Tax Efficient Investing

Efficient uses Exchange Traded Funds (ETFs) to maximize tax efficiency for investors.  It is common and accepted belief that asset allocation is the most important determinant of portfolio performance.  The second most important determinant of performance is the tax efficiency of the portfolio.  ETFs have a unique redemption and creation feature that maximizes after tax return. 

Facts
An ETF combines the valuation feature of a mutual fund, which can be purchased or redeemed at the end of each trading day for its net asset value, with the ease of trading like a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds. ETFs have been available in the U.S. since 1993 and in Europe since 1999, but grew in popularity when Barclays Global Investors introduced the iShares in 2000.

Why do ETFs cost less than traditional mutual funds?
ETFs generally have lower internal costs than other investment products because most ETFs are not actively managed. This insulates them from the cost of having to buy and sell securities to accommodate shareholder purchases and redemptions. ETFs typically have lower marketing, distribution and accounting expenses, and most ETFs do not have 12b-1 fees. In addition, ETFs offer tax efficiencies that can drive the cost of management down. ETFs typically generate low or even no capital gains, because of the low turnover of their portfolio securities. While this is an advantage they share with other index funds, ETFs further enhance their tax efficiency by not having to sell securities to meet investor redemptions.

Capital Gains
In the U.S., whenever a mutual fund realizes a capital gain that is not balanced by a realized loss, the mutual fund must distribute the capital gains to its shareholders. This can happen whenever the mutual fund sells portfolio securities, whether to reallocate its investments or to fund shareholder redemptions. These gains are taxable to all shareholders, even those who reinvest the gains distributions in more shares of the fund. In contrast, ETFs are not redeemed by holders (instead, holders simply sell their ETF shares on the stock market, as they would a stock, or effect a non-taxable redemption of a creation unit for portfolio securities), so that investors generally only realize capital gains when they sell their own shares. For these reasons, ETFs are more tax-efficient than conventional mutual funds in the same asset classes or categories.