One of the wildest things that I’ve seen over my career as a Financial Advisor is the growth of the Exchange Traded Fund (ETF).
I started in 2008 during the Financial Crisis. At this time ETFs were well on their way to becoming a thing, but they were nowhere near at the scale of mutual funds. While mutual funds were familiar enough to come up in conversations at a job site—even among those who weren’t financially savvy—ETFs were not.
This JPMorgan Asset Management chart reveals how ETFs have grown significantly, and are now trillions of dollars larger than when I began in the business.
Should this matter to you?
It might.
There are tax implications you should care about.
Capital gain distributions are something that investors must report on their taxes in their non-retirement accounts.
Guess what? Mutual funds tend to have more capital gain distributions than ETFs.
Again, JPMorgan has the chart:
Active mutual funds—where a mutual fund manager is deciding what to buy and sell within the fund—tend to have a higher percentage of capital gains.
The writers over at TurboTax explain,
“In terms of capital gains and losses and dividends, tax law treats these the same for ETFs and mutual funds. However, one benefit of ETFs is that they often encounter fewer taxable events.
Because ETFs trade on an exchange, they transfer from one investor to another. As a result, the ETF creator does not need to redeem shares each time an investor wishes to sell or issue new shares when an investor wants to make a purchase.
For mutual funds, the share redemption can trigger a tax liability. When a mutual fund investor sells shares back to the fund sponsor, the remaining shareholders of the fund often incur a tax liability.”1
The bad news is that even in a year where stocks don’t perform well and capital gains would not seem to be much of a problem, the structure of mutual funds may still create a tax impact. Ryan Szakacs and Amanda Mentis point out: “Even in a down year like 2022, when the S&P 500 returned -18.1%, more than 42% of all active mutual funds distributed capital gains worth a weighted average of 5% of NAV.”2
Ouch.
There are all kinds of reasons to choose what kind of funds to invest in—be it mutual funds or ETFs—like fees, holdings, dividends, managers, performance, and how a fund might fit in your asset allocation and financial plan.
But don’t forget taxes.
Of course, this does not mean that you should always choose an ETF over a mutual fund.
As a firm, we’ve seen benefits from both.
But when the time comes to pay Uncle Sam it’s important to know what you own and why you own it.
Like Benjamin Franklin said, “In this world nothing can be said to be certain, except death and tax differences between a mutual fund and an ETF.”
Ok. He didn’t say that.
The takeaway is simply to know what you own and why you own it. Taxes should be part of that why.
The more you are taxed, the less you experience the benefit of compound interest. Brian Armour over at Morningstar unpacks how this happens:
If you take a capital gains distribution this year, for example, you receive that money, you pay taxes on it, then you put it back in a smaller amount. With the ETF, you wouldn’t have to pay until you sell it at the end of the day. That just allows you to compound. It’s a small return, but over long periods of time, it can be meaningful.3
I don’t give tax advice, so consider bouncing everything off a tax professional.
Above all, don’t just make investment decisions based on what you read on the Internet or what someone is trying to sell you.
And don’t forget to pay Uncle Sam what you should, but not more than you should when it comes to your investments.
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Sources:
1. “Tax Efficiency: ETF vs Mutual Fund”, November 1, 2025. Accessed online: https://turbotax.intuit.com/tax-tips/investments-and-taxes/tax-efficiency-etf-vs-mutual-fund/L1sYF0Ec3
2. “The Tax Efficiency of ETFs”. Accessed online: https://am.jpmorgan.com/us/en/asset-management/adv/insights/etf-insights/tax-efficiency-of-etfs/
3. “How ETFs Help You Cut Your Tax Bill”, November 28, 2025. Accessed online: https://www.morningstar.com/funds/how-etfs-help-you-cut-your-tax-bill-2