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From observation, it seems like an ETF fund manager can buy and sell assets while avoiding a capital gains tax. However, if I were to do that, I would be taxed each time I sold (and thus missing out on potential return due to the time value of money).

Is it correct that fund managers can avoid capital gains taxation when they rebalance their porfolios? If so, how can an individual do the same and what evidence exists regarding the tax advantages of an ETF only portfolio compared to a stock only portfolio?

For reference, I am in Canada.

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ETFs are structured to minimize capital gains distributions via "in-kind" transactions involving an Authorized Participant. These are not considered sales.

Fund managers of mutual funds and individual investors are not entitled to such protection from taxation.

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  • This is helpful. Is there any way for a retail investor to engage in an in-kind transaction?
    – wispi
    Nov 15, 2020 at 0:17
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    There are a variety of in-kind transactions. For example, a stock dividend. Or withdrawing a security out of a retirement account (without selling it) as an RMD. However, in the context of what I think that you are suggesting, the only protection from capital gains is if it occurs in a sheltered account (speaking from a U.S. perspective). Nov 15, 2020 at 0:35

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