By Solomon G. Teller, CFA, Chief Investment Strategist, Green Harvest Asset Management
We’ve recently discussed some of the advantages of using ETFs to capture tax benefits here, here, and here. In addition, last week’s market activity highlighted another feature: the ability to capture tax benefits for the same account repeatedly through different ETFs.
Last week, Green Harvest allocated a new account to the U.S. Equity strategy. ETFs of every sector were selected and purchased in appropriate weights to represent the overall U.S. Equity market. As stocks fell, Green Harvest swapped ETFs in several sectors for this account. In one sector, not one, but two different swaps were implemented – see chart. The first swap on Monday the 16th captured a 2.6% loss for investors. When Energy stocks declined further, a second swap was performed on Thursday the 19th to capture an additional loss, this time in excess of 6%.1
Nobody knows where Energy stocks or the market as a whole will go from here. Investors can, however, put in place a robust after-tax-oriented investment process that can both aim to grow their wealth and help them to keep more of it.
1 Some direct indexers offer a different solution using individual stocks. They may sell one or more stocks that have declined and purchase similar stocks in the index to keep exposure. This might offer a similar benefit assuming the stocks have sufficiently similar characteristics and return expectations. However, to repeat this process requires a sufficient number of stocks. For instance, in the Energy sector, two companies: Exxon Mobil and Chevron, together represent 45% of the sector, a challenge for executing multiple substitutes.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when the portfolio is liquidated. Current performance may be higher or lower than that quoted. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.
GHAM does not provide tax advice. Although GHAM does not employ a Certified Public Accountant on its staff, we have, and continue to work with outside accounting firms and outside tax counsel that provide ongoing guidance and updates on all relevant tax law. Federal, state and local tax laws are subject to change. GHAM is not responsible for providing clients updates on any changes in tax laws, rules or statutes.
Reasons to harvest capital losses, sources of capital gains and the suggestion that mutual funds distribute capital gains are for example purposes only and not meant to be tax, estate planning or investment advice in any form or for any specific client.
All performance and estimates of strategy performance, after tax alpha, after tax alpha opportunities and other performance figures are derived from data provided from multiple third-party sources. All estimates were created with the benefit of hindsight and may not be achieved in a live account. The data received by GHAM is unaudited and its reliability and accuracy is not guaranteed.
The availability of tax alpha is highly dependent upon the initial date and time of investment as well as market direction and security volatility during the investment period. Tax loss harvesting outcomes may vary greatly for clients who invest on different days, weeks, months and all other time periods.
All estimates of past returns of broad, narrow, sector, country, regional or other indices do not include the impact of advisor fees, unless specifically indicated. Past performance and volatility figures should not be relied upon as an indicator of future performance or volatility.
This material is not intended to be relied upon as legal, investment or tax advice in any form or for any specific client. The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person. All investments carry a certain degree of risk, and there is no assurance that an investment will perform as expected over any period of time.
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