M* discovers that ETFs are more tax efficient than mutual funds


Moderator Emeritus
Dec 11, 2002
"Are ETFs Really More Tax-Efficient Than Mutual Funds?"

M*'s startling conclusion? "In most cases ETFs are more tax efficient than conventional mutual funds in the same asset classes or categories. Nevertheless, ETFs can surprise you."

Followed by: "Disclosure: Barclays Global Investors (BGI), which is owned by Barclays, currently licenses Morningstar's 16 style-based indexes for use in BGI's iShares exchange-traded funds. iShares are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in iShares that are based on Morningstar indexes."
C'mon nords, you somewhat misrepresent what Mr Culloton wrote.   Suppose I pull a couple of quotes from the article:

Culloton@Morningstar said:
For instance, Vanguard 500 Index's VFINX tax-cost ratios for the trailing one-, three-, and five-year periods ended Jan. 31, 2006, are lower than those of both of its ETF rivals: SPDR SPY and iShares S&P 500 Index IVV.


Culloton@Morningstar said:
Similarly, at the end of January, the five-year tax-cost ratios and tax-adjusted returns of traditional index funds such as the Schwab 1000 Index SNXFX and the TIAA-CREF Equity Index TCEIX were better than those of their ETF counterparts--iShares Russell 1000 Index IWB and iShares Russell 3000 Index IWV, respectively.

Anyways, Mr Culloton did not have any startling conclusions.
Hmmm...those were noted exceptions in the article.

A broader couple of quotes perhaps?

"Overall, the answer is yes. ETFs have been much more tax-efficient, as measured by Morningstar's tax-cost ratio, than the typical conventional mutual fund."

"These examples, however, may be exceptions that prove the rule: In most cases ETFs are more tax efficient than conventional mutual funds in the same asset classes or categories."

Sounds like a conclusion...how startling is up to the reader I guess.
OK, OK, I'm not trying to flog an agenda, it just seemed that M* was asking pretty ingenuous questions and then answering them with a lot of caveats. Almost as if they had to keep someone's ETF marketing staff happy.

You know, deadline journalism.
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