WSJ(12/1) Investing In Funds: A Monthly Analysis: -2-

Barclays Global Investors, manager of the iShares line of ETFs, said in November that only two of the 178 iShares ETFs will have capital-gains distributions this year: Cohen & Steers Realty Majors Index Fund, which has an estimated distribution of just under 1% of the fund's net asset value, and iShares Lehman Short Treasury Bond Fund, which has an estimated distribution of less than 0.01%.

"It's just another feather in the cap of ETFs," says Mayflower Advisors' Mr. Glazer.

For investors who would rather buy actively managed funds in hopes of earning market-beating returns, there are tax-managed funds. These actively managed funds try to keep the tax hit low by selling some holdings at a loss to offset gains and also by holding onto stocks longer than the average mutual fund.

It's unclear whether tax-managed funds deliver better returns on average than other funds, says Morningstar's Mr. Davis. But some are attractive. He suggests Vanguard Tax-Managed Growth & Income and Vanguard Tax-Managed Capital Appreciation. "They both try to keep the portfolio characteristics of index funds," such as low turnover, Mr. Davis says. He likes Eaton Vance Tax-Managed Value fund because "it has strong after-tax returns and a sensible approach to value investing."

Mr. Davis also recommends Vanguard Tax-Managed Balanced Fund, one of the few tax-managed mutual funds that also invests in bonds. "It's important to be tax-efficient in bonds, too," he says. Fifty percent of the fund is in tax-free municipal bonds.

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Mr. Mamudi is a reporter in MarketWatch's New York bureau. He can be reached at smamudi@marketwatch.com.