When compared to mutual funds, investors have found that ETFs offer greater tax efficiency because of their innate creation/redemption process – ETFs don’t sell holdings but use “in-kind” transfers, or shares-for-shares, which reduce the possibility of future capital gains distributions.
Rawson, though, points out that the tax benefits form the in-kind creation/redemption process diminishes with international-focused ETFs.
“In summary, tax efficiency comes from diligent implementation of a sound low-turnover strategy, not necessarily from some magical tax loophole afforded only to ETFs,” Rawson said.
For more information on ETFs and taxes, visit our taxes category.
Max Chen contributed to this article.