Tax Efficiency
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Because ETFs seek to track market indexes, their turnover is typically lower than that of actively managed funds. Lower turnover can result in tax efficiencies for investors when securities are sold at a gain. In addition, with traditional mutual funds, the buying and selling activities of some unitholders can trigger capital gains distributions for all of the fund’s unitholders. For example when the fund must sell securities to raise cash in order to meet redemptions, any related capital gains are distributed to all remaining investors in the fund. Please click here to learn the differences between ETFs and actively managed funds.

In contrast, ETF unitholders buy and sell units from one another on an exchange just like stocks; there is no fund company in the middle. Thus, ETF investors are generally insulated from the tax consequences of their fellow unitholders’ actions and will primarily be affected when they decide to buy and sell an ETF.