Right now, investors and advisors from all kinds of backgrounds are thinking about tax-loss harvesting. By selling off strategies or holdings that have seen losses this year, investors and advisors alike can reduce their tax bill.
Of course, many of those same investors look to reinvest those proceeds back into the market, with active ETFs an appealing option to consider. While being cognizant of the wash-sale rule, those investors can find a lot to like in active strategies.
Tax-Loss Harvesting Ahead of 2024
Where might investors be looking for tax-loss harvesting opportunities? The likes of high dividend index funds and intermediate core funds provide key examples. The former category has faced headwinds in 2023, with those indexes more overweight to cyclical areas like energy and utilities that struggled this year. An active approach could have avoided such a big weight to those areas.
See more: “Active ETFs Continue Market-Share Grab“
What’s more, tax-loss harvesting with active ETFs offers inherent benefits compared to mutual funds, for example. ETFs are much more tax efficient, with a unique create/redeem mechanism. Because ETFs normally generate fewer capital gains distributions, that can reduce the overall tax bill relative to mutual funds, as well. Consider the graph below from T. Rowe Price, using Morningstar Direct data:
Active ETFs offer tax advantages via their reduced tendency to provide capital gains events compared to mutual funds.
Active ETFs also merit a look for tax-loss harvesting given their strong year so far in 2023. Actives have taken in significant flows in 2023 relative to their AUM as investors have sought out active ETFs for their adaptability. In a year that saw rapidly rising rates, a mini bank crisis, and growing geopolitical risk, active ETFs have offered seasoned management and flexibility that has appealed.
Taken together, for investors looking to tax-loss-harvest various losses this year, active ETFs provide a strong option. Should they carry their momentum this year into 2024, they could appeal to an even broader audience.
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