> You could make the same argument about buying into a mutual fund, yet mutual funds have to distribute capital gains every year. This is sort of true, but no

> You could make the same argument about buying into a mutual fund, yet mutual funds have to distribute capital gains every year. This is sort of true, but no longer completely true -- because of ETFs. For example, Vanguard uses ETFs that connect with their Mutual Funds in such a way that it has virtually eliminated capital gains distributions on the majority of its index mutual funds. They are now taxed more similarly to ETFs. > Similarly, if I tried to re-create an index in my own account with individual stocks, I would end up incurring cap gains as I had to add and remove stocks when the index changes. However, if you did this with your own stocks, you could also take capital losses, which mutual funds cannot do (they cannot distribute capital losses to you), and you could also just decide to hold onto the individual stocks indefinitely. At a small percentage of your portfolio, it would probably not significantly effect performance (some evidence even suggests that stock portfolios that never sold stocks when dropped from the indexes even outperformed the indexes!). Even worse, in a mutual fund, you can actually buy into already existing capital gains that you never even profited from. For instance, if a mutual fund had a lot of gains in 2017, you buy in at the end of 2017, and then the mutual fund realizes those gains, you would receive those distributions and pay taxes, which seems pretty unfair to pay capital gains taxes on. There's a lot of nuance and oddities in how all of these taxes work, but it certainly seems far from clear that the way ETFs "dodge" (defer) capital gains taxes until you sell the asset is unfair. To me, mutual funds seem to be the weird tax structure, not ETFs, which at least have a clear and predictable capital gains cost (your sale price minus your purchase price).