It’s been a rough year for bond markets, with 2022 shaping up to be the worst period for fixed income since at least 1926 (if not the late 18th Century). With markets continuing to be volatile, many investors are bracing for annual investment losses.
The one upside, however, is that investors can write off these losses during tax time through a process known as tax loss harvesting. Tax loss harvesting is when an investor sells underperforming assets at a loss and then uses those losses to offset capital gains made from other investments and/or ordinary income.
If losses exceed gains, or if only losses are incurred, then up to $3,000 can be used to offset ordinary income in the year. Any amount above $3,000 can be carried forward for use in future years.
Tax loss harvesting can come in handy during volatile markets. Market turbulence can be a perfect time to reassess a portfolio. Capitalizing on losses can help offset future gains while also offering the chance to rebalance.
“Investment losses can be hard to swallow, but tax-loss harvesting lets you take the losses of one investment to offset the gains of another,” according to American Century Investments. “Of course, taxes alone shouldn’t drive investment decisions. But harvesting losses in concert with your overall investment plan could help with tax planning when you are rebalancing your portfolio.”
Bond funds like the American Century Diversified Corporate Bond ETF (KORP) could be a good place for investors seeking tax loss harvesting options. The actively managed KORP offers investment-grade quality debt holdings. The fund seeks current income by emphasizing investment-grade debt while dynamically allocating a portion of the portfolio to high yield.
According to its product website, KORP creates a systematically managed portfolio that integrates fundamental and quantitative expertise that:
- Adjusts investment-grade and high-yield components to balance interest rate and credit risk
- Screens individual credits to seek those with sound fundamentals, reduced default risk, attractive valuations, and liquidity
- Adjusts industry and duration exposures as risks and opportunities emerge
KORP has outperformed several other competing investment-grade corporate bond ETFs year-to-date, including the Vanguard Intermediate-Term Corporate Bond ETF (VCIT), the iShares Intermediate-Term Corporate Bond ETF (IGIB), and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).
“Most bond funds have seen a price decline this year,” said Ed Rosenberg, senior vice president and head of ETFs at American Century Investments. “Most people don’t think about bond funds as a place to look for tax loss harvesting.”
KORP has an expense ratio of 0.29%.
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