Apple (NasdaqGS: AAPL) has faced intense scrutiny lately over using foreign subsidiaries to cut its U.S. income taxes.
Of course, no one likes to pay taxes, which is why the tax efficiency of stock ETFs versus mutual funds is a key selling point.
The tax advantages of ETFs stem from how the exchange-listed financial products are traded between investors. Their tax efficiency is also related to how ETFs create and redeem shares, which is different than traditional mutual funds. [ETFs and Taxes]
When investors buy an equity mutual fund, the portfolio manager puts the cash to work by buying company shares. Conversely, when the fund receives redemption requests from shareholders, the manager sells stock to raise the cash, which can trigger a capital gain distribution for all the shareholders remaining in the fund.
ETFs take a different approach. Investors trade ETFs on an exchange in the secondary market like individual securities.