Question

Why ETFs are more tax-efficient than mutual funds?

Answer 1

Exchange traded fund are considered more tax efficient than the mutual fund because most of the exchange traded fund are passively managed fund and in the passively managed fund, there are less transactions involved, so there would be less incidence of taxation as there would be virtually less transactions than mutual funds

Exchange traded fund have their own unique mechanism of buying and selling. Exchange traded fund can use creation units which will allow for the purchase and sales in the fund collectively thereby reducing the taxes.

So, due to these factors of management by exchange traded fund, they would be tax efficient because the total amount of taxes paid by exchange traded fund would be lower than mutual funds because of above stated facts.