egyhazy:

  Redemptions and creations are performed 'in-kind' which allows the ETF and indirectly, the VG fund, to raise the cost-basis and reduce capital gains.  If you want to know more, you have to understand the structure of ETFs.  In the case of Vanguard, the ETF is a share class of the mutual fund so the mutual fund shares in this benefit.

Hi egyhazy,

If you don't mind, please point me to something that shows this. I can't just accept Vanguard can flush capital gains to the ETF holder and reduce the tax efficiency of the ETF. If that is the case, I wouldn't buy a Vanguard ETF.

I don't know when/if I'll get back to you this weekend, as I am headed to the coast. I should be back Sunday or Monday. I may get to a computer while down there, but I may not.

Chin