ETF-Tax Advantages for shareholders

" ...

An ETF's ability to significantly decrease or possibly avoid capital gain distributions stems from two unique traits:

- Unlike mutual funds, shares of ETFs are traded on an exchange in the secondary market, just like a stock. When one investor sells ETF shares and another investor buys them on the exchange, the underlying securities of the ETF don't need to be sold in order to raise cash for the redemption.

- An in-kind redemption process enables the fund manager to purge the lowest cost-basis stocks through stock transfers during the creation and redemption process.

The result is greater tax efficiency because shareholder activity and the resulting portfolio turnover don't affect the portfolio to the same extent as with mutual funds. These traits can also mean a substantial difference in the after-tax rate of returns from a mutual fund versus an ETF--even if they both replicate the same underlying index. Understanding structural differences between ETFS and mutual funds helps shareholders understand how tax treatment differs for each type of investment. ... "


Full-text reads as in the link: http://www.invescopowershares.com/pdf/P-TES-WP-1-E.pdf