Evaluate ESGB for Tax Loss Harvest Bond Opportunities | ETF Trends

There are just a few weeks remain in 2022, meaning that now is as good of a time as any for investors to consider tax loss harvesting opportunities, of which there are plenty, including ESGB.

Thanks to six interest rate increases by the Federal Reserve, the realm of fixed income exchange traded funds is overflowing with tax loss harvesting opportunities. In fact, this could be an opportune time for investors to consider shifting away from standard aggregate bond strategies to environmental, social, and governance (ESG) fixed income exchange traded funds.

That group includes the IQ MacKay ESG Core Plus Bond ETF (ESGB). In fact, ESGB could be one of the ideal ETFs for investors to tax loss harvest with because an essential element in tax loss harvesting is moving out of one security and into another that’s comparable. The switch from a traditional aggregate bond fund to an ETF such as ESGB checks that box.

“It’s clear that buying the exact same individual bond, mutual fund, or exchange-traded fund (ETF) meets the definition of a substantially identical security, but that’s where the clarity ends. The IRS doesn’t clarify, for example, whether two individual bonds from the same issuer that have different maturities, coupons, yields, and/or ranking in the capital structure would be considered substantially identical,” noted Cooper Howard of Charles Schwab.

Tax loss harvesting or not, investors are waking up to the ESGB story. The ETF, which debuted in June 2021, has $248.7 million in assets under management, as of November 23. Interestingly, nearly $239 million of that sum flowed into the ETF just this year. Maybe there are signs of investors tax loss harvesting with ESGB because the ETF’s quarter-to-date inflows are close to $66 million.

Tax loss harvesting with ESGB makes sense for investors who not only want to dump lagging aggregate bond strategies, but those who are seeking ESG exposure and a move up the credit quality spectrum.

“We also believe that it makes sense to move up in credit quality and tax loss harvesting can provide an opportunity to sell lower-rated securities at a loss and move up in credit quality while potentially saving on taxes,” added Howard. “From a tactical standpoint, it may make sense to reduce your holdings in lower-rated investments, take the capital loss for tax purposes, and reinvest in a higher-rated security. Given the large changes in interest rates this year, it may be the case that the new higher-rated bond yields more today than the original lower-rated bond.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.