Short answer is yes there is a potential tax impact while rebalancing, but this is often a benefit due to the opportunities it presents to tax loss harvest, which we enable on accounts that are sufficiently diversified.
With an ETF there is still a tax impact it's just shifted to the holder of the instrument who gets to decide when to sell or buy.
With an ETF, I can hold it for 20 years, and the value keeps compounding.
However, with this other method, each annual rebalance takes value out of the account. Unless I'm sure I can outperform an ETF with this active rebalancing, this tool would have worse outcomes.
If I am trying to optimize my portfolio, it seems I should choose ETFs that are composed of the equities I want and use current income to attempt to rebalance (e.g. purchase underperforming equities, instead of selling high performing equities to buy underperforming ones).
With an ETF there is still a tax impact it's just shifted to the holder of the instrument who gets to decide when to sell or buy.