February 16, 2006 at 8:33 am by Tom Lydon
Morningstar uses a tax-cost ratio, which measures how much a fund’s annualized return is reduced by the taxes that an investor in the highest tax bracket would pay on distributions. Using this ratio to look at exchange-traded funds with at least a 5-year history, shows ETFs are overall more tax efficient than mutual funds. Why?
Most ETFs had a lower tax-cost ratio than mutual funds. Especially in the asset classes where high turnover in mutual funds generate capital gains. Capital gains have been rare with ETFs.
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