Why is ETF more tax-efficient?

[Carlyn]

Hello, I'm so much interested in the ETF. I would like to learn why they are more tax-efficient. ETF is popular and respected by many. It is tax-efficient, but the reason is not clear to me. Explain to me, please.

[Faraz]

Hello Carlyn,
Unlike other mutual funds, Exchange-traded funds tend to be more tax-efficient. Normally ETF will give rise to reduced tax liabilities when you are holding them in a taxable account. This is a different case when mutual funds are held in a similar account.
Even though ETF and mutual funds are usually taxed the same way, ETF is designed in a way that the taxes from it are less.
In-kind benefits are one reason why ETF are tax-efficient. This is where investors can redeem the shares they desire to sell in kind. This helps avoid cash sales, thus reducing the tax impact.
ETF also save and come up with units without them being taxable instruments. This enables long-term investors to have few capital gains, thus making them tax efficient.