Move Into Active ETFs When Tax-Loss Harvesting EM Losses

As advisors look at options for tax-loss harvesting EM losses, ditching passive funds in favor of active ETFs may be worth consideration.

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.

Many emerging markets funds have seen significant losses this year, making it a great area to harvest losses and move into something better – particularly, an active ETF, which couples active management with the favorable tax benefits of ETFs.

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 geopolitics 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) 

MEM invests in emerging market companies with perceived sustainable growth potential, capitalizing on consumption and innovation trends. The fund utilizes an all-cap, company-first approach, which emphasizes fundamental research over top-down country or sector allocation.  

MINV, a high-conviction, concentrated equity portfolio, invests in innovative companies in Asia ex-Japan, capitalizing on the new economy and rising disposable income in the region. MINV is worth consideration for investors who want a more thematic and concentrated approach.  

MCH is a high-conviction equity portfolio that seeks companies benefiting from China’s domestic consumption. MCH uses an all-cap fundamental GARP approach driven by proprietary research and combines long-term core holdings with more opportunistic ideas to provide consistency through cycles.

For more news, information, and analysis, visit the Emerging Markets Channel.