Many ETFs remain tax efficient due to in-kind transactions and through long-term holding of components of a market benchmark. However, some ETF holdings and income from taxable bonds can lead to tax headaches, according to the Wall Street Journal.

ETF tax efficiency weakens in funds where distributions come from taxable bond interest. Those income streams are taxable at ordinary-income rates, and the tax treatment of any given ETF is determined by its underlying investments, the article said.

Another example that ETFs aren’t so tax efficient is when funds invest in commodities-future contracts. Gains and losses by the fund are taxable—even if distributions are not paid to shareholders, according to the Wall Street Journal article.

Also, some nonequity ETFs, notably those based on futures contracts, send investors tax information on the more complicated Schedule K-1 form.

For the full story, head over to WSJ.com.