Please stay tuned for important disclosure information at the conclusion of this episode.

Welcome to Investing Insights. I'm your host, I Vana Hampton.

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. ETS 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 or nothing because ETFs can minimize their capital gains distributions.

Joining me is Brian Armour for Morningstar Research Services. The director of ETF and passive

strategies research for North America explains how ETFs beat mutual funds at the tax game.

Welcome back to the podcast, Brian.

Thanks for having me.

So, ETFs are more tax-friendly than their mutual fund rivals. Why is that?

Yeah, so it comes down to how they're structured. So mutual fund, you can trade at the end of the day at net asset value, but only once a day. And ETFs, meanwhile, shareholders trade with one another on stock exchanges. And then authorized participants are the ones that get to trade directly with the fund and create or redeem more shares. And so that two-tiered approach, having the secondary market and the primary market,

allows for easier handling of cash flows so that that fund doesn't have to then buy or sell shares

based on what people are trading in on stock exchanges.

They can only do it when authorized participants trade with the ETF.

And on top of that, with the ETF, they tend to do it in kind,

custom and creation of redemption baskets.

And so what that means is like instead of having to go out and buy the underlying stocks or

bonds or selling the stocks or bonds, they can just get them from the market maker and then

pass it back to them when they redeem.

So there's no actually realization of capital gains.

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