Tax Cost Ratio

Tax Cost Ratio measures the percentage by which an investment’s annualized return is reduced due to taxes on distributions. Some investments, such as mutual funds, frequently distribute stock dividends, bond dividends, and capital gains to their shareholders, who are then required to pay taxes on those distributions in the year they are received.

It’s an important metric to evaluate because it provides a clear indication of how much of an investment’s annualized returns will be reduced by taxation. For example, if an investment had a 2% tax cost ratio over a 3-year period, it means investors lost an average of 2% to taxes on distributions each year. If the fund had a 3-year annualized pre-tax return of 10%, an investor would have taken home roughly 8% on an after-tax basis.

Tax cost ratios typically fall within the range of 0-5%. A 0% tax cost ratio means the fund had no taxable distributions, while a 5% ratio suggests the fund was less tax efficient. Tax cost ratio metrics are available for different time periods for the following security types on YCharts: mutual funds, ETFs, closed-end funds (CEFs), and portfolios.