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. As you can see, active ETFs offer significantly greater tax efficiency than actively-managed mutual funds in three of the four asset classes we investigated. The results are especially dramatic for large and small cap equity funds where active ETFs deliver the largest reductions in taxes. Meanwhile, the taxable bond asset class is notoriously inefficient due to interest payments (which is why these funds may be placed in tax-advantaged accounts), but bond ETFs still deliver lower tax drags than fixed income mutual funds. Now let's turn to the International Equity asset class where ETFs and mutual funds had equivalent tax drags. For mutual funds, this was the most tax-efficient asset class we studied. On the active ETF side, there was a tiny number of active International Equity products to analyze. One incredibly tax-inefficient active ETF skewed the result for this asset class higher due to the small sample size. Excluding that one fund, the average tax drag for active ETFs would be slightly lower than for mutual funds. A Word on Expenses In addition to the tax savings that active ETFs can provide, they also carry lower expense ratios, on average, than active mutual funds. The cost reduction is pervasive across all four of the asset classes we researched, and the fee differentials are quite large. These direct savings benefit investors in tax-advantaged accounts and across tax brackets, too. For these reasons, the lower fees associated with active ETFs are arguably even more important than the tax efficiency. Combined Savings 1.71% 1.05% 0.60% 0.69% 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. Total Active ETF Savings