Are ETFs more efficient than index funds?

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Are ETFs more efficient than index funds?

Post by conwy »

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: ... 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.


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Re: Are ETFs more efficient than index funds?

Post by Solvent »

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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Re: Are ETFs more efficient than index funds?

Post by fiby41 »

For most funds we have the two options you allude to: Growth and Dividend payout. Both have the same stocks but in the former the dividends are reinvested at the AMC (level of the fund house) and in the latter dividend is deposited into your withdrawal account you linked to the brokerage. This results in there being a difference between the prices of the same funds marked G and D.

For tax purposes we can deposit money into the brokerage account from any number of bank accounts regardless of weather they are in the same name or not, but withdrawal is allowed only to the one bank account that we had to prove was ours at the time of opening the brokerage account and linking it.

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Re: Are ETFs more efficient than index funds?

Post by IlliniDave »

I can't read the whole thing but it sounds like the article is talking about something different than you are. Vanguard found a way to avoid having to pass on capital gain distributions that might be triggered by redemptions to shareholders who don't sell. They supposedly have a patented way to convert the mutual fund shares to ETF shares and then transact.It is still possible the funds might pass on CG distributions in some situations (Vanguard's disclaimer) but I've yet to get a gain distribution from VG from an index fund.

I believe dividends are passed on to both mutual funds and ETFs more-or-less the same. seems like ETFs might sort of naturally be less susceptible (or immune) when it comes to exposure to capital gains distributions from other shareholders selling shares, but I'm not sure. What few ETFs I own are in a retirement account and I don't pay attention to the auto reinvests.

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