ETFs and index mutual funds tend to be generally more tax-efficient than actively managed funds. And in general, ETFs tend to be more tax-efficient than index mutual funds. Exchange-traded funds (ETFs) take the benefits of investing in mutual funds to the next level. ETFs can offer lower operating costs than traditional fixed capital funds, flexible operations, greater transparency and better tax efficiency in taxable accounts.
However, there are drawbacks, such as negotiation costs and product learning complexities. Most informed financial experts agree that the advantages of ETFs outweigh the disadvantages by a significant margin. To reduce their tax liability, they should start by investing in tax-advantaged accounts, such as a Roth IRA. This may be important if the ETF is held in a taxable account and not in a tax-advantaged retirement account, such as an IRA or 401 (k).