Tax-Efficient Funds
These tax-friendly picks help investors keep more of what they make.
Name
|
Ticker
|
Category
|
Morningstar Analyst Rating
|
|---|---|---|---|
| Muni New York Long | |||
| Large Blend | |||
| Small Blend | |||
| Mid-Cap Blend | |||
| Mid-Cap Blend | |||
| Small Blend | |||
| Mid-Cap Blend | |||
| Large Blend | |||
| Large Blend | |||
| Large Blend | |||
| Muni National Long | |||
| Mid-Cap Blend | |||
| Muni National Long | |||
| Large Blend | |||
| Large Blend | |||
| Large Blend | |||
| Large Blend | |||
| Muni National Interm | |||
| Large Blend | |||
| Small Blend | |||
| Large Blend | |||
| Large Blend | |||
| Large Blend | |||
| Muni National Long | |||
| Small Blend | |||
| Large Blend | |||
| Large Blend | |||
| Muni National Interm | |||
| Muni National Long | |||
| High Yield Muni | |||
| Large Blend |
It’s no surprise that several index funds made this list of tax-friendly picks. Index funds tend to have lower turnover, changing their holdings only when the index they follow changes (which is relatively infrequently for most indexes). But some actively managed funds, which are also represented on this list, pass the screen, particularly when the managers execute a low turnover strategy—meaning they are holding their picks for longer, versus rapidly buying and selling into and out of positions. Some funds are also explicitly managed for tax efficiency. Tax-conscious investors will also find plenty of muni choices on the list. Municipal bond funds can be good options for investors, particularly those in higher income brackets, because they are exempt from federal taxes and also potentially state taxes (when they are issued from the investor’s state of residence).
List Criteria
Gold-Rated Funds
The Analyst Rating for Funds is based on our fund analysts’ conviction in a fund’s ability to outperform its peer group (funds in the same category) and benchmark on a risk-adjusted basis over the long term. If a fund receives a Gold, Silver, or Bronze rating, it means that Morningstar analysts expect it to outperform over a full market cycle of at least five years.
Low Tax-Cost Ratio
The Morningstar Tax Cost Ratio measures how much a fund’s annualized return is reduced by the taxes investors pay on distributions. Mutual funds regularly distribute stock dividends, bond dividends, and capital gains to their shareholders. Investors who hold the funds in taxable accounts then must pay taxes on those distributions during the year they were received. The tax cost ratio, available on a fund’s data report page on Morningstar.com, is expressed like an expense ratio and is usually concentrated in the range of 0%-5%. For example, if a fund had a 2% tax cost ratio for the three-year time period, it means that on average each year, investors in that fund lost 2% of their assets to taxes.
No-Load Funds
This list includes only no-load funds. “No load” refers to a mutual fund that does not charge a fee (known as a load) for buying or selling its shares; the investor typically buys no-load funds directly from a fund company or through a fund supermarket. Load funds, on the other hand, are sold by an advisor or broker and charge a percentage fee at purchase or sale of the shares, which is meant to be compensation for the planner’s investment-selection advice. (Note: Not all advisors sell load funds. Many are compensated via a flat fee or a percentage of all assets under management.) Whether a fund charges a load or not isn’t a reflection of its underlying quality. Many load funds are also Medalists, and some load funds are available without a load through 401(k) or other retirement plans. But we’re including only no-load funds here, since this list is designed to help investors who are primarily doing their own fund-picking.
Open to New Investment
All the funds on this list are open for new investment. Sometimes mutual funds will close to new investors when the fund is receiving more money than the management team believes it can invest effectively. Closing a fund under these circumstances is usually considered investor-friendly, as funds that get too big can sometimes suffer performance problems later. Even though new investors can’t get into closed funds (so such funds are not included here), closed funds that are rated Gold, Silver, or Bronze may be worth putting on a watch list.
Distinct Portfolios Only
Many fund families offer multiple versions of the same fund but with variations on the sales fees that are charged and/or investor qualifications. Screening for “distinct portfolios only” removes all but one of these options to avoid having several share classes of the same offering cluttering the list. Morningstar normally designates the oldest share class as the distinct portfolio. In some cases, this share class may be for institutions (such as company retirement funds) or otherwise have a high investment minimum. In those cases, investors may want to consider an “investor” share class of the same fund, though the fund expenses may be higher for those share classes.