ETFs (exchange-traded funds) try to track an index, which helps keep capital gains taxes to a minimum. Learn more about what makes them tax-efficient.

Visit to learn more about Vanguard ETFs®—all commission-free when bought through a Vanguard account. Or browse our full list of ETFs now at

For more answers to common ETF questions, visit

IMPORTANT INFORMATION
**You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.**

**Visit to obtain prospectuses or, if available, summary prospectuses for Vanguard ETFs. The prospectus contains investment objectives, risks, charges, expenses, and other important information; read and consider carefully before investing.**

All investing is subject to risk, including the possible loss of the money you invest.

Although our investment professionals are qualified to provide information about Vanguard funds and services, they can’t provide tax advice. If your tax situation is complex or if you’re uncertain of the interpretation of a specific tax rule, we recommend that you seek advice from a qualified tax professional.

© 2018 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds….(read more)

LEARN MORE ABOUT: IRA Accounts

INVESTING IN A GOLD IRA: Gold IRA Account

INVESTING IN A SILVER IRA: Silver IRA Account

REVEALED: Best Gold Backed IRA

Are ETFs Tax-Efficient?

Exchange-Traded Funds (ETFs) have gained tremendous popularity among investors in recent years. These funds offer numerous advantages, including diversification, low expense ratios, and flexibility. However, one key benefit often touted by financial advisors and fund providers is the potential tax efficiency of ETFs.

But what exactly does tax efficiency mean in the context of ETFs? And are ETFs truly tax-efficient investment vehicles? Let’s explore.

To understand tax efficiency, we need to examine how traditional mutual funds and ETFs are structured and how they are taxed. Traditional mutual funds are open-end investment vehicles that are bought and sold at the end of the trading day at the fund’s net asset value (NAV). Mutual funds are structured to allow investors to buy and sell shares directly with the fund at its NAV, meaning the fund must allocate capital gains from selling securities to its shareholders.

In contrast, ETFs are exchange-traded investment funds that can be bought and sold throughout the trading day on an exchange. ETFs are structured differently from mutual funds as they create and redeem shares with authorized participants (APs) instead of directly with individual investors. This unique structure can provide certain tax advantages over traditional mutual funds.

ETFs are generally touted as being more tax-efficient than mutual funds due to their unique structure. When investors buy or sell shares of an ETF on an exchange, they do so with other shareholders and not directly with the fund itself. This means that capital gains generated from redemptions and sales of securities within the ETF do not flow directly to individual shareholders. Instead, the ETF can use in-kind transfers to settle these trades and minimize the impact on shareholders’ tax liabilities.

When an ETF experiences net inflows, it can create new shares and exchange them for a basket of securities with APs. The ETF can then transfer these securities without triggering a taxable event because the transfer is done in-kind. On the other hand, when an investor exits the ETF, selling their shares to other market participants, the ETF does not need to sell securities, potentially generating capital gains. Instead, it can use the redemption process to transfer a basket of securities to the investor without incurring tax liabilities.

Additionally, ETFs can utilize the creation and redemption process to address capital gains generated within the fund itself. By selectively redeeming shares with high embedded capital gains and replacing them with lower-gain securities, ETFs can manage their tax liabilities and minimize the distributions required to be made to shareholders.

These tax benefits can lead to potential cost savings for investors. By minimizing capital gains distributions, ETFs can help investors avoid the tax consequences often associated with traditional mutual funds. Moreover, ETFs offer tax advantages in terms of tax deferral since investors only pay taxes when they sell their shares, not when the ETF makes trades within the fund.

However, it is important to note that not all ETFs are created equal in terms of tax efficiency. While ETFs in general have the potential for tax benefits, some ETFs may be more tax-efficient than others. This largely depends on the investment strategy employed by the ETF and the frequency of trading within the fund. ETFs that track broad-based indexes and have low turnover are generally considered more tax-efficient than actively managed ETFs or highly specialized funds. Active trading and frequent rebalancing can generate more capital gains, potentially eroding the tax efficiency of an ETF.

In conclusion, ETFs offer potential tax advantages compared to traditional mutual funds due to their unique structure and in-kind transfer process. By minimizing taxable events and capital gains distributions, ETFs can provide tax-efficient investment options for investors. However, it is crucial to consider the specific ETF’s investment strategy and turnover when assessing its tax efficiency. Consulting with a financial advisor is always recommended to make informed investment decisions tailored to individual tax situations.