Tax Loss Harvesting Opportunities Within Small-Caps | ETF Trends

Small-caps have taken an outsized hit this year as recession risk rises under an aggressively tightening Federal Reserve monetary policy regime. Advisors evaluating their portfolios for tax loss harvesting opportunities in the last quarter of the year have options within small-caps.

With a strong dollar expected to gouge into the bottom line of multinational companies while the Federal Reserve continues its aggressive rate hiking regime alongside quantitative tightening, and with inflation continuing to cut into margins, it could be a challenging fourth quarter for all equities, but particularly for large-caps that have multinational exposures. Small-caps are already priced at a steep discount, offering an attractive entry point or a tax loss harvesting opportunity into a risk-managed option.

Losses within equities this year could be captured via tax loss harvesting, a practice whereby the investment is sold off at a loss, and those losses can then be applied to taxes owed on investments making a profit. In other words, capital losses can offset capital gains, though tax loss harvesting is a tax deferral, not a cancellation.

Advisors and investors selling an investment for tax loss harvesting purposes but still wishing to maintain their exposure need to be aware of the wash-sale rule, which prevents repurchasing of the identical security or investment sold for 60 days around the sale (30 days before and 30 days after), or else the capital loss will not be applicable towards offsetting capital gains. The way around this is to purchase a similar fund that still provides the desired exposure but is different enough to avoid triggering the wash-sale rule.

In the case of the Russell 2000®, if an investor had an allocation to a broad-based ETF that covered the Russell 2000® and they wished to capture those capital losses to offset any gains they might have this year, they could sell the broad-based ETF at a loss and move into a fund that offered potentially better volatility mitigation within the Russell 2000® for the current market of uncertainty while also providing monthly income opportunities.

Tax Loss Harvesting Small-Caps With NTKI

A tax loss strategy for advisors looking for investment opportunities within equities for their clients is to move into the Nationwide Russell 2000® Risk-Managed Income ETF (NTKI). This actively managed fund invests in a portfolio of securities that replicates the Russell 2000® Index. The Russell 2000® tracks approximately 2,000 U.S. small-cap companies.

The Russell 2000® was down 23.82% as of 10/11/2022, while the broader S&P 500® Index, which tracks the 500 top U.S.-listed companies, was down 23.76% over the same period. There is tax loss harvesting potential in capturing losses in the broad S&P 500® that could feel outsized effects of a strong dollar and inflation in the fourth quarter and moving to small-caps that are already steeply discounted on recession risks or moving from a general investment in the Russell 2000® to a risk-managed investment within the same index.

Image source: Harvest Volatility Management

NTKI has demonstrated better performance within small caps than the Russell 2000®, outperforming the broader index by over 8% as of the end of the third quarter. NTKI also has a distribution yield of 7.01% as of June 30, 2022. (Click this link to see the fact sheet with standardized performance and 30-day SEC yield.)

The fund utilizes an options collar in seeking to generate monthly income. A collar strategy is a strategy that entails holding shares of underlying security while simultaneously buying protective put options as well as writing calls for the same security. A put option gives its owner the right, but not the obligation, to sell the underlying asset at a specific price on a specific day. In contrast, a call option gives its owner the right but not the obligation to buy the asset instead.

The options collar is intended to reduce the fund’s volatility, generate monthly income, and provide a measure of downside protection.

For more news, information, and strategy, visit our Retirement Income Channel.


This article was prepared as part of Nationwide’s paid sponsorship of VettaFi.

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The NTKI Prospectus may be accessed at: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NTKI/index.php

Call 1-800-617-0004 to request a summary prospectus and/or a prospectus, or download prospectuses at etf.nationwidefinancial.com. These prospectuses outline investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.

The results shown represent past performance; past performance does not guarantee future results. Current performance may be lower or higher than the past performance shown, which does not guarantee future results. Share price, principal value and return will vary, and you may have a gain or a loss when you sell your shares. Returns for periods less than one year are not annualized. Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. To obtain the most recent month-end performance, go to etf.nationwidefinancial.com or call 1-877-893-1830.

Click this link for the funds’ Standardized performance and 30-day SEC yield.

KEY RISKS: The Nationwide Nasdaq-100® Risk-Managed Income ETF, Nationwide S&P 500® Risk-Managed Income ETF, Nationwide Dow Jones® Risk-Managed Income ETF, and Nationwide Russell 2000® Risk-Managed Income ETF (collectively, the “Risk-Managed Income ETFs”) are subject to the risks of investing in equity securities, including tracking stock (a class of common stock that “tracks” the performance of a unit or division within a larger company). A tracking stock’s value may decline even if the larger company’s stock increases in value. The Risk-Managed Income ETFs are subject to the risks of investing in foreign securities (currency fluctuations, political risks, differences in accounting and limited availability of information, all of which are magnified in emerging markets).

The Risk-Managed Income ETFs may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Risk-Managed Income ETFs employ a collared options strategy (using call and put options is speculative and can lead to losses because of adverse movements in the price or value of the reference asset). The success of the Risk-Managed Income ETFs’ investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties. The Risk-Managed Income ETFs expect to invest a portion of their assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index.

The Risk-Managed Income ETFs frequently may buy and sell portfolio securities and other assets to rebalance its exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Risk-Managed Income ETFs and greater tax liabilities for shareholders. The Risk-Managed Income ETFs may concentrate on specific sectors or industries, subjecting them to greater volatility than that of other ETFs. The Risk-Managed Income ETFs may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Funds’ value and total return. Although the Risk-Managed Income ETFs intend to invest in a variety of securities and instruments, the Risk-Managed Income ETFs will be considered non-diversified.

Additional risks include: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.

The Fund expects to invest a portion of its assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index. The Fund frequently may buy and sell portfolio securities and other assets to rebalance its exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Fund and greater tax liabilities for shareholders. The Fund may concentrate on specific sectors or industries, subjecting it to greater volatility than that of other ETFs. The Fund may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Fund’s value and total return. Although the Fund intends to invest in a variety of securities and instruments, the Fund will be considered non-diversified. Additional Fund risk includes: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.

Russell 2000® Index: An unmanaged index that measures the performance of the small-capitalization segment of the U.S. equity universe.

FTSE Russell (“Russell”) is the Index Provider for the Russell 2000® Index (“Russell 2000®” or the “Index”). Russell is not affiliated with the Fund, Nationwide Fund Advisors, the Distributor nor any of their respective affiliates. Nationwide Fund Advisors has entered into a license agreement with Russell to use the Russell 2000®.

The Nationwide Russell 2000® Risk-Managed Income ETF (“NTKI”) has been developed solely by Nationwide Fund Advisors. NTKI is not in any way connected to nor sponsored, endorsed, sold or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). FTSE Russell is a trading name of certain of the LSE Group companies. All rights in the Russell 2000® vest in the relevant LSE Group company which owns the Index. “Russell®” is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license. The Index is calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. The LSE Group does not accept any liability whatsoever to any person arising out of (a) the use of reliance on or any error in the Index or (b) investment in or operation of NTKI. The LSE Group makes no claim, prediction, warranty nor representation either as to the results to be obtained from NTKI or the suitability of the Index for the purpose to which it is being put by Nationwide Fund Advisors.

S&P 500® Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries; gives a broad look at the U.S. equities market and those companies’ stock price performance.

The S&P 500® Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and has been licensed for use by Nationwide Fund Advisors. Standard & Poor’s®, S&P®, and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Nationwide Fund Advisors. The Nationwide S&P 500® Risk-Managed Income ETF (“NSPI”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P or their respective affiliates, and none of such parties makes any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions or interruptions of the S&P 500® Index.

Market index performance is provided by a third-party source Nationwide Funds Group deems to be reliable (Morningstar and U.S. Bank). Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses have been reflected. Individuals cannot invest directly in an index.

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