Mutual funds and ETFs are quite different. Let us count the ways

When mutual funds sell investments throughout the year, any profits from those transactions get passed on to the fund’s shareholders via capital gains distributions.

If your mutual funds are in a taxable account — i.e., a brokerage account — you’ll owe taxes on the gains for the year they were distributed.

However, if you hold mutual funds in a tax-advantaged account — i.e., 401(k) plan or an individual retirement account — you don’t need to worry about it because gains are deferred until you withdraw money in retirement.

“If you’re a long-term investor, it’s not a big deal,” McAleer said. “It’s the short-term investor’s dilemma.”

Generally speaking, capital gains are less likely with ETFs, due to how they are constructed and how they are traded. This makes them generally more tax-efficient.