There is no guarantee that an ETF will not distribute capital gains. What generally allows them to avoid this is that they can choose to distribute underlying shares of stocks held in the ETF when a large investor makes a significant withdrawal. This allows them to distribute shares in which the ETF has the lowest basis and avoid realizing an actual capital gain if the underlying stock shares were sold and cash distributed as a result of the withdrawal. What also makes Vanguard different is its patented hybrid model and just bolted on an ETF to the existing mutual fund share classes. Where there is an ETF version and a mutual fund version of, for instance, the S&P 500 index, both of the funds are actually different share classes of the underlying investment pool as I understand the Vanguard system.