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Originally Posted by tophcfa
Perhaps I am painting all ETF’s with a broad brush, but the couple that I have owned sell a portion of my shares every month to pay the management fees (unlike how mutual funds work) which generate 12 annual capital gains/losses per fund that have to be reported for tax purposes. These sales are considered non-covered shares which means the cost basis is not reported to either the ETF investors or the IRS. Instead, the burden of proving the correct cost basis falls on the ETF shareholders, which can be a major pain in the a$$ if you invest in the ETF during different time periods and/or automatically reinvest dividends and or income back into the fund. Because of the hassle/inconvenience of this along with the fact I can typically invest in mutual funds giving me substantially the same exposure, I won’t invest in ETF’s in a taxable account. Hopefully that explanation clarifies my previous statement.
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I use Vanguard mutual funds. The only advantages I see with ETFs are that the management fees are lower and the ETFs can be sold more than once per day. But, Vanguard fees are so low that they are negligible, and I don't want to sell shares more than once per day. Also, I believe that mutual funds are more tax efficient because they attract more "buy and hold" investors. So, the mutual fund manager is not forced to sell individual stocks in the fund (a taxable event) as often to raise cash to pay investors when they sell shares. Also, I direct that any capital gain distributions and dividends be transferred into my money market account, not reinvested in additional shares. That way, I always have the exact same number shares in my mutual fund. Vanguard keeps track of the cost basis for all mutual funds. No need to calculate it yourself.