Yes, ETFs are typically more tax-efficient than mutual funds, because they can usually meet redemptions without selling portfolio securities and triggering capital gains.
By law, both mutual funds and ETFs must distribute their net capital gains from selling portfolio securities to shareholders, so investors can owe tax on those distributions even in a year when the fund lost money and they sold nothing. When mutual fund investors redeem shares, the fund pays them cash, which often means selling holdings and realizing gains that get passed to everyone still in the fund. ETF shares, by contrast, are created and redeemed only by large broker-dealers called Authorized Participants, in big blocks such as 50,000 shares, and those redemptions are frequently paid in kind with a basket of the fund’s securities instead of cash. That in-kind exchange lets the ETF avoid many of the sales that would create taxable gains. You still owe tax on dividends and on your own gains when you sell. The SEC also notes that this advantage does not matter if you hold the fund in a tax-advantaged account such as an IRA or a 401(k).
Source: U.S. SEC, Mutual Funds and ETFs: A Guide for Investors
Image: Stock ticker board by Francisco Gonzalez, CC BY 2.0, via Wikimedia Commons.