Exchange funds allow investors to exchange individual shares for units in the fund, increasing diversification and deferring capital gains tax. They are not exchange-traded funds and are exclusive to the US, with private and public options available. Shares in the fund cannot be sold for at least seven years to minimize tax liability.
Exchange funds are stock funds that allow individual investors to exchange their ownership of an individual share for units in the exchange fund at a mutually agreed upon exchange rate. The exchange nature of the transaction means that exchange funds are also known as exchange funds. They allow individual investors to increase their investment diversification in a tax-efficient manner, as the individual investor’s capital gains tax liability is effectively deferred.
Reflecting their primary purpose, exchange funds are commonly marketed to investors as a solution to concentrated wealth. They are sometimes mistakenly confused with exchange-traded funds; but the two products are quite different investment vehicles. One major point of difference is that exchange funds are not listed on an official exchange and therefore cannot be publicly traded.
The share exchanged in an exchange fund is not a sale for tax purposes and therefore is not a taxable event. This allows the investor to defer payment of any capital gains tax until the investor sells the units in the exchange pool. At that time, the investor must pay tax on the difference between the sale price of the units and the original cost of the shares that were exchanged in the exchange.
Exchange funds are exclusive to the United States. They have been around for almost 50 years, but grew significantly in number and value in the late 1990s. This was the end of the tech boom, when many people accumulated significant shares in a single or limited number of technology companies.
Exchange funds can be private or public. Private exchange funds own private companies that are not publicly traded, while public exchange funds own publicly traded stocks. There are several large operators that provide one or another type of fund. In addition, there are numerous small exchange funds made up of various individuals, each of whom has the same problem in the form of wealth concentrated in one or a few major stocks. Collectively they form a limited partnership, exchanging some of their shares in the fund in exchange for units in the fund.
Exchange funds can also allow people to lighten their holding of an individual share without violating lockup restrictions. This is because shares in an exchange fund are unlikely to be sold before seven years. To minimize your capital gains tax liability, an exchange fund must retain ownership of your shares for at least seven years.
Smart Assets.
Protect your devices with Threat Protection by NordVPN
