Taxes may not be the first thing you think about when you invest, but they play a bigger role in long-term results than many people realize. At the end of the day, an investor can only spend what is left after Uncle Sam has taken his cut.

The gap between what you earn and what you keep can be surprisingly wide. Two investors can own very similar portfolios and end up with very different after-tax returns, simply because one paid more taxes along the way. The good news? Modern investors have an array of tools at their disposal to maximize tax efficiency.

Here are three practical strategies that can help keep more of your money working for you.

1. Choose Tax-Efficient Investment Vehicles

Mutual funds and ETFs are required to distribute capital gains that occur inside the fund, even if you didn’t sell anything yourself. That can create frustration, unpredictability, and unnecessary taxes.

While both vehicles follow the same rules, they don’t operate the same way. ETFs use an “in-kind” creation and redemption mechanism that allows them to remove appreciated positions from the portfolio without triggering a taxable event. This structural advantage helps ETFs avoid capital-gain distributions far more effectively than traditional mutual funds⁽¹⁾, giving investors more control over when they recognize gains.

For long-term investors seeking broad, diversified exposure at low cost, ETFs offer a simple and powerful path to better tax efficiency.

2. Keep Portfolio Turnover Low

Turnover represents the buying and selling activity happening inside a portfolio. High-turnover strategies buy and sell more frequently, which can create taxable gains in two ways: through trades you make directly and through trades happening inside the funds you hold. Both sources add to your tax bill over time. The problem is compounded if the gains end up being short-term⁽²⁾, as they are taxed at higher rates.

Broad-market and factor-based funds, by contrast, usually have very low turnover baked into their design. They don’t need to trade often to maintain their exposure. That patience shows up in the tax bill. Lower turnover means fewer taxable events, fewer surprises, and more of your returns compounding over the long term. It’s one of the quiet advantages of disciplined, rules-based investing.

3. Use Tax-Loss Harvesting Where Appropriate

Markets move in cycles, and temporary declines can create opportunities. Tax-loss harvesting involves selling an investment at a loss to offset realized gains elsewhere. The goal isn’t market timing, it’s disciplined tax management.

Effective harvesting programs follow a consistent, rules-driven process. The key is to capture the loss while staying fully invested, typically by reinvesting the proceeds into a similar (but not “substantially identical”) fund. This maintains your market exposure while securing a tax benefit. Harvested losses can help reduce your tax bill, smooth rebalancing, and support stronger after-tax results.

Final Thoughts

Tax efficiency doesn’t require complex strategies or exotic products. Small, thoughtful choices can make a meaningful difference. Using ETFs, minimizing turnover, and a disciplined loss harvesting program can quietly add real value over time. More importantly, they support what matters most: keeping your plan on track and letting compounding do the heavy lifting.

1. More recently, at least one fund provider has figured out how to incorporate the ‘in-kind’ creation and redemption process into the mutual fund wrapper. Funds managed by Dimensional Fund Advisors now carry this capability. This marks a substantial improvement in tax efficiency for the vehicle.  

2. Short-term gains arise when an appreciated security is sold prior to being owned for a full year.

Week in Review

• The latest ISM (Institute for Supply Management) Manufacturing PMI, a key indicator of economic activity in the manufacturing sector, fell to 48.2 in January. This marked the ninth straight month that the Manufacturing PMI stayed below 50, signaling contraction in manufacturing activity.
• According to FactSet, 95% of the S&P 500 reported Q3 results as of November 21st. The earnings growth rate for the quarter ended at 13.4% year-over-year, which would mark the fourth straight quarter of double-digit earnings growth for the index. FactSet also provides insight into the revenue growth for the S&P 500 this quarter, which is currently at 8.4%. If 8.4% is the actual growth rate of revenue for the quarter, it would mark the highest revenue growth rate reported by the index since Q3 of 2022.
• The Producer Price Index (PPI), which tracks changes in prices that producers pay to their suppliers, rose 0.3% in September and 2.7% year-over-year. Core PPI, which excludes food and energy, edged up 0.1% for the month and 2.9% annually. These September figures, delayed by the recent government shutdown, indicate a modest increase in wholesale prices prior to the shutdown. Importantly, this report will be the final inflation data available to the Federal Reserve before its December policy meeting.

Hot Reads

Markets 

• U.S. Manufacturing Contracts for Ninth Straight Month (WSJ)
• Where Do Fed Voters Stand On a December Rate Cut (WSJ)
• Fed Chair Powell’s Allies Provide Opening for December Rate Cut (WSJ)
  

Investing 

• How Much Will the Stock Market Fall in 2026? (WSJ)
• The Untold Story of Charlie Munger’s Final Years (WSJ)
• Are Stocks a Better Bet Than Social Security (Jason Zweig)

 Other 

• Inside Cadillac’s $1 Billion F1 Gamble (YouTube)
• How AI is Killing The Value of a College Degree – CNBC (YouTube)
• In Fukushima’s Shadow: Japan’s Pivot Back to Nuclear (YouTube)

Markets at a Glance

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Economic Calendar

Source: MarketWatch

IMPORTANT DISCLOSURE INFORMATION