Tax-Savvy Investing: Why ETFs Are Winning the Hearts (and Wallets) of American Investors

The chief executive officer of Zerodha, Nithin Kamath, elaborated on why ETFs are rapidly gaining preference over mutual funds in the US. The essential part is tax efficiency. As US mutual funds are pass-through entities, they must distribute capital gains to unitholders who then pay taxes on these gains. By contrast, ETFs use an in-kind process of creation and redemption which literally converts capital gains taxes into non-adjustable amounts, lessening the actual tax burden. This fundamental tax advantage has been a significant contributor to the great success of index funds, particularly ETFs, in the American market. From now till 2024, passive funds have extended their lead; now about 53% of long-term open-end and ETF assets are invested in indexed strategies, effectively undermining decades of active management dominance. 

 

Source: Economic Times