ETFs have always been known for their tax-efficiency, but a recent report by Lipper has placed uncertainty over whether they have recently lived up to their reputation, according to the Financial Times.

The report said that from 1995 through 1999, ETFs performed as they were supposed to. However over the past five years ETFs have not been tax efficient.

Much of this has to do with the bear market of 2000-2002, during which time mutual funds produced large capital losses that could not be used to counterbalance capital gains until the year they were recognized, the Financial Times reports.

Mutual funds passed through their lowest distribution period in 2001-2004, thus enabling them to compete on tax efficiency, and making ETFs appear to be less tax efficient than they are in reality, according to Tom Roseen, a senior research analyst at Lipper.

Income distributions also have a direct impact on the fall of ETF tax efficiency. "If the market goes back to go-go years - I think it will - ETFs will shine again, said Roseen. "They are still one of the most tax efficient products around."

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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