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Are Actively Managed Exchange Traded Equity Funds Tax Efficient?  

Author:  Richard B. Toolson.

Source: Volume 39, Number 02, Winter 2022 , pp.23-31(9)

Journal of Taxation of Investments

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A fund may be classified as tax efficient if it does not distribute capital gains to shareholders. Because of the unique structure of exchanged traded funds (ETFs), ETFs that track a broad market index have historically demonstrated tax efficiency by rarely making capital gains distributions to shareholders. Stock turnover for actively managed mutual funds is the norm because their objective is to buy and sell stocks with the goal of outperforming their benchmark index. The result is that they often make significant capital gains distributions. A number of large well respected investment management companies have started to offer actively managed ETFs. This article examines the capital gains distribution track record for seven actively managed EFTs from two large well-regarded investment management firms. Tentatively, based on the capital gains distribution track record of these actively managed ETFs, the results are encouraging.

Keywords: tax efficiency, ETFs, exchanged traded funds, capital gains distributions, after-tax accumulations

Affiliations:  1: Washington State University.

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