The lower costs associated with ETFs are the result of:
ETFs are structured for tax efficiency. With regard to capital gains taxes, they tend to be lower than other managed funds since trading/turnover within the ETF itself is relatively low. Additionally, investors only realize any potential capital gains when they sell the ETF itself.
Where dividends are concerned, the tax situation differs depending on whether the dividend being issued by the ETF is considered qualified or unqualified. For a dividend to be considered qualified, the ETF needs to be held by an investor for at least 60 days prior to the dividend payout date. The tax rate for qualified dividends then varies between 5%–15%, depending on the investor’s income tax rate. For unqualified dividends, investors are simply taxed at their current income tax rate.