some  of their securities to get cash when a shareholder redeems some shares. Such transactions incur costs that are paid (proportionally) by all the shareholders in the fund, not just the person requesting redemption, and thus the remaining shareholders get a lower return. (Exchange-traded funds are traded as if they are shares of common stock,  and a shareholder seeking a redemption pays the costs of the redemption). For this reason, many mutual funds do not allow redemptions for some period of time after a purchase, or purchases for some period of time after a redemption. The periods of time are chosen by the fund, and are stated in the prospectus (which everyone has acknowledged has been received before an investment was made). "Does the bolded sentence apply for ETFs and ETF companies? No, the value of an ETF is determined by an exchange and thus the value of the share is whatever the trading price is. Thus, the price of an ETF may go up or down just like other securities. Money market funds can be a bit different as the mutual fund company will typically step in to avoid ""Breaking the Buck"" that could happen as a failure for that kind of fund. To wit,   must ETF companies invest a dollar in the ETF for every dollar that an   investor deposited in this aforesaid ETF? No, because an ETF is traded as shares on the market, unless you are using the creation/redemption mechanism for the ETF, you are buying and selling shares like most retail investors I'd suspect. If you are using the creation/redemption system then there are baskets of other securities that are being swapped either for shares in the ETF or from shares in the ETF." "How does [FINRA's 5% markup policy]  (http://www.investopedia.com/study-guide/series-55/commissions-and-trade-complaints/finra-5-markup-policy/) affect the expense/profit/value of an ETF/Mutual Fund?  An extreme example to illustrate: If my fund buys 100 IBM @ 100, The fund would credit the broker $10,000 for those shares and the broker would give the fund 100 shares. Additionally there would be some sort of commission (say $10) paid on top of the transaction which would come out of the fund's expense ratio.  But the broker is ""allowed"" to charge a 5% markup. So that means, that $100 price that I see could have hit the tape at $95 (assume 5% markup which is allowed). Thus, assuming that the day had zero volatility for IBM,  when the fund gets priced at the end of the day, my 100 shares which ""cost"" 10,000 (plus $10) now has a market value of $9,500. Is that how it ""could"" work? That 500 isn't calculated as part of the expense of the fund is it? (how could it be, they don't know about the exact value of the markup)." Any ETF has expenses, including fees, and those are taken out of the assets of the fund as spelled out in the prospectus.  Typically a fund has dividend income from its holdings, and it deducts the expenses from the that income, and only the net dividend is passed through to the ETF holder.   In the case of QQQ, it certainly will have dividend income as it approximates a large stock index.  The prospectus shows that it will adjust daily the reported Net Asset Value (NAV) to reflect accrued expenses, and the cash to pay them will come from the dividend cash.  (If the dividend does not cover the expenses, the NAV will decline away from the modeled index.) Note that the NAV is not the ETF price found on the exchange, but is the underlying value.  The price tends to track the NAV fairly closely, both because investors don't want to overpay for an ETF or get less than it is worth, and also because large institutions may buy or redeem a large block of shares (to profit) when the price is out of line.  This will bring the price closer to that of the underlying asset (e.g. the NASDAQ 100 for QQQ) which is reflected by the NAV.