Why do ETFs usually generate fewer capital gain distributions overall than mutual fund?

Question

I read on Investopedia that:

Comprehensively, ETFs usually generate fewer capital gain distributions overall which can make them somewhat more tax efficient than mutual funds.

Why do ETFs usually generate fewer capital gain distributions overall than mutual fund? Is that because, 1)

• Managers of a mutual fund must also buy and sell individual securities in a mutual fund when accommodating new shares and share redemptions.
• [whereas] ETFs have their own unique mechanism for buying and selling. ETFs use creation units which allow for the purchase and sale of assets in the fund collectively.

2. Mutual funds tend to the less actively managed than ETFs?

3. Some other reason(s)?

Answer 1

It is a mix of different factors.

1. The typical ETF tracks an index while most mutual funds are actively managed. A high turnover rate will generate lots of taxable events
2. The creation-redemption-process is an exchange of assets and tax advantaged
3. Changes to the index are often not made by buying and selling the underlying stock but by heartbeat trades which are tax advantaged as well

Comparing active mututal funds and ETFs to the classic index fund (=a mutual fund tracking an index) we can see that most of the tax advantage comes from being passive and not so much from the shenanigans. Note that this is mostly valid for funds tracking a broad market index and a lot less for any niche index that has high turnover.

Answer 2

When shares of an mutual fund are traded, most days end with a net difference, which the mutual fund manager has to follow by buying / selling the underlying shares. Each sale will result in some capital gains; and in average, about every second day is a ‘sell’ day.

For ETFs, the daily trading happens between buyers and sellers in the open market; the fund manager does nothing, and no capital gains are triggered for the fund (only for the people that sold of course).
Only rarely - if the offer or demand for the ETF accumulates significantly over several days and moves the ETF price too far from the underlying net assets - will fund management buy or sell underlying shares.