The high tax hit will be especially unwelcome in a year where most active funds have underperformed the broader equities market. According to S&P Capital IQ Fund Research, 80% of running large-cap mutual funds have underperformed the S&P 500 in 2014. Year-to-date, AGTHX has increased 10.3%, whereas the S&P 500 index rose 14.0%. [Why Active Funds Are Underperforming Index ETFs]

While index-based ETFs are not perfectly exempt from capital gains issues, the structure has a large advantage. Specifically, ETFs benefit from “in-kind” redemptions – swap securities for securities, whereas mutual funds typically redeem shares by selling securities, which trigger a taxable event. With many active mutual funds underperforming this year, investors would have been pulling out the products, which would have forced many active funds to sell off securities to meet the redemptions as well.

For more information on funds, visit our mutual funds category.

Max Chen contributed to this article.

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