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

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:

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

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.

Canadians can find the above ETFs on Questrade or Interactive Brokers. Investors outside North America can use eToro or possibly Interactive Brokers.

Disclosures:  None.

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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.