Are ETFs more efficient than index funds?

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conwy
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Are ETFs more efficient than index funds?

Post by conwy » Sun Jul 07, 2019 8:48 pm

I currently own the Vanguard High Growth Index Fund (Wholesale).

But I was reading on a separate forum that this might be less tax efficient than owning a similar/equivalent Vanguard ETF.

The reason is – if I own an index fund ETF, then as it grows over the long-term, I don't get taxed on that growth, because the dividends aren't paid to me directly, but are merely reflected in the price of the ETF.

Whereas if I own exactly the same index fund directly, then every time dividends are distributed, that distribution triggers a tax event and I have to pay tax on it.

Here's an article that was linked to on the other forum, explaining this:

https://www.bloomberg.com/opinion/artic ... ying-taxes

Is this true? Does anyone else agree?

If so, it looks like I'd be better off switching to the equivalent Vanguard ETF as soon as possible (through a cheap brokerage, in Australia we have SelfWealth, CMC), so I can pay less taxes and make better returns over the long term.

Thoughts?

Solvent
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Re: Are ETFs more efficient than index funds?

Post by Solvent » Sun Jul 07, 2019 11:39 pm

It sounds like you're describing an 'accumulating' fund. They're actually not available in Australia, as far as I know. All Vanguard ETFs pay out their dividends.

Part of the reason being that if you are an Australian resident taxpayer you must pay taxes on the dividends anyway, even if they remain in the fund. This makes the accounting a complete headache, so you must be wary even if you buy a fund like this with an international brokerage.

I'm not an accountant or tax lawyer, of course, so this is just my understanding of the situation.

Edit: Having now read that article, though, it's about capital gains, not dividends. This may work the same way in Aus, but I really don't know.

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