TAX AND EXPENSE ADVANTAGES OF INDEX
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The holdings in an index fund are not traded often
because they are held to match an index. Most index funds are
passively managed. Managers of actively managed funds
trade their securities more often. This results in capital gains
and losses. When a fund has net capital gains, its shareholders
must pay taxes on the capital gain distributions, even if they are
reinvested. Most index funds have little capital gain distributions
subject to tax. Some investors think of this characteristic as a
Since most index funds are managed passively,
management expenses are lower compared to actively managed mutual
funds. Two funds composed of the same securities will perform the
same. However, the one with lower expenses has an advantage.
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