ETF Trends
ETF Trends

One of the big fears investors have is that when they’re holding a losing position, as soon as they sell it, it’s going to turn right back around and start performing well. Dan Dolan, the director of wealth management strategies at Select Sector SPDRs, believes that exchange traded funds (ETFs) offer a perfect opportunity to circumvent those concerns.

"One of the challenges for people is to realize losses in their portfolios. ‘The second I sell my security, it’s going to move higher.’ It’s difficult for people," Dolan says. "The trick is: sell that fund and buy something else that contains that position."

Known as tax-loss harvesting, it involves selling a losing position in order to claim a tax loss, then immediately buying a new index fund or ETF that holds that same position, so you don’t lose your stake if things do indeed make a turnaround. Once you’ve held the new fund for 31 days, you’re free to sell it and re-purchase the old position.

The 31 days is key — that’s to prevent triggering the IRS’s "wash-sale" rule, which states that if you buy a security that is "substantially identical" to the one you just sold, you cannot claim the loss.

The beauty of ETFs, Dolan says, is that for the first time, investors have insight and can see precisely what they’re buying, making tax-loss harvesting a breeze, relatively speaking. "What’s changed here is the ETF structure and their total transparency. With mutual funds, you never really knew what was in there. When you were making trades, you just didn’t know."

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.