By Solomon G. Teller, CFA, Chief Investment Strategist, Green Harvest Asset Management
Mutual funds collectively made $367 billion of taxable capital gains distributions in 2020, totaling just over $3 trillion of distributions in the last 10 years.1 The vast majority of these distributions were reinvested back into the mutual funds. In other words, even though mutual fund investors did not take advantage of the liquidity opportunity, those distributions were still taxable.2
Fortunately, investors looking to improve their bottom line, i.e., after-tax returns, have a number of available options. For instance, they can transition mutual fund assets into tax-efficient Exchange Traded Funds (ETFs) and even tax-beneficial strategies.3 Or, they can continue to hold their existing fund positions but add tax-beneficial strategies along side those mutual funds that may offset additional mutual fund capital gain distributions.
In either case, the goal is to stay invested and keep more, so why tolerate unnecessary taxation? Talk to us to learn more.
1 These distributions stem from realized gains that occur within the mutual funds themselves when underlying securities are sold at a profit. Neither mutual funds nor ETFs can pass through to investors any realized losses that accrue within their portfolios.
2 Excluding assets held in IRAs and other tax-deferred accounts. Nearly half of mutual fund assets over the last five years were in taxable accounts.
3 In contrast, many ETFs do not have to distribute realized capital gains thanks to their creation redemption process.
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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