Issue link: https://resources.envestnet.com/i/1527502
FOR HOME OFFICE AND ADVISOR USE ONLY – NOT FOR USE WITH THE INVESTING PUBLIC. © 2024 Envestnet | PMC. All rights reserved. Active ETFs can offer significant tax reductions, on average, versus active mutual funds in three of the four categories we examine. Active ETFs may provide direct cost savings, too. In the previous article of this series, we introduced you to the world of active ETFs and the features of these funds. Although we referenced the potential tax benefits of using active ETFs instead of traditional mutual funds in our earlier post, this aspect of active ETFs deserves greater attention. (One reader even wrote to request more research on the topic!) While the tax efficiency of passive ETFs has been addressed in multiple industry reports and academic papers, there's a dearth of information on active ETF taxation. We're here to fill this gap in the tax data while also quantifying the differences in active ETF and mutual fund expense ratios across four key asset classes. Let's explore our findings! 1 Active ETFs Can Reduce Tax Drags We used the Morningstar Tax Ratio data set to model tax drags on funds. This metric assesses the difference between pre-tax and after-tax returns. For our analysis, we used one-year tax drag data for funds because one of the most popular structures for active ETFs only received SEC approval in 2019, with launches beginning in 2020. 2 For that reason, three-year tax drag data isn't available for many active ETFs. Expense ratios for all funds were pulled from their most recent prospectuses. We narrowed the fund universe to include only US products denominated in US dollars, too. Our results are summarized in the visual below: 1 All data sets are from Morningstar Direct with calculations by Envestnet | PMC. Tax Ratio data as of 6/30/2023. Expense Ratio data as of 7/27/2023. 2 The ETF Institute -0.97% -1.14% -1.15% -0.81% -0.37% -0.60% -0.55% -0.30% -1.74% -1.33% -0.92% -1.74% -0.63% -0.82% -0.92% -1.56% Large Cap Equity Funds Small Cap Equity Funds International Equity Funds Taxable Bond Funds Source: Envestnet | PMC. Morningstar Direct. Data includes only active mutual funds (all share classes) and active ETFs. Active Fund Cost & Tax Breakdown Average Mutual Fund Expense Ratio Average ETF Expense Ratio Average Mutual Fund Tax Drag Average ETF Tax Drag FREQUENTLY ASKED QUESTIONS Do Active ETFs Deliver on Tax Efficiency?