Tax Efficiency

You can purchase taxable investments, but minimize the amount of tax you pay by purchasing a tax-efficient mutual fund. A tax-efficient fund can reduce your taxes by decreasing the income earnings and capital gains distributed to their shareholders. They typically do this by limiting the frequency with which they buy and sell securities, which results in a low turnover rate. Because index funds buy and sell investments only when the composition of the index changes, they are usually considered to be tax-efficient investments. For the same reason, many ETFs are tax-efficient as well.

Actively managed funds can also increase their tax efficiency by limiting their investments in products that produce current taxable income, or yield. In addition, they can postpone selling investments until they qualify for long-term capital gains, making them subject to a lower tax rate.

Any fund with tax efficiency as an objective will state the goal in its prospectus.

Investors should consider the investment objectives, risks, charges, and expenses of mutual fund carefully before investing. A prospectus contains this and other information about the fund and is available through or through a Scottrade branch office. The prospectus should be read carefully before investing.

Scottrade does not provide tax advice. This material is for informational purposes only. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.