Tax Advantages of ETFs vs. Mutual Funds
Last year, 78% of equity mutual funds paid out taxable gains. ETFs: 7%.
The potential tax advantages of ETFs vs. mutual funds is clear.
Same holdings, same market — but the wrapper decides who gets a tax bill in April.
Mutual funds must sell holdings for cash when investors leave, and the gains get passed to everyone still in the fund. ETFs can hand appreciated shares out in-kind instead, so most never distribute gains at all.
The numbers:
All U.S. funds, 2024: 40% of mutual funds paid out gains vs. 5% of ETFs
U.S. equity funds: 78% vs. 7%
Even in 2022, with the S&P 500 down 18%, roughly two-thirds of equity mutual funds still distributed gains — averaging 7% of assets
At scale, that stings. A 7% distribution on a $1M mutual fund position means about $70,000 of taxable gains reported to you — even if you sold nothing. (Hypothetical example, for illustration only.)
Two caveats before anyone rushes to switch. Inside an IRA or 401(k), none of this matters — it's a taxable-account issue. And selling a long-held mutual fund to buy an ETF can trigger the very gains you're trying to avoid. The right move depends on your embedded gains, your bracket, and your timeline.
Do you know which of your taxable-account funds sent you a capital gains distribution last year?
Owning the wrong investment in your taxable account can completely unravel even the best tax plans. We can help. Contact us for a free strategy session.
About the author:
Financial Advisor
Adam is a Lead Financial Advisor with Covenant Wealth Advisors, a CERTIFIED FINANCIAL PLANNER™ practitioner and an Enrolled Agent (EA). He has over 13 years of experience in the financial services industry in the areas of financial planning for retirement, tax planning, and investment management.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER™ professional with the assistance of AI. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.
