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>The reason Vanguard mutual funds are unique in this respect is that they hold a patent allowed assets to be comingled between their ETF and mutual fund share classes, so the superior tax efficiency aspects of the ETF can be shared with the mutual fund (and vice versa).

Wait, what? What does this actually look like for you on your taxes? This sounds like something that would be out of your hands/tax responsibility.

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Most of Vanaguard's ETFs are just another class of the overall mutual fund. So for example, the Vanguard Total Stock Market Index Fund has four (I think) share classes: Investor, Admiral, Institutional, and ETF. Vanguard arranges things such that shares of stock in the underlying fund that have lots of built-in gains are shoved into ETF shares, which means they don't have to sell them when people redeem shares of the mutual fund classes.

tl;dr: basically they just never have to sell shares with built-in capital gains so you rarely see a capital gains distribution when you use Vanguard index funds.

The way this shows up on your taxes is that Vanguard stock mutual funds (almost) never make capital gains distributions, while other mutual fund companies do. Capital gains distributions are taxed, and are inefficient as they cost you money.

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