ETFs in General Are Better To Hold in a Taxable Account Than Mutual Funds

[hodedofome]

Would like to start a discussion on this. Mostly it has to do with the tax efficiency of an ETF vs a Mutual Fund:

https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency
http://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp
https://advisors.vanguard.com/iam/pdf/Efficiency_transcript2.pdf

And before the subject of commissions comes up, you can purchase quite a few ETFs commission-free with a lot of brokers out there. Namely, all Vanguard ETFs are free to trade if your account is at Vanguard.

[GGNoob]

Vanguard mutual funds are actually just as tax efficient as Vanguard ETF's: http://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

Vanguard funds
Vanguard ETFs are structured as another share class of a mutual fund, like Admiral or Investor shares. This is a process unique to Vanguard, protected by a patent until 2023, with two important consequences for the mutual fund investor:

Tax efficiency: the mutual fund shares benefit from the disposition of capital gains through ETF shares, making Vanguard funds with ETF share classes as efficient as an ETF.
Conversion: mutual fund shares can be converted to ETF shares without a taxable event. This helps when transferring assets to another broker, including charitable donations. Conversion in the other direction is not possible.
The second point is an argument to start with mutual fund shares, if unsure. One can always convert to ETF later if needed.

To find out whether a mutual fund has ETF shares, visit the fund page on vanguard.com and look for "Also available as an ETF". Most or all index funds do have ETF shares and benefit from the above considerations.

Vanguard's Admiral shares of index funds generally have the same expense ratios as the ETF shares, which are themselves competitively priced in the ETF market. Therefore, if Admiral shares are available and one meets the required minimum (usually $10,000), there is no fee advantage for using ETFs. Before hitting the $10,000 mark, the cost difference is small in absolute terms, for example:

Emerging Markets Index Fund Investor Shares VEIEX   ER 0.33%   $33 per $10K per year
ETF version VWO or Admiral version VEMAX   ER 0.15%   $15 per $10K per year
ETF cost savings before Investor shares convert to Admiral   0.18%   $18 per year maximum

But that is unique to Vanguard.