As advisors look to tax-loss harvesting to enhance clients’ overall investment returns, now is the ideal time to reallocate emerging markets exposure to an active ETF.
With the end of the year approaching quickly, tax-loss harvesting is becoming a large focus among advisors and clients. Tax-loss harvesting can help lower clients’ tax bills and enhance overall investment returns by offsetting realized capital gains with realized capital losses. The emerging markets sleeve of a portfolio is an ideal place to start.
While passive strategies have many strong use cases, certain asset classes, like emerging markets, are more suitable for active management because their benchmarks fail to represent the investable opportunities that exist, according to David Dali, head of portfolio strategy at Matthews Asia.
“Emerging market benchmarks also cannot vet quality and corporate governance and they don’t include world class companies doing business within emerging market economies if they are domiciled outside those economies,” Dali wrote in an insight on November 28. “Perhaps most topically, active managers in emerging markets, unlike benchmark-tracking strategies, can be cognizant of geo-politics and government policy and take steps to mitigate the impact of both.”
Three active strategies to consider when tax-loss harvesting include the Matthews Emerging Markets Equity Active ETF (MEM), the Matthews Asia Innovators Active ETF (MINV), and the Matthews China Active ETF (MCH).
For investors who are unhappy with the overall shortcomings of an index ETF and want to be exposed to opportunities not only in Asia but also in countries like Brazil, MEM might be an ideal fit; however, investors who want more concentrated exposure to China, specifically, might want to consider MCH. MCH is more forward-thinking in terms of how it looks about very complex and large geography, according to John Paul Lech, portfolio manager at Matthews Asia. For those who want a more thematic and concentrated approach around something like innovation, MINV would be a good fit.
Investors looking to get out of the ARK Innovation ETF (ARKK) or other U.S. innovation-focused strategies may also find value in MINV, as it focuses on innovation, aiming to invest in both old and new companies in science-related and technology-related sectors while also screening for sustainable growth. The overlap between ARKK and MINV is minimal, presenting an ideal opportunity for tax-loss harvesting.
For more news, information, and analysis, visit the Emerging Markets Channel.