3 Reasons to Add Tax-Efficient ETFs Exposure Now

The end of the year is fast approaching, and so too is the end of the tax year. It’s been a complicated stock market year for investors, to say the least, with tax implications galore. That matters for those facing a big bill from their gains, but for those with more middling returns, tax relief could potentially be even more beneficial. Tax-efficient ETFs can provide that help, and there are some real reasons to add them right now.

Tax Efficient ETFs Provide Income, Too

While individual tax outlooks inform a lot of investor interest in tax efficient ETFs, they can be more than tax bill relief tools. Such funds also add current income, which can be really impactful in an uncertain end of 2025. Tariff issues may have defined the spring swoon for U.S. stocks, but they continue to loom over markets. Geopolitical risks are never far away, either, and perhaps most importantly, inflation could resurge if the Fed’s rate cut gambit goes wrong.

An Active Approach Can Do More in Bonds

There are muni bond ETFs out there that take an index approach to limiting tax impacts, but the space also presents active ETF opportunities. Active can stand out potentially more in fixed income than equities, in some cases. 

Active managers can provide deeper scrutiny of issuers, assessing them for factors like cash flow or credit quality. Fundamentally, given that sometimes bonds are called early or defaulted on, active can help maintain an allocation more than passive can.

Rate Turbulence Could Impact Fixed Income Writ Large

While many investors may be pleased and satisfied with their bond allocations for now, a rate cut could throw them for a whirl. That may include tax efficient ETFs that rely on muni bonds, of course, but that tax impact could make such bonds stand out even as lower rates change the overall picture. 

The American Century Diversified Municipal Bond ETF (TAXF) charges a 27 basis point (bps) fee for its approach. TAXF actively invests in both investment-grade and high-yield municipal bonds. That can provide the aforementioned income while also lowering tax exposure. 

The fund has returned 1.5% over the last three months, outperforming its ETF Database Category and FactSet Segment averages. Looking ahead, tax efficient ETFs like TAXF could make for a shrewd earlier move.

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