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What is the impact of potential cap gains exposure for a retail ETF investor? Question
Apparently, ETFs have a "potential cap gains exposure" in that, when the ETF buys and sells some underlying asset, it is subject to capital gains tax. Supposedly, this leads to things like buying an ETF, and losing money on taxation of capital gains that occurred before you bought the ETF yourself.
I thought that as a retail investor, the only tax you pay with an ETF is the capital gains tax on the difference between sell and buy price of the ETF. The capital gains on the ETF's comprising assets are not the ETF investor's problem - the fund itself handles those and the outcome is "baked in" to the ETF price. So you only pay a tax on your purchase of the ETF, not the purchases of stocks within the ETF.
Does this "potential cap gains exposure" actually affect a retail investor in a meaningful way?
Some popular ETFs like index funds might not make trades frequent, which makes them complicated in this context. So let's say we're talking about an ETF that is actively managed, and frequently opens and closes whole positions within the tax year.
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