Many are dumping portfolio losers for tax purposes before the year closes out. While the added selling may pressure the pummeled assets even further over the short-term, investors may pick up underperforming assets and related exchange traded funds on the cheap.
For instance, a plunge in oil prices and weakness in the energy sector have caused many to trim energy-related holdings – the Energy Select Sector SPDR (NYSEArca: XLE) has declined 14.4% over the past month.
Consequently, some argue that buying assets that have sold off for tax purposes can be a useful strategy at this time of the year, reports Alex Rosenberg for CNBC.
“I think it’s a very good opportunity if you have a picture of where you think we’re going” in the year ahead, John Stoltzfus, chief market strategist at Oppenheimer, said in the CNBC article.
Specifically, after another decent year in the equities market, investors with capital gains can offset taxes paid on the gains with losses on other investments. For example, XLE is down 15.1% year-to-date, compared to the S&P 500’s 10.5% rise. If investors continue to sell off energy for tax purposes, the assets could continue to experience further downward pressure.
Additionally, West Texas Intermediate crude oil futures are now trading around $56.4 per barrel, almost 50% from its high on the year. The United States Oil Fund (NYSEArca: USO) is down 37.9% year-to-date. [As Oil Plunged in November, Energy ETFs Added Assets]
Nevertheless, tax-related selling will be short-term and could open up opportunities ahead.