IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v38y2025i10p2988-3039..html

The Role of Taxes in the Rise of ETFs

Author

Listed:
  • Rabih Moussawi
  • Ke Shen
  • Raisa Velthuis

Abstract

This paper argues that a lesser known yet economically significant tax-deferral feature of ETFs’ security design is crucial to their success. By relying on the in-kind redemption exemption, authorized participants help ETFs avoid distributing capital gains and reduce their tax overhang, partly by deploying heartbeat trades. We estimate that the ETF tax efficiency has increased long-term investors’ after-tax returns by 1.05% per year relative to mutual funds in recent years. Exploiting cross-sectional and time-series variations in investors’ tax burden, we show that tax efficiency is a significant driver of capital migration by high-net-worth investors from mutual funds into ETFs.

Suggested Citation

  • Rabih Moussawi & Ke Shen & Raisa Velthuis, 2025. "The Role of Taxes in the Rise of ETFs," The Review of Financial Studies, Society for Financial Studies, vol. 38(10), pages 2988-3039.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:10:p:2988-3039.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhaf044
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:38:y:2025:i:10:p:2988-3039.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sfsssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.