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The taxable investor's hypothetical ideal of diversification and tax efficiency, a frozen index fund consists of a fixed portfolio of stocks that does not change in composition as a result of a portfolio manager's decision or as a result of component companies being merged or liquidated in taxable transactions. The tax advantage of a frozen index fund is that it distributes only ordinary cash dividends, never taxable capital gains. A U.S.-based taxable investor defers any capital gains indefinitely, often permitting heirs to take advantage of the tax- free step up in basis at the original buyer's death. EXchange TRAded (EXTRA) Funds come closest to the ideal. See EXchange-TRAded (EXTRA) Funds, Standard & Poor's-500 Depository Receipts (SPDRs).
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