Mutual funds, exchange-traded funds (ETFs) and separately managed accounts (SMAs) each have a place in your client's portfolio, but there are different considerations to keep in mind when it comes to taxation and asset location.

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Key Takeaway

By understanding how each investment vehicle is taxed, you'll be better positioned to guide clients in making tax-smart asset allocation and asset location choices.

Comparison of Mutual Funds, ETFs and SMAs

Although mutual funds, ETFs and SMAs share many of the same characteristics, there are several distinguishing features to consider.


Mutual FundsNo
SMAsYes, allows for the exclusion of individual holdings based on investor preferences.

Mutual FundsCash
SMAsCash or in kind

Tax Treatment
Mutual FundsMutual Funds
Tax Inefficient
Trading activity from rebalancing and redemption can cause capital gain allocations to investors.
Tax Efficient
Fund structure enables the mitigation of capital gain realization caused by rebalancing and redemptions.
Tax Managed
Holding individual securities allows an investor to elect for loss harvesting* and enables better control of gain realization.

Locations to Consider
Mutual FundsTax deferred and tax exempt accounts
ETFsEither tax deferred, tax exempt or taxable accounts
SMAsTaxable accounts

Next Steps

Review your client's portfolios.
Identify possible opportunities for improved asset location.
Meet with clients to discuss.


The Importance of Asset Location


*For illustrative purposes only. Not a recommendation to buy or sell any security. All investments are subject to risks, including risk of loss. Elements of this analysis include comparisons of different account types and investment vehicles each of which have distinct trading, expense, tax and risk characteristics. This is not a comprehensive description of all differences between the vehicles described. Tax saving strategies should not undermine one’s investment goals.

There is no assurance that investment objectives will be achieved.

Investment strategies that seek to enhance after-tax performance may be unable to fully realize strategic gains or harvest losses due to various factors. Market conditions may limit the ability to generate tax losses. Tax-loss harvesting involves the risks that the new investment could perform worse than the original investment and that transaction costs could offset the tax benefit. Also, a tax-managed strategy may cause a client portfolio to hold a security in order to achieve more favorable tax treatment or to sell a security in order to create tax losses. Prospective investors should consult with a tax or legal advisor before making any investment decision.

The Firm does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Tax laws are complex and subject to change. Investors should always consult their own legal or tax professionals for information concerning their individual situations.