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How Much More Tax-Wise Are ETFs vs. Mutual Funds?

But many don’t know the exact magnitude of those tax savings. It is not insignificant. We decided to quantify just how much post tax performance in a taxable account can be juiced by an ETF as opposed to a mutual fund. On average, our findings show, an ETF gives an extra 0.20 percentage point a year in post tax performance compared with mutual funds, and international-equity ETFs even more upward of 0.33 percentage point on average. To be matched for comparison, the mutual fund and the ETF needed to be from the same fund family, have the same objective and have a similar cost structure. We created roughly 10 matched pairs in each of six different asset classes: U.S. large-cap equity, U.S. small-cap equity, value, growth, international equity and fixed income. Looking at each matched pair in all of the groupings, we then recorded the average annualized post tax returns for the mutual fund and the ETF over the past 10 years. The first interesting finding is that the average U.S. large-cap equity ETF delivered a post tax return of 10.11% a year for the period. The average matched mutual fund delivered a post tax return of 9.95% a year. This implies that an investor can save 0.16 percentage point a year on a posttax basis by going with the large-cap ETF as opposed to the similar mutual fund. The average international-equity ETF delivered a post tax return of 2.75% a year. The average matched mutual fund delivered a post tax return of 2.42% a year over the same period. This yields a postt ax difference in returns of 0.33 percentage point a year—or more than 1 percentage point in excess returns over a three-year period. The results associated with bond and other fixed-income assets offer a slightly different picture. The average fixed-income ETF delivered a post tax return of 0.15% a year over the past 10 years. The average matched mutual fund delivered a post tax return of 0.12% a year over the same period; a difference of just 0.03 percentage point. The greater post tax return that ETFs offer on average, though seemingly small, is important to note and can add up quickly over time—more than a percentage point in extra returns after just five years.

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