Best ETFs for Taxable Brokerage Accounts
Taxable accounts need tax-efficient ETFs. Here is which funds to hold here vs your retirement accounts.
Don't have time? Here's what you need to know:
- 1Taxable accounts need tax-efficient ETFs: VTI, VOO, and VUG produce minimal taxable events
- 2Hold tax-inefficient assets (bonds, REITs, high-yield) in Roth IRA or 401(k) instead
- 3Asset location (which account holds which fund) can save thousands in taxes over a lifetime
- 4Tax-loss harvesting in taxable accounts offsets gains and reduces your annual tax bill
The Tax Rules That Shape Your Taxable Portfolio
In a taxable brokerage account, you owe taxes on dividends (annually) and capital gains (when you sell). Qualified dividends are taxed at 0-20% depending on income. Short-term capital gains (held under 1 year) are taxed as ordinary income (up to 37%). Long-term gains (held over 1 year) get the lower 0-20% rate. Minimizing these taxes is the primary concern in taxable accounts.
ETFs are already more tax-efficient than mutual funds due to their in-kind creation/redemption process (which avoids generating taxable events). But some ETFs are more tax-efficient than others. The goal: hold the most tax-efficient assets here and move tax-inefficient assets to your Roth IRA or 401(k).
Best ETFs for Taxable Accounts
Avoid in taxable accounts: REIT ETFs (VNQ — dividends taxed as ordinary income), high-yield bond ETFs (HYG — interest taxed as ordinary income), and actively managed funds (frequent trading generates capital gains distributions). Hold these in tax-advantaged accounts instead.
| ETF | Why It Is Tax-Efficient | Dividend Yield | Tax Cost Ratio |
|---|---|---|---|
| VTI | Low turnover, ETF structure, qualified dividends | ~1.3% | Very low |
| VOO | Same as VTI — low turnover, qualified dividends | ~1.3% | Very low |
| VXUS | Eligible for foreign tax credit (deductible) | ~3.0% | Low (credit offsets some tax) |
| VUG | Growth stocks pay minimal dividends | ~0.5% | Very low |
| Tax-managed funds (VTMFX) | Specifically designed to minimize distributions | ~1.2% | Lowest |
Asset Location: Put the Right Fund in the Right Account
Asset allocation is what you own (80% stocks, 20% bonds). Asset location is where you own it. The optimal placement: highest-growth assets (U.S. stocks, growth ETFs) in Roth IRA (tax-free growth). Tax-inefficient income generators (bonds, REITs) in traditional 401(k) (tax-deferred). Tax-efficient stock ETFs (VTI, VUG) in taxable account (lowest tax drag).
This does not mean every account has a different allocation. Your total portfolio across all accounts should still match your target (e.g., 80/20 stocks/bonds). You are just placing each asset type in the account where it is taxed most favorably.
Tip: Harvest tax losses in your taxable account: if VTI drops 10%, sell it and immediately buy ITOT (similar but different enough to avoid wash sale rules). You claim the loss on your taxes while maintaining market exposure.
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Frequently Asked Questions
Should I use a growth ETF in my taxable account to minimize dividends?
Yes — this is a valid tax strategy. VUG yields only ~0.5% vs VTI's ~1.3%. On a $100,000 portfolio, that is $800 less in annual taxable dividends. The trade-off is slightly different market exposure (growth-tilted), which may or may not align with your target allocation.
What is tax-loss harvesting?
Selling an investment at a loss to offset capital gains or reduce taxable income (up to $3,000 per year). You then buy a similar (but not identical) fund to maintain market exposure. Example: sell VTI at a loss, buy ITOT. The tax benefit compounds over time.
Can I hold bonds in a taxable account?
You can, but it is tax-inefficient. Bond interest is taxed as ordinary income (up to 37%). If you must hold bonds in a taxable account, consider municipal bond ETFs (MUB) — their interest is exempt from federal taxes and often state taxes too.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.