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The 6 Best ETFs for Taxable Accounts (3 From Vanguard)

Last Updated: February 16, 2021 10 Comments – 3 min. read

Tax-efficient investing should always be a priority in asset placement across accounts and in subsequent fund selection, especially for high-income investors. Why give up money to Uncle Sam unnecessarily if you don’t have to? Minimizing your portfolio’s tax burden means maximizing its long-term total return. Here we’ll explore tax-efficient fund placement and the best ETFs for taxable accounts.

Prefer video? Watch it here.

Disclosure:  Some of the links on this page are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality, ad-free content on this site and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful, not because of the commission I get if you decide to purchase through my links. Read more here.

In a hurry? Here’s the list:

  1. IVV – iShares Core S&P 500 ETF
  2. ITOT – iShares Core S&P Total U.S. Stock Market ETF
  3. IXUS – iShares Core MSCI Total International Stock ETF
  4. VUG – Vanguard Growth ETF
  5. VTEB – Vanguard Tax-Exempt Bond ETF
  6. VGIT – Vanguard Intermediate-Term Treasury ETF

Contents

  • Introduction – Creating a Tax-Efficient ETF Portfolio
  • The Best ETFs for Taxable Accounts
    • IVV – iShares Core S&P 500 ETF
    • ITOT – iShares Core S&P Total U.S. Stock Market ETF
    • IXUS – iShares Core MSCI Total International Stock ETF
    • VUG – Vanguard Growth ETF
    • VTEB – Vanguard Tax-Exempt Bond ETF
    • VGIT – Vanguard Intermediate-Term Treasury ETF
  • Where to Buy These Tax-Efficient ETFs

Introduction – Creating a Tax-Efficient ETF Portfolio

Whether it’s for shorter investing horizons, income investing, or retirement account spillover, investing in taxable accounts is unavoidable sometimes. It’s usually a good problem to have.

Tax-inefficient assets, best held in tax-advantaged space like an IRA, would be things like high-dividend-yield stocks or funds, REITs, metals (taxed as collectibles), and actively managed funds. Dividends and capital gains distributions are taxed when they’re paid. REITs are required to distribute nearly all their income, usually at the non-qualified dividend rate. Actively managed funds have what’s called high turnover – they are constantly buying and selling securities within the fund. Bond funds are also relatively tax-inefficient, but interest from treasury bonds is exempt from state taxes.

ETFs are particularly attractive for tax-efficient investing in a taxable brokerage account, but not all ETFs are created equally. Specifically, we’re looking for ETFs with tax-efficient structure, passive management, low turnover, low capital gains distributions, low fees, and low dividend yield. Among these options are broad core stock funds, Growth stock funds, treasury bonds, and municipal bonds.

The Best ETFs for Taxable Accounts

Let’s dive into the 6 best ETFs for taxable accounts.

IVV – iShares Core S&P 500 ETF

IVV from iShares tracks the S&P 500 index, which is composed of 500 of the largest companies in the United States. The fund has an expense ratio of 0.03%.

ITOT – iShares Core S&P Total U.S. Stock Market ETF

To add exposure to small- and mid-caps, you might go with a total market ETF. ITOT from iShares is a low-cost option to access the total U.S. stock market. The fund contains over 3,500 stocks and has an expense ratio of 0.03%.

IXUS – iShares Core MSCI Total International Stock ETF

International stocks usually carry a higher dividend yield than U.S. stocks, but this is balanced out somewhat by the foreign tax credit, a credit to individuals who pay taxes on foreign investment income. This makes international stock funds reasonably tax-efficient. Just like ITOT, IXUS is a low-cost option to get exposure to a broad total market, in this case ex-US stocks. The fund tracks the MSCI ACWI ex USA IMI Index and has an expense ratio of 0.09%.

VUG – Vanguard Growth ETF

Prefer Growth stocks or want a Growth tilt for your portfolio? You’re in luck. Growth stocks have low or no dividend yield, making them ideal for a taxable environment where a high yield creates a larger tax burden. The Vanguard Growth ETF tracks the CRSP US Large Cap Growth Index, which is comprised of large-cap stocks that exhibit growth characteristics. The fund has an expense ratio of 0.04%.

VTEB – Vanguard Tax-Exempt Bond ETF

Bond funds are usually best kept in tax-advantaged accounts. But if you want bonds in your taxable account, some are more tax-efficient than others. Interest from municipal bonds is tax-free at federal, state, and local levels. This is especially impactful for high-income investors in a higher tax bracket. VTEB is Vanguard’s municipal bond index fund, which tracks the S&P National AMT-Free Municipal Bond Index. The ETF has an expense ratio of 0.06%.

VGIT – Vanguard Intermediate-Term Treasury ETF

Similarly, interest from treasury bonds is tax-exempt at state and local levels. Treasury bonds tend to possess a lower correlation to stocks than municipal bonds, making them a likely superior hedge. Vanguard’s Intermediate Term Treasury ETF tracks the Bloomberg Barclays U.S. Treasury 3–10 Year Bond Index. The fund has an expense ratio of 0.05%.

Where to Buy These Tax-Efficient ETFs

M1 Finance is a great choice of broker to buy the aforementioned ETFs in your taxable account. It has zero transaction fees and offers fractional shares, and a modern, user-friendly interface and mobile app.

Most importantly in this context, the broker features automatic rebalancing, which directs new deposits to underweight assets according to your specified allocations, so that you don’t have to manually rebalance and pay taxes unnecessarily. Moreover, M1 features built-in tax optimization, selling any losses to offset gains first, followed by your oldest tax lots, in order to minimize capital gains taxes.

M1 also offers some of the lowest margin rates if you want to employ leverage in your taxable account to enhance exposure. I wrote a comprehensive review of M1 Finance here.


Disclosures:  None.

Interested in more Lazy Portfolios? See the full list here.

Disclaimer:  While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.

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About John Williamson

Analytical and entrepreneurial-minded data nerd, usability enthusiast, Boglehead, and Oxford comma advocate. I lead the Paid Search marketing efforts at Gild Group. I'm not a big fan of social media, but you can find me on LinkedIn and Reddit.

Reader Interactions

Comments

  1. Reid says

    February 16, 2021 at 7:06 pm

    Just wanted to give you a shout out. Great website. There is a wealth of knowledge here that I just discovered today. Appreciate all the hard work.

    Reply
    • John Williamson says

      February 16, 2021 at 7:31 pm

      Wow, thanks for the kind words, Reid! Glad you’ve found it useful so far. Comments like yours keep me going!

      Reply
  2. Aruna C says

    January 18, 2021 at 7:47 am

    I became aware of tax efficiency only recently,I have Vanguard US Growth Fund VWUAX in taxable account,is there an equivalent ETF in Vanguard or other?Or just stay with the fund?

    Reply
    • John Williamson says

      January 20, 2021 at 3:52 pm

      Not sure if there’s an ETF equivalent for that mutual fund. VUG might be the closest. Best to contact Vanguard and ask them.

      Reply
  3. DS36 says

    December 24, 2020 at 5:05 am

    Hi. Love your website, Can you show us your recommendation of what ETFs and allocation to put into a taxable account? Thanks a lot.

    Reply
    • John Williamson says

      December 24, 2020 at 10:02 am

      Thanks for the kind words! I can’t prescribe an exact asset selection and asset allocation, but if you can choose an asset allocation based on this post, a simple, globally diversified, 3-fund combination would be a total U.S. stock market index fund like ITOT above, a total international stock market fund via IXUS, and an intermediate treasury bond fund like VGIT mentioned above. An example for an 80/20 allocation would be 60/20/20 ITOT/IXUS/VGIT. You could also use a Value tilt in your tax-advantaged space and a Growth tilt in taxable using VUG to be more tax-efficient.

      Hope this helps! Happy holidays!

      Reply
      • DS36 says

        December 26, 2020 at 2:23 am

        Great thanks. I already have my tax-deferred account setup (Roth IRA). I was just looking for ideas for my taxable account for the most tax-efficiency. I was thinking a Growth ETF like VUG, but I just wasn’t sure. I already have VGIT in my Roth. Hopefully, this idea makes sense. I am just trying to the most tax-efficient as possible.

        Reply
        • John Williamson says

          December 27, 2020 at 6:22 pm

          Then yes, exactly; you were on the right track. Maximizing tax efficiency would be using VUG in taxable and VTV in the Roth.

          Reply
  4. Michael says

    November 14, 2020 at 3:53 pm

    What is your take on Vanguards Mega Cap Growth ETF (MGK) for taxable accounts?

    Reply
    • John Williamson says

      November 14, 2020 at 3:59 pm

      Hey Michael, that would be a good one for taxable accounts too. Similar to VUG.

      Reply

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