Investing with ETFs (Bank of America Deals, and Vanguard warning)

For all of you that are taking an active part in your investment strategy, well done.

To all those that have Bank of America. They offer $0 equity trades (with a few qualifiers), but this allows for an interesting investment opportunity. ETFs. Or Exchange Traded Funds. I don't have the energy to get into how they actually function, but they are like equity versions of most mutual funds that are traded. In other words the are bought and sold on a per share basis like stocks. ETFs often track an index, such as SPY and the S&P 500. This allows for a few neat tax benefits because you control when the capital gains are realized from sale. Furthermore, tracking an index (an index fund) lowers the turnover rate (all that buying and selling by fund managers) which presents some unique tax savings. The good thing about 30 free $0 trades per month from B of A is that you can construct your portfolio entirely of ETFs, and not worry about paying brokerage fees. Let's hope this isn't just a short term promotional gimmick.

A notice concerning Vanguard ETFs. Vanguard is the 800 lb gorilla of Funds. Known for low fees (pretty much always). Apparently they have tied their ETFs to their normal funds which presents a potential tax liability. Click here to get the explanation from my source. They have the some of the lowest fees in the business of ETFs as well, but this tax liability could present a problem that people don't usually count on. The article mentions that this is perhaps why Barclays (iShares) still has the majority of the market, despite slightly higher fees.

Keep this in mind when considering which ETF to invest in. As in the case below, we have Barclay's and Vanguard's investments.
iShares MSCI Emerg Mkts Index (EEM) = .7% expense ratio
Vanguard Emerging Markets Stock ETF (VWO) = .3% expense ratio
If you put in $10,000 that's $40 per year in additional fees to iShares.

Now how does this relate to the tax paid at years end, if it so happens that investors at Vanguard sell off shares and force a tax on the ETF investors? I'll discuss this later.