ETF Tax Efficiency
Because ETFs seek to track market indexes, their turnover is typically lower than that of actively managed funds. Lower turnover can result in increased tax efficiency for investors when securities are sold at a gain. In addition, with traditional mutual funds, the buying and selling activities of some shareholders can trigger capital gains distributions for all of the fund's shareholders. For example when the fund must sell securities to raise cash in order to meet redemptions, any related capital gains are distributed to all remaining investors in the fund. Learn the differences between ETFs and actively managed funds.
In contrast, ETF trading occurs on an exchange just like stocks; there is no fund company in the middle. Thus ETF investors are generally insulated from the tax consequences of their fellow shareholders' actions and will primarily be affected when they decide to complete ETF trading by either buying or selling an ETF.