Abstract
Exchange-traded funds (ETFs) are investment tools that can insulate investors from the negative effect of money flows that generate tax liabilities. This study demonstrates that ETFs clearly offer a tax advantage when compared to similar index-based mutual funds, but mostly for investors who favor a buy-and-hold investment strategy. Short-term holders will not benefit nearly as much from ETF tax-efficiency. This study also concludes that there exists an inverse relationship between tax-efficiency and marginal tax rates, with the least affluent investors enjoying most of the tax savings.
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