Investing in a taxable brokerage account offers flexibility and liquidity but it also requires smart planning to minimize tax drag. The right exchange-traded funds (ETFs) can reduce capital gains exposure, limit taxable distributions, and maximize your after-tax returns.
The best ETFs for taxable accounts typically have low turnover, track broad market indexes, and use in-kind redemption strategies to avoid triggering capital gains. Some even focus on qualified dividend income (QDI) or employ tax-managed strategies to further reduce tax liability.
This guide reviews the five best ETFs for taxable accounts using criteria from our Long-Term Investing evaluation methodology, prioritizing funds that align with buy-and-hold strategies, minimize tax friction, and offer strong total return potential.
How We Chose the Best ETFs for Taxable Accounts
Using our long-term investing framework, we evaluated ETFs based on:
- Tax efficiency: Use of in-kind redemptions, low turnover, and minimal taxable distributions
- Distributions: Preference for funds with qualified dividends or tax-managed payouts
- Turnover rate: Lower turnover generally equates to lower capital gains realization
- Total return potential: Long-term performance net of taxes and fees
- Fund access: Availability across major brokerages with no-load, no-commission options
- Fee structure: Low expense ratios and transparent cost structures
- Dividend reinvestment: Access to dividend reinvestment plans (DRIPs) and auto-invest features
- Investor education: Tools for screening, filtering, and understanding long-term ETF performance
5 Best ETFs for Taxable Brokerage Accounts
The following ETFs stand out for their tax efficiency, low costs, and strong long-term return potential making them potentially well-suited for taxable investment accounts. DRIPs can apply to all of the ETFs listed, but whether they’re available depends on your brokerage platform and whether you’ve opted in to reinvest dividends automatically.
Vanguard Total Stock Market Index Fund ETF (VTI) – Best for Broad U.S. Market Exposure
Vanguard Total Stock Market Index Fund ETF offers exposure to the entire U.S. stock market, from large-cap to micro-cap companies. With an extremely low expense ratio of 0.03% and a turnover rate under 3%, it’s one of the most tax-efficient funds available. VTI also benefits from in-kind redemptions, helping minimize capital gains distributions.
If you’re reinvesting dividends through a DRIP, be sure to track those reinvestments carefully to manage your cost basis for capital gains reporting.
Why it works in a taxable account:
- Tax-efficient structure with limited distributions
- Low annual turnover reduces realized gains
- Most dividends are qualified for lower tax rates
- Strong long-term growth potential across market caps
iShares Core S&P 500 ETF (IVV) – Best for Large-Cap Tax Efficiency
The iShares Core S&P 500 ETF tracks the S&P 500. Unlike many mutual funds, IVV benefits from ETF-specific tax advantages, such as in-kind creation/redemption mechanisms. Its ultra-low turnover (around 3%) and low expense ratio (0.03%) make it ideal for taxable accounts.
Why it works in a taxable account:
- Rarely distributes capital gains
- Eligible for qualified dividend treatment
- Long-term exposure to leading U.S. companies
- Widely available with no commission fees at most brokerages
Vanguard U.S. Multifactor ETF (VFMF) – Best for Tax-Aware Factor Investing
The Vanguard U.S. Multifactor ETF is unique in the tax-managed ETF space. It seeks exposure to U.S. equities with factor tilts (value, quality, momentum), while actively managing for tax efficiency. This includes harvesting losses and minimizing short-term gains. Tax-loss harvesting matters because it allows investors to offset capital gains with losses, reducing their taxable income and potentially improving after-tax returns over time.
Factor tilts such as leaning into value or low-volatility stocks, can help keep taxes low by reducing portfolio turnover, which minimizes short-term capital gains. By favoring long-term holding strategies and more tax-efficient asset classes, investors can potentially defer taxes and improve after-tax returns.
Why it works in a taxable account:
- Actively managed with tax sensitivity
- Designed specifically for taxable accounts
- Exposure to smart beta factors without high turnover
- Higher QDI-eligible income compared to many factor funds
iShares MSCI ACWI ex U.S. ETF (ACWX) – Best for Global Diversification
Taxable accounts can benefit from separating domestic and international exposure. The iShares MSCI ACWI ex U.S. ETF gives access to non-U.S. developed and emerging markets, without duplicating U.S. holdings that are already in a fund like VTI or IVV. It avoids overlap and allows better tax-loss harvesting strategies between asset classes.
Why it works in a taxable account:
- International diversification without U.S. holdings
- Low turnover and minimal capital gain distributions
- Enables tax-efficient global allocation
- 100% QDI eligibility for many dividend payers in developed markets
Schwab U.S. Dividend Equity ETF (SCHD) – Best for Qualified Dividend Income
The Schwab U.S. Dividend Equity ETF offers exposure to high-quality U.S. dividend stocks with a focus on sustainable yield and capital appreciation. It tracks an index designed to select companies with long records of dividend payments and strong fundamentals. With nearly all of its dividends classified as qualified, SCHD offers an excellent balance between income generation and tax efficiency.
Investors using DRIPs should remember that reinvested dividends are still taxed in the year received, even though no cash is taken out. Accurate recordkeeping is essential to avoid tax surprises later.
Why it works in a taxable account:
- Dividends largely taxed at the lower QDI rate
- Turnover rate under 30%
- Competitive 0.06% expense ratio
- Available commission-free at major brokerages
Why Tax Efficiency Matters in a Brokerage Account
When investing through a taxable brokerage account, every realized capital gain or non-qualified dividend can lead to a tax bill. These ongoing tax liabilities, often referred to as tax drag, can quietly erode your long-term returns, especially for investors with frequent distributions or high portfolio turnover.
Tax-efficient ETFs help mitigate this impact by limiting taxable events. Funds with low turnover and minimal distributions allow more of your investment gains to remain untouched, compounding over time. This is especially beneficial for buy-and-hold investors focused on long-term growth.
One of the key advantages of ETFs over mutual funds is their in-kind redemption mechanism. This structure allows ETF managers to remove appreciated assets from the fund without triggering taxable capital gains. Combined with low expense ratios and index-based strategies, ETFs are often better suited for taxable accounts where minimizing taxes is part of the overall investment strategy.
How to Maximize After-Tax Returns
To maximize after-tax returns in a taxable account, focus on low-turnover ETFs that minimize capital gains distributions and prioritize those generating qualified dividends, which are taxed at lower rates than ordinary income. Implement tax-loss harvesting when appropriate to offset gains, and avoid overlapping funds to better isolate losses. Using dividend reinvestment plans (DRIPs) can help maintain compounding, but be cautious of wash-sale rules when repurchasing similar ETFs. Many brokerages, including Vanguard, Schwab, and Fidelity, offer tax-efficient tools and automation features to streamline these strategies over time.
Choosing ETFs That Work for Your Taxable Account
Not all ETFs are created equal when it comes to tax efficiency. Funds like Vanguard Total Stock Market Index Fund, iShares Core S&P 500, and Schwab U.S. Dividend Equity deliver broad exposure with minimal tax impact, while specialized options like Vanguard U.S. Multifactor and iShares MSCI ACWI ex U.S. offer strategic diversification and smart tax-aware management.
When selecting ETFs for a taxable account, look beyond just performance. Evaluate turnover rates, distribution history, dividend classification, and structure. The right combination of tax efficiency and total return can significantly improve your after-tax wealth over the long term.
Frequently Asked Questions
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Tax-efficient ETFs typically have low turnover, use in-kind redemptions, and limit capital gains distributions.
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Many bond ETFs generate ordinary income taxed at higher rates. Unless you’re using municipal bond ETFs, fixed income is often better suited for tax-advantaged accounts.
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Yes. Even if you reinvest dividends through a dividend reinvestment plan (DRIP), they are still taxable in the year received.
