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section header ETF fundamentals

subsection header Basics

ETFs and tax-efficiency

ETFs are treated the same as conventional open-end mutual funds for tax purposes.

Investors generally pay taxes on income and capital gains distributions during the life of the investment, as well as on any capital gains generated on the sale of their ETF units.

Indexed investments, such as index ETFs, can provide a tax advantage relative to actively managed open-end mutual funds because their management tends to require less portfolio turnover. Lower turnover can minimize capital gains distributions, which can in turn, improve long-term after-tax performance and tax efficiency.

Index ETFs may also be more tax-efficient than their index mutual fund counterparts. That's because ETFs generally don't experience cash redemptions from investors. Although ETF units are redeemable like mutual fund units, most investors who want to sell their ETF units will do so on the stock exchange. This means that an ETF, unlike a mutual fund, does not need to sell its portfolio securities in potentially capital-gain generating transactions in order to raise cash to meet investor redemption requests.

Only certain authorized dealers typically redeem ETF units directly, and in a majority of circumstances, the ETF redeems to the authorized dealers by providing them with a basket of the ETFโ€™s portfolio securities. With these "in-kind" redemption transactions, ETFs are able to minimize transaction costs and portfolio-level capital gains.


Important note:

The information presented here addresses certain Canadian federal income tax considerations for Canada-resident individual investors. It is presented for general investor education, and does not constitute tax, legal, or financial advice. Please consult your tax and/or financial advisor for the tax results applicable to your specific situation.


Learn about the different types of exchange-traded products, how index and active ETFs are managed and more.


Learn about ETF trading, common order types, premiums and discounts, liquidity considerations and more.


Learn about strategic and tactical uses for ETFs, including asset and sub-asset allocation, portfolio completion, cash equitization and more.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.

All investment funds, including those that seek to track an index are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While the Vanguard ETFs are designed to be as diversified as the original indices they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.

All monetary figures are expressed in Canadian dollars unless otherwise noted.