Quote:
Originally Posted by Caymus
I thought that ETFs are more tax efficient. They only trade when the underlining companies are added/deleted from an index. Most conventional mutual funds trade more frequently which result in declaring larger annual (forced) capital gains.
|
ETF managers are forced to sell shares to raise cash when a lot of investors sell their shares. This creates a taxable event.
Without doing the research, I'm really not sure which is more tax efficient. But, my thinking is that a fund manager is forced to sell stocks to raise cash when a lot of investors sell their shares. This creates a taxable event for all shareholders. People who buy ETFs are more likely than mutual fund investors to buy and sell shares frequently, thereby creating more potential for taxable events.
Several years ago, I compared the tax efficiency of the Vanguard S&P 500 index fund to the Fidelity S&P 500 index fund and found that the Vanguard fund was significantly more tax efficient. I attributed that to Vanguard having more buy and hold investors than Fidelity.