Are Vanguard ETFs more tax-efficient?

ETFs are generally considered more tax-efficient than mutual funds , owing to the fact that they typically have fewer capital gains distributions. However, they still have tax implications you must consider, both when creating your portfolio as well as when timing the sale of an ETF you hold.

Is VOO or VTI more tax-efficient?

Generally, ETFs will have a slight edge from a tax efficiency perspective. ETFs tend to distribute comparatively fewer capital gains to shareholders – these same gains are simply more challenging to manage efficiently from a mutual fund. Overall, VOO and VTI are considered to have the same level of tax efficiency .

What is Vanguard's best performing fund?

Vanguard High-Yield Corporate Fund (VWEAX) The Vanguard High-Yield Corporate Fund is the company's top performing bond fund over the past decade. It features a high-yield, intermediate-term fixed income portfolio.

Is it better to buy Vanguard ETFs through Vanguard?

Key Takeaways. Investors can buy and sell Vanguard mutual funds and ETFs through any number of brokerage firms and financial advisors. If you buy directly through Vanguard, you may benefit from lower fees, better customer service, and additional product research .

Do any Vanguard ETFs pay monthly dividends?

Vanguard is a large investment advisor offering mutual funds and ETFs, many of which pay dividends. Most of Vanguard's ETF products pay monthly or quarterly dividends .

Should you hold ETFs in a taxable account?

ETFs can be more tax efficient compared to traditional mutual funds. Generally, holding an ETF in a taxable account will generate less tax liabilities than if you held a similarly structured mutual fund in the same account . From the perspective of the IRS, the tax treatment of ETFs and mutual funds are the same.

How long should you hold an ETF?

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

What is the downside of ETFs?

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes , and of course — like any investment — ETFs also come with risk.

Is qqq good for taxable accounts?

Great Taxable Account ETFs #2: PowerShares QQQ (QQQ) And if you hold them for quite a while, capital gains taxes are lower. That makes them perfect for a long-term taxable account .

Are dividend ETFs good for a taxable account?

Key Takeaways. Like stocks, dividends paid by ETFs are taxable in the year they're distributed provided they're not sitting in a tax-advantaged plan . Qualified and unqualified dividends are taxed differently. Dividend ETFs are usually better off in a tax-advantaged account, such as an IRA or 401(k).

Is an ETF better than an index fund in a taxable account?

If you're investing in a taxable brokerage account, you may be able to squeeze out a bit more tax efficiency from an ETF than an index fund. However, index funds are still very tax-efficient, so the difference is negligible . Don't sell an index fund just to buy the equivalent ETF.

Which ETF is tax free?

Vanguard Intermediate-Term Tax-Exempt Bond ETF is designed for tax-sensitive investors with an intermediate-term time horizon and a preference for passive management. The new ETF has an expense ratio of 0.08%, compared with the average expense ratio for competing funds of 0.37% 1 .

The 6 Best ETFs for Taxable Accounts (3 From Vanguard) (2024)

Tax-efficient investing should always be a priority in asset placement across accounts and in subsequent fund selection, especially for high-income investors. Why give up money to Uncle Sam unnecessarily if you don't have to? Minimizing your portfolio's tax burden means maximizing its long-term total return. Here we'll explore tax-efficient fund placement and the best ETFs for taxable accounts.

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In a hurry? Here's the list:

IVV – iShares Core S&P 500 ETF
ITOT – iShares Core S&P Total U.S. Stock Market ETF
IXUS – iShares Core MSCI Total International Stock ETF
VUG – Vanguard Growth ETF
VTEB – Vanguard Tax-Exempt Bond ETF
VGIT – Vanguard Intermediate-Term Treasury ETF

Contents

Video

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Introduction – Creating a Tax-Efficient ETF Portfolio

Whether it's for shorter investing horizons, income investing, or retirement account spillover, investing in taxable accounts is unavoidable sometimes. It's usually a good problem to have.

Tax-inefficient assets, best held in tax-advantaged space like an IRA, would be things like high-dividend-yield stocks or funds, REITs, metals (taxed as collectibles), and actively managed funds. Dividends and capital gains distributions are taxed when they're paid. REITs are required to distribute nearly all their income, usually at the non-qualified dividend rate. Actively managed funds have what's called high turnover – they are constantly buying and selling securities within the fund. Bond funds are also relatively tax-inefficient, but interest from treasury bonds is exempt from state taxes.

ETFs are particularly attractive for tax-efficient investing in a taxable brokerage account, but not all ETFs are created equally. Specifically, we're looking for ETFs with tax-efficient structure, passive management, low turnover, low capital gains distributions, low fees, and low dividend yield. Among these options are broad core stock funds, Growth stock funds, treasury bonds, and municipal bonds.

The Best ETFs for Taxable Accounts

Let's dive into the 6 best ETFs for taxable accounts.

IVV – iShares Core S&P 500 ETF

IVV from iShares tracks the S&P 500 index, which is composed of 500 of the largest companies in the United States. The fund has an expense ratio of 0.03%.

ITOT – iShares Core S&P Total U.S. Stock Market ETF

To add exposure to small- and mid-caps, you might go with a total market ETF. ITOT from iShares is a low-cost option to access the total U.S. stock market. The fund contains over 3,500 stocks and has an expense ratio of 0.03%.

IXUS – iShares Core MSCI Total International Stock ETF

International stocks usually carry a higher dividend yield than U.S. stocks, but this is balanced out somewhat by the foreign tax credit, a credit to individuals who pay taxes on foreign investment income. This makes international stock funds reasonably tax-efficient. Just like ITOT, IXUS is a low-cost option to get exposure to a broad total market, in this case ex-US stocks. The fund tracks the MSCI ACWI ex USA IMI Index and has an expense ratio of 0.09%.

VUG – Vanguard Growth ETF

Prefer Growth stocks or want a Growth tilt for your portfolio? You're in luck. Growth stocks have low or no dividend yield, making them ideal for a taxable environment where a high yield creates a larger tax burden. The Vanguard Growth ETF tracks the CRSP US Large Cap Growth Index, which is comprised of large-cap stocks that exhibit growth characteristics. The fund has an expense ratio of 0.04%.

VTEB – Vanguard Tax-Exempt Bond ETF

Bond funds are usually best kept in tax-advantaged accounts. But if you want bonds in your taxable account, some are more tax-efficient than others. Interest from municipal bonds is tax-free at federal, state, and local levels. This is especially impactful for high-income investors in a higher tax bracket. VTEB is Vanguard's municipal bond index fund, which tracks the S&P National AMT-Free Municipal Bond Index. The ETF has an expense ratio of 0.06%.

VGIT – Vanguard Intermediate-Term Treasury ETF

Similarly, interest from treasury bonds is tax-exempt at state and local levels. Treasury bonds tend to possess a lower correlation to stocks than municipal bonds, making them a likely superior hedge. Vanguard's Intermediate Term Treasury ETF tracks the Bloomberg Barclays U.S. Treasury 3–10 Year Bond Index. The fund has an expense ratio of 0.05%.

Where to Buy These Tax-Efficient ETFs

M1 Financeis a great choice of broker to buy the aforementioned ETFs in your taxable account. It has zero transaction fees and offers fractional shares, and a modern, user-friendly interface and mobile app.

Most importantly in this context, the broker features automatic rebalancing, which directs new deposits to underweight assets according to your specified allocations, so that you don't have to manually rebalance and pay taxes unnecessarily. Moreover, M1 features built-in tax optimization, selling any losses to offset gains first, followed by your oldest tax lots, in order to minimize capital gains taxes.

M1 also offers some of the lowest margin rates if you want to employ leverage in your taxable account to enhance exposure. I wrote a comprehensive review of M1 Finance here.

Canadians can find the above ETFs on Questrade or Interactive Brokers. Investors outside North America can use eToro or possibly Interactive Brokers.

Disclosures: None.

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Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.

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