Quora Answer: Are ETFs or Mutual Funds More Tax Efficient?

The following is my answer to a Quora question: “What are more tax efficient: ETFs or mutual funds?”

In places such as Singapore, it does not matter, because we do not have a capital gains tax.  In places like the US, where there is a capital gains tax, definitely ETFs.  This is because ETFs are structured for tax efficiency; this was a primary reason why they were created.  For example, in the US, when the realised gain on a mutual fund is not offset by a realised loss, the mutual fund is compelled to distribute that gain to the shareholders, or it will occur a tax.  These gains are still taxable on the shareholders.  On the other hand, an ETF is not redeemed by the holders.  Capital gains are only realised when the holders sell their share of the ETF, or when the trade reflects significant change in the underlying index.