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How can an investor assess the tax efficiency of an ETF?

Personal Finance & Money Asked on May 10, 2021

I read on this answer by mhoran_psprep

The tax impacts [resulting from the ETF manager changing the ETF composition by selling + buying stocks] are assigned to the investors.

This means that if two ETFs have the same price increase over the course of one year, and one ETF is actively managed whereas the second ETF is index-based (a.k.a. passively managed), then the index-based ETF these are higher written on investment because it will cause less tax burden then the actively managed ETF.

This makes me wonder: How can an investor assess the tax efficiency of an ETF?

One Answer

ETFs, whether indexed or actively-managed, rarely pass through capital gains. They have a tax loophole that benefits investors:

Because your money goes to buy what are known as creation units, instead of fund assets themselves, ETFs experience fewer taxable events than mutual funds.

-- Forbes

Answered by Orange Coast- reinstate Monica on May 10, 2021

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