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.
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In a hurry? Here’s the list:
- 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
Introduction – Tax-Efficient Qualities
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.
ETFs are particularly attractive for tax-efficient investing, 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 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, dynamic rebalancing, and a modern, user-friendly interface and mobile app. 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.
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.