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Growth of unrealized gains in tax-managed index funds
Right now, the unrealized appreciation of Vanguard Tax-Managed   Small-Cap Fund Admiral Shares is 28.4% of NAV. As long as the fund   delivers decent returns over the long term, is there anything stopping   this amount from ballooning to, say, 90% fifty years hence? I'd have a heck of a time imagining how this grows to that high a number realistically.  The inflows and outflows of the fund are a bigger question along with what kinds of changes are there to capital gains that may make the fund try to hold onto the stocks longer and minimize the tax burden. If this happens, won't new investors be scared away by the prospect of   owing taxes on these gains? For example, a financial crisis or a   superior new investment technology could lead investors to dump their   shares of tax-managed index funds, triggering enormous capital-gains   distributions. And if new investors are scared away, won't the fund be   forced to sell its assets to cover redemptions (even if there is no   disruptive event), leading to larger capital-gains distributions than   in the past? Possibly but you have more than a few assumptions in this to my mind that I wonder how well are you estimating the probability of this happening. Finally, do ETFs avoid this problem (assuming it is a problem)? Yes, ETFs have creation and redemption units that allow for in-kind transactions and thus there isn't a selling of the stock.  However, if one wants to pull out various unlikely scenarios then there is the potential of the market being shut down for an extended period of time that would prevent one from selling shares of the ETF that may or may not be as applicable as open-end fund shares. I would however suggest researching if there are hybrid funds that mix open-end fund shares with ETF shares which could be an alternative here.