What is an ETF's tax drag?

Tax drag refers to the way taxes reduce your net investment return over time. In taxable accounts, dividends, interest distributions, and realized capital gains can all create tax bills.

Tax drag varies by asset class and structure. Bond ETF distributions are often taxed as ordinary income, while equity ETF dividends may be qualified depending on rules. International ETFs can involve withholding taxes.

To reduce tax drag, investors often match assets to account types (taxable vs retirement), prefer tax-efficient structures where appropriate, and avoid unnecessary turnover. It's not about avoiding taxes entirely, it's about being intentional.