An ETF can be more tax-efficient for investors than a traditional mutual fund, because an ETF does not need to sell securities to redeem shares. For example, in a traditional mutual fund the portfolio manager must sell securities from the portfolio to generate cash for investors choosing to redeem their shares. A significant number of shareholder redemptions have the potential to create sizeable gains, or losses to the fund’s balance sheet. In turn, these taxable events are passed on to all the existing shareholders of the open-ended mutual fund. The ETF manager does not need to sell any portion of the portfolio to provide cash to redeeming shareholders. As a result, existing shareholders are shielded from the tax events when other shareholders sell their ETF shares.

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