Exchanged-trade funds (ETFs) have long been crowned more tax-friendly than mutual funds. That may be true across much of the industry, but not at Vanguard. Compare apples to apples, and each Vanguard Admiral-class index fund delivers the same after-tax returns as its ETF sibling.
This runs counter to the industry’s standard mantra that ETFs are more tax-friendly than mutual funds. So, I’ll explain why this is so at Vanguard and show you the proof in the performance pudding.
If you’d like a refresher on ETFs, I recently updated my ETFs 101 and 102 articles. In those articles, I discuss the differences between ETFs and mutual funds, offer a warning about ETF returns, and explain why ETFs are typically considered more tax-efficient than mutual funds.
With that said, let’s get to the matter at hand.
Key Points
- ETFs are a modernized version of mutual funds that you can trade during the day.
- Vanguard’s ETFs have no tax advantage over Vanguard’s index funds.
- If you don’t see the value (or don’t want to deal with the complexity) of trading throughout the day, stick with Vanguard’s Admiral-class index mutual funds.
Share Classes of the Same Fund
Exchange-traded funds (ETFs) are mutual funds that you can trade throughout the day like stocks—think of them as mutual funds version 2.0. It should come as no surprise that in developing version 2.0, the Wall Street wiz-kids found a way to make ETFs more tax-friendly than their mutual fund predecessors.
Vanguard went one step further and found a way to bring the tax advantages of ETFs to index mutual funds, leveling the playing field … at least in Malvern.
I know this runs counter to the standard commentary on ETFs, so let me be crystal clear: Vanguard’s ETFs have no tax advantage over Vanguard’s index funds.
How did Vanguard do this?