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.
“What you want to take away from this is not only a bearish bias in underperforming commodities towards the end of the year, but also the late holiday gift it leaves,” Bill Baruch of iiTrader said in the article.
Moreover, Baruch argues that the sold off assets may also experience a “bullish bias to start the year” as fund managers reallocate into underperforming assets. [Why This Energy ETF Could Surprise]
Jeff Saut of Raymond James believes that investors could take advantage of the oil wekaness with midstream master limited partnerships during the tax-loss selling season. Additionally, Stoltzfus points to downstream oil companies, or firms that process and sell oil and gas products, such as Chevron (NYSE: CVX) and Valero (NYSE: VLO).
ETF investors can choose from a number of broad MLP-related ETFs. For instance, the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) and the Alerian MLP ETF (NYSEArca: AMLP) are the two largest MLP-related exchange traded products on the market. AMJ tracks the Alerian MLP Index, which includes 50 of the largest MLPs, while AMLP tracks the Alerian MLP Infrastructure Index, which includes 25 pipeline and processing MLPs. [How MLP ETFs Work]
Broad market capitalization-weighted energy ETFs include a heavy position in Chevron. XLE has a 13.4% position in CVX, along with a 2.3% tilt toward VLO.
For more information on the energy sector, visit our energy category.