This year has not been kind to emerging markets as the investment category has significantly lagged developed markets due to weakness in the commodities market and expected rate hike from the Federal Reserve. Consequently, emerging market equity and debt benchmarks have fallen off as net inflows from overseas investors dipped from $285 billion in 2014 to $66 billion this year, with ETF investors pulling $2.8 billion from Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and $7.0 from iShares MSCI Emerging Markets ETF (NYSEArca: EEM) this year. [2015’s Black Sheep ETFs]
However, when implementing a tax-loss strategy, investors need to be aware of the “wash-sale” rule. Investors cannot claim the loss if they buy a “substantially identical” security within 30 days of the sale. The IRS, though, hasn’t provided a hard definition of “substantially identical,” and investors should consult a tax advisor about the wash-sale rule.
As a way to meet the regulatory rules, many investors utilize the tax-loss harvesting strategy featuring ETFs that track the same market segment but pegged to different indices.
For example, GEM tries to reflect the performance of the Goldman Sachs ActiveBeta Emerging Markets Equity Index, which includes exposure to developing market stocks but selects components based on good value, strong momentum, high quality and low volatility.
For more information on ETF flows, visit our ETF Performance Reports category.
Max Chen contributed to this article.