25 Top Picks for Tax-Efficient ETFs and Mutual Funds

The typical large-blend fund in Morningstar’s database posted an annualized return of 19.20% over the three-year period ended June 8, 2026. Meanwhile, the median tax-cost ratio of that same group of funds was 1.26%.

That means that an investor in the highest tax bracket who owned an average-performing large-blend fund and held it for a decade in a taxable account would have ceded about 7% of her returns to taxes. And that assumes the investor didn’t sell at the end of the period but simply bought and held; the 1.26% per year tax-cost ratio was simply her carrying cost for the fund and doesn’t factor in any taxes due upon the sale.

It’s usually not a good idea to hold taxable-bond funds in a taxable account, particularly for people in higher tax brackets, and that’s especially true now that yields have gone up to more meaningful levels. That’s because the majority of the return that bonds earn consists of income rather than capital gains, and income is taxed at the ordinary income tax rate versus the lower long-term capital gains rate. The typical intermediate-term core bond fund returned 3.91% over the past three years and had a tax-cost ratio of 1.55%. For investors in the highest tax bracket who bought and held a taxable-bond fund in a taxable account (again, usually not advisable), their tax burden would have gobbled up about 40% of the return of the fund.

Some investors might assume that paying taxes is simply the cost of earning good returns. And it’s certainly true that good asset location can help reduce the drag of taxes. For example, by holding taxable bonds in their tax-sheltered accounts, investors will be on the hook for taxes only when they pull money out, not for any income their bonds or bond funds kick off during their holding periods. (Investors in Roth IRAs won’t owe any taxes at all upon withdrawal in retirement, provided they’ve minded their p’s and q’s.)

Investors can also help reduce their tax bills by maintaining a tight focus on tax-efficient funds for their taxable accounts. Individual stocks can be a good fit as taxable holdings: The investor will be subject to tax on any dividends the stocks pay out but won’t have to contend with the kinds of capital gains distributions that have bedeviled many investors in actively managed stock funds.

Mutual funds and exchange-traded funds can be quite tax-efficient, too; the key is to choose carefully. For equity investors, traditional index funds and ETFs tend to do a good job of limiting taxable capital gains; tax-managed mutual funds can also be a good choice. On the fixed-income side, municipal-bond funds can be a good fit for the taxable accounts of investors in higher tax brackets, though aftertax muni yields may be less attractive at various points in time, especially when muni demand is strong.

Here’s a rundown of some of our analysts’ favorite tax-efficient funds and ETFs for core equity and bond exposure. Note that this is not an inclusive list; I focused on funds with Gold, Silver, or Bronze Morningstar Medalist Ratings with structural features that should contribute to decent tax efficiency over time.

Top Tax-Efficient ETFs for US Equity Exposure

• iShares Core S&P 500 ETF IVV
• iShares Core S&P Total U.S. Stock Market ETF ITOT
• Schwab US Broad Market ETF SCHB
• Vanguard S&P 500 ETF VOO
• Vanguard Total Stock Market ETF VTI

Equity ETFs have taken off in popularity in recent years, in part because of their ability to limit taxable capital gains. Not all ETFs have the same tax efficiency, but broadly diversified core equity ETFs manage to reduce capital gains distributions, thanks to their very low turnover as well as the ETF structure.

Investors could also hold separate small-, mid-, and large-cap ETFs; iShares, Schwab, and Vanguard all field cheap and excellent versions. However, the main reason for holding discrete building blocks for each market-cap band is to rebalance among them, but doing so will tend to trigger more frequent selling—and in turn capital gains realization—than is ideal.

Top Tax-Efficient Index Mutual Funds for US Equity Exposure

• Vanguard Total Stock Market Index VTSAX
• Vanguard 500 Index VFIAX
• DFA US Core Equity 1 DFEOX
• Fidelity Total Market Index FSKAX
• Schwab S&P 500 Index SWPPX

Traditional index funds benefit from the chief factor that is responsible for ETFs’ tax efficiency: very low turnover. Thus, most of Morningstar’s favorite core index funds are fine tax-efficient picks. Vanguard Total Stock Market Index and Vanguard 500 Index have a tax-efficiency benefit because they’re share classes of the firm’s ETFs. Gold-rated DFA US Core Equity 1 also has fine long-term tax efficiency numbers, as do core index-trackers from Fidelity and Schwab.

Top Tax-Managed Funds for US Equity Exposure

• Vanguard Tax-Managed Capital Appreciation VTCLX
• Vanguard Tax-Managed Small Cap VTMSX
• Vanguard Tax-Managed Balanced VTMFX

Although they’ve been eclipsed by “popular kid” ETFs in recent years, the small subset of tax-managed funds has historically done a terrific job of limiting taxable capital gains. Vanguard’s suite of tax-managed funds is a standout in this small group. Its funds closely track indexes and benefit from low turnover; they also layer on additional tax-management techniques such as tax-loss harvesting and downplaying dividend-payers. Their expense ratios are ultralow, and their tax-cost ratios are on par with or even lower than comparable ETFs. I used Vanguard Tax-Managed Capital Appreciation and Vanguard Tax-Managed Small Cap in my core model tax-efficient Bucket portfolios for retired investors.

Top Tax-Efficient ETFs for Non-US Equity Exposure

• Vanguard FTSE All-World ex-US ETF VEU
• Vanguard Total International Stock ETF VXUS
• Schwab International Equity ETF SCHF
• iShares Core MSCI Total International Stock ETF IXUS

Foreign-stock ETFs have all the structural tax-efficiency benefits that US stock ETFs do, but their tax-cost ratios tend to be a bit higher for one key reason: Foreign companies often pay higher dividends than US companies, and those year-in, year-out payments lead to higher tax bills. For example, iShares Core MSCI Total International Stock ETF has a 12-month dividend yield of 2.93%, versus 1.03% for iShares Core S&P Total US Stock Market ETF. Accordingly, foreign-stock ETFs’ tax-cost ratios are higher than those of US ETFs. Even so, broad foreign-stock ETFs are appreciably more tax-efficient than actively managed international funds.

Top Tax-Efficient Mutual Funds for Non-US Equity Exposure

• Fidelity Global ex US Index FSGGX
• Fidelity International Index FSPSX
• Vanguard Total International Stock Index VTIAX
• Vanguard FTSE All-World ex-US Index VFWAX

Many of the same caveats that apply to foreign-stock ETFs also apply to foreign-stock index funds. They generally enjoy low tax-cost ratios relative to actively managed products but usually have worse tax-cost ratios than US index funds and ETFs because of higher dividends on foreign stocks. Among Morningstar’s favorite core international-equity index funds are those from Vanguard and Fidelity.

Top Tax-Efficient Mutual Funds for Bond Exposure

• Fidelity Municipal Income FHIGX
• Fidelity Tax-Free Bond FTABX
• Vanguard Intermediate-Term Tax-Exempt VWIUX
• Vanguard Limited-Term Tax-Exempt VMLUX

For investors in higher tax brackets who want to hold bonds in their taxable accounts, a municipal-bond fund can be a good fit. (At the same time, it’s worth noting that aftertax yields on munis won’t always be higher than those of taxable bonds with similar risk attributes.) Fidelity’s muni funds have long been among Morningstar’s favorites, as have Vanguard’s.