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ETF Specialist

Vanguard's Unique ETF Structure Presents Unique Tax Risks

It is important investors be aware of this risk, but it isn't worth losing sleep over.

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A version of this article previously appeared in the December issue of Morningstar ETFInvestor. Click here to download a copy.

Exchange-traded funds' structural advantages make them more tax-efficient than traditional open-end mutual funds. But not all ETFs are built alike. Most of Vanguard's ETFs were established as separate share classes of the firm's mutual funds. There are pros and cons to this setup, which I'll outline here. I'll focus on the unique tax risk faced by investors in the ETF share class of Vanguard's funds, steps the funds' managers can take to mitigate this risk, and whether it is a risk worth taking.

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