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Homing In on Tax-Efficient Stock Funds

These mutual funds and ETFs can serve as tax-friendly holdings for your portfolio.

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Conventional wisdom on asset location is that stocks are best held in taxable accounts. But not all stocks and stock funds are tax-efficient. Dividend yield from REITs, for example, is typically taxed as ordinary income, while high-turnover stock funds will rack up short-term gains that are also taxable at an investor's ordinary income tax rate.

That said, there are some simple and effective ways to limit the bite taxes take from your stock portfolio's return. Stock investors looking to shield their gains from taxes have a few different avenues--tax-managed funds, broad-market traditional index funds, and exchange-traded funds

First Stop: Tax-Managed Funds
Tax-managed funds can be a good starting point when searching for holdings for a taxable account. Such offerings deliberately strive to minimize the tax liability that shareholders can incur by keeping portfolio turnover low and realizing capital gains to offset losses.

Esther Pak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.