Last updated: July 2026
This article is for informational purposes only and is not investment advice or tax advice. See our full Disclaimer for details.
Our Best ETFs for a Roth IRA guide covered which funds tend to make the most sense inside a tax-advantaged account. This article covers the flip side: which ETFs are best suited for a regular taxable brokerage account, where dividends, interest, and capital gains are all subject to tax as you go — and which funds tend to create more of a tax drag than they’re worth in that setting.
2026 Tax Rates on Investment Income, Briefly
Before getting into fund selection, a quick reference on how investment income is actually taxed in a taxable account, based on current IRS figures for 2026:
- Long-term capital gains and qualified dividends (assets held more than one year) are taxed at 0%, 15%, or 20%, depending on your taxable income and filing status. For 2026, the 0% bracket applies up to $49,450 (single) or $98,900 (married filing jointly); the 20% rate applies above roughly $545,500 (single) or $613,700 (married filing jointly), with 15% applying in between.
- Short-term capital gains (assets held one year or less) and non-qualified (ordinary) dividends are taxed at your regular marginal income tax rate — up to 37%.
- Net Investment Income Tax (NIIT), an additional 3.8% surtax, applies to investment income once your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).
These figures are based on current IRS guidance and can change; always confirm current thresholds with the IRS or a tax professional, since where your income falls relative to these brackets significantly affects how much fund selection actually matters for your situation.
What Makes an ETF “Tax-Efficient”?
A few structural factors determine how much annual tax drag a fund creates in a taxable account, independent of your personal tax bracket:
Qualified vs. non-qualified dividends. Dividends from most standard U.S. stock ETFs are typically qualified, taxed at the lower long-term capital gains rates. Dividends from REITs and some other structures are typically non-qualified, taxed at your higher ordinary income rate.
Turnover. Funds that buy and sell holdings frequently (common in actively managed funds) tend to generate more realized capital gains distributions, which are taxable events even if you didn’t personally sell anything. Low-turnover index funds generate far fewer of these unexpected distributions.
The ETF creation/redemption structure, covered in more detail in our What Is an ETF? guide, generally makes ETFs more tax-efficient than comparable mutual funds, since in-kind redemptions let funds avoid realizing certain capital gains internally.
Income character from options strategies. Funds using covered-call or other options strategies, like JEPI or JEPQ, often generate a meaningful share of ordinary income rather than qualified dividends — a structurally less tax-efficient profile in a taxable account, as covered in our JEPI vs SCHD comparison.
ETFs That Tend to Fit Well in a Taxable Account
Broad core index funds (VTI, VOO). Low turnover, mostly qualified dividends, and a modest overall yield combine to make these among the most tax-efficient equity holdings available — there’s little downside to holding them in a taxable account specifically.
International funds (VXUS). This is a case where account type cuts the opposite direction from some other funds on this site. U.S. investors can often claim a foreign tax credit on their tax return for taxes foreign governments withhold from VXUS’s international dividends — but that credit is generally only available in a taxable account, not inside an IRA, since IRAs aren’t themselves subject to U.S. tax in the first place. Some investors specifically prefer holding VXUS in a taxable account partly for this reason, a nuance we cover in more depth in our Best ETFs for a Roth IRA guide.
Municipal bond funds (VTEB). As covered in our Best Bond ETFs guide, municipal bond interest is generally exempt from federal income tax, making VTEB one of the few fixed-income options that doesn’t create the ordinary-income tax drag typical of most bond funds — making it a natural fit specifically for a taxable account, where that exemption actually matters (inside an IRA, the exemption provides no additional benefit, since IRA income isn’t taxed annually regardless).
Traditional dividend growth funds (SCHD, VIG, DGRO). These funds’ distributions are largely qualified dividends, making them reasonably tax-efficient even outside a retirement account, as discussed in our Best Dividend ETFs guide — though as covered below, they’re not necessarily the most tax-advantaged place to hold every type of dividend fund.
ETFs That Tend to Create More Tax Drag in a Taxable Account
High-yield, options-income funds (JEPI, JEPQ, QYLD, SPYI). As covered in our Best ETFs for Monthly Dividend Income guide, these funds often generate a substantial share of ordinary income, which is taxed at your higher marginal rate in a taxable account every year — a meaningful reason many investors specifically prioritize holding these inside a Roth or traditional IRA instead. (SPYI’s Section 1256 tax structure is a partial exception, discussed in that guide.)
REIT ETFs. REIT dividends are generally non-qualified, taxed as ordinary income, for structural tax reasons specific to how REITs are required to operate. This is the same reasoning covered in our Roth IRA guide, in reverse: a taxable account is generally the less tax-efficient place to hold a REIT-heavy fund.
Taxable bond funds (BND, AGG, and most Treasury or corporate bond ETFs). Interest income from these funds is generally taxed as ordinary income, every year, regardless of whether you reinvest it — a meaningfully higher tax rate than the qualified dividend treatment most stock ETFs receive. This is a large part of why many investors prioritize holding core bond funds inside tax-advantaged accounts, reserving VTEB for the taxable-account bond allocation instead, as discussed in our Best Bond ETFs guide.
Actively managed funds with high turnover. Frequent buying and selling inside a fund can generate capital gains distributions passed through to all shareholders — including investors who didn’t sell anything that year — creating a less predictable, potentially larger annual tax bill than a comparable low-turnover index fund.
Tax-Loss Harvesting: A Taxable-Account-Specific Strategy
This is a strategy that only applies to taxable accounts, since it involves realizing losses for tax purposes — something with no benefit inside a tax-sheltered IRA. Tax-loss harvesting involves selling a position that’s down in value to realize a capital loss, which can offset capital gains elsewhere in your portfolio (and, within IRS limits, a limited amount of ordinary income), while reinvesting the proceeds in a similar — but not “substantially identical” — investment to maintain your market exposure.
The wash-sale rule is the key constraint. If you sell an ETF at a loss and buy back the same fund (or a “substantially identical” one) within 30 days before or after the sale, the IRS disallows the loss for tax purposes. This is why tax-loss harvesting strategies often involve swapping into a similar-but-not-identical fund (for example, moving from one total-market index fund to a different provider’s total-market index fund tracking a different index) rather than simply repurchasing the same ticker. This is a genuinely detailed area of tax law — a tax professional can help ensure any tax-loss harvesting strategy is executed correctly for your specific situation.
A Sample Taxable-Account-Focused Allocation (For Illustration Only)
The following is a hypothetical example illustrating the asset-location concepts above — not a personalized recommendation, and assuming you also hold tax-advantaged accounts where less tax-efficient funds might be placed instead:
| Fund | Category | Illustrative taxable-account allocation |
|---|---|---|
| VTI or VOO | Core U.S. index | 50% |
| VXUS | International (foreign tax credit benefit) | 25% |
| SCHD | Dividend/quality (qualified dividends) | 15% |
| VTEB | Tax-exempt municipal bonds | 10% |
Your own allocation should reflect your full financial picture — including what you hold in tax-advantaged accounts — rather than copying a generic example like this one.
Why Account Type Matters More Than It Might Seem
It’s worth being direct about the stakes here: for an investor in a higher tax bracket holding a meaningful amount of ordinary-income-generating funds (like REITs, taxable bonds, or JEPI) in a taxable account rather than a tax-advantaged one, the annual tax drag can meaningfully reduce long-term compounding — not because the fund itself performed worse, but because a larger share of its return was lost to taxes every single year rather than being reinvested tax-free. This is the core logic behind “asset location” as a distinct concept from “asset allocation”: what you own matters, but where you hold it can matter almost as much for after-tax returns.
Frequently Asked Questions
Do I need to sell my current holdings to fix a poor asset location setup? Not necessarily, and not automatically. Selling an appreciated position in a taxable account can trigger its own capital gains tax bill, which may outweigh the benefit of relocating the fund. Many investors address asset location gradually — directing new contributions to the more tax-efficient account/fund pairing going forward — rather than immediately restructuring existing holdings. A tax professional can help evaluate whether a one-time reshuffle makes sense for your specific situation.
Is it worth holding bonds in a taxable account at all? It depends on your overall account mix and tax bracket. If you have limited space in tax-advantaged accounts, some taxable bond exposure may be unavoidable — in that case, a tax-exempt option like VTEB is generally more tax-efficient than a standard taxable bond fund like BND, for investors in higher tax brackets specifically.
Does tax-loss harvesting actually save me money, or just delay taxes? Both, depending on execution. It can permanently reduce your tax bill if used to offset gains at a higher rate than you’d eventually pay, or if used against ordinary income within IRS limits. In other cases, it effectively defers tax by lowering your cost basis in the replacement investment, meaning a larger gain (and tax bill) may be realized later when you eventually sell. The overall benefit depends on your specific tax situation and timing.
What’s the difference between qualified and ordinary dividends, in simple terms? Qualified dividends are taxed at the lower long-term capital gains rates (0%, 15%, or 20%). Ordinary (non-qualified) dividends are taxed at your regular marginal income tax rate, which can be significantly higher. Most standard U.S. stock ETF dividends are qualified; REIT dividends and much of the income from options-strategy funds typically are not.
Should I avoid REITs and high-yield funds entirely if I only have a taxable account? Not necessarily — this article isn’t suggesting these funds are bad investments, only that they tend to be less tax-efficient specifically in a taxable account compared to a tax-advantaged one. If a taxable account is your only option, you can still hold these funds; you’d simply want to factor the additional ordinary-income tax treatment into your overall return expectations.
How much does asset location actually matter compared to overall asset allocation? Most financial guidance treats overall asset allocation (how much you hold in stocks vs. bonds vs. other categories) as the more important decision, with asset location (which account holds which fund) as a secondary optimization on top of that foundation. Asset location matters more the larger your taxable account balance and the higher your tax bracket.
This article reflects 2026 IRS tax brackets and general tax principles as of the “last updated” date above and is provided for general informational purposes only — it is not personalized tax or investment advice. Tax rates, thresholds, and rules can change; always verify current figures directly with the IRS or a licensed tax professional before making investment or tax-planning decisions. Read our full Disclaimer and Privacy Policy for more information.