How to Move Investments Without Triggering Big Taxes

Exchange-traded funds can help you cut your tax bill. All funds must distribute capital gains from the stocks and bonds that they sell throughout the year. The gains can leave you stuck with unwanted taxes. ETFs and mutual funds differ when it comes to tax efficiency. It starts with how the investments are traded and how the transactions are treated. The differences can result in ETF investors owing less than mutual fund investors or nothing at all because ETFs can minimize their capital gain distributions. Bryan Armour, Morningstar’s director of ETF and passive strategies research for North America, explains how ETFs beat mutual funds at the tax game.

ETFs vs. Mutual Funds: The Benefits That Really Matter

On this episode:

00:00:00 Welcome

00:01:01 ETFs are more tax-friendly than their mutual fund rivals. Why is that?

00:02:17 How does the way ETFs are traded limit the tax drag that affects mutual funds?

00:03:23 ETF investors will eventually pay a tax bill. Why is it important to control when that happens?

00:04:04We talked about tax drag. What about cash drag? How are ETFs winning here?

00:04:51An ETF’s underlying strategy can sharpen or dull the edge it has over a mutual fund when it comes to capital gains. Which ETF strategies have held the biggest advantage over the past few years?

00:05:40Can you talk about the tax issues involving international stocks when managing gains in an ETF?

00:06:55And what about taxable-bond ETFs versus mutual funds?

00:07:37 Some ETFs do not benefit from tax efficiency. Which investments are those, and why don’t they?

00:08:24High-turnover strategies, where there’s a lot of buying and selling, can result in a big tax bill for investors. What have you found when you compared two momentum strategies?

00:08:58How can outflows leave loyal investors with a big tax bill?

00:09:49Active ETFs’ popularity is soaring. How tax-friendly are these investments versus their passive peers and mutual funds?

00:10:52 Which ETFs belong in taxable accounts and tax-advantaged accounts like an IRA or 401(k) to maximize tax efficiency?

00:11:55What if someone listening or watching just realized they should work on their asset location? What should they do?

00:12:54What’s the takeaway for using ETFs to cut tax bills?

Watch more from Morningstar:
Tax-Loss Harvesting Isn’t Just for Downturns. Here’s Why 

Bond ETFs Are Surging in Popularity in 2025. Here Are 5 of the Best

Investors Still Need to Mind the Gap in Their Funds’ Returns

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