As the Fall gets into gear, more and more investors and advisors will be considering their end of year tax bills. While markets saw plenty of uncertainty and upheaval so far in 2025, many will be facing significant tax implications on their gains. Tax loss harvesting presents one option to decrease that burden, but looking longer term, investors and advisors may want to consider structural changes to lower their future portfolio tax impacts. Active ETFs may be able to help.
See more: When Market Vol Turns Things Upside Down, Trust Active Investing
How do active ETFs reduce portfolio tax impacts? T. Rowe Price leaders dove into the topic in a recent piece. T. Rowe Price Head of ETF Solutions Kevin Signorelli and Head of ETF Specialists Chris Murphy spoke to the ways in which ETFs themselves can reduce tax impacts as well as provide strong vehicles for tax loss harvesting.
Navigating Portfolio Tax Impact in Active ETFs
First and foremost, as many investors – but not all – may know, ETFs see fewer taxable events compared to mutual funds. That can provide a baseline reduction in tax impacts for those with a majority of their assets in ETFs compared to mutual funds. ETFs provide that benefit thanks to their creation / redemption mechanism, which creates a degree of separation between investors compared to what mutual fund investors experience.
What’s more, as Signorelli and Murphy point out, active ETFs specifically can frequently operate more efficiently than mutual funds. That can lead to those ETFs charging less for their services, reducing bills even more.
Finally, active ETFs can also provide a strong option for tax loss harvesting. A classic option to reduce portfolio tax impact, and with tax loss harvesting season in full swing, active may appeal. Investors of all profiles may look at underperforming passive equity funds and see opportunity to move into strategies that have performed well, like active international equities. Even domestically, investors could move from a broad equities allocation used for tech exposure to a true, active tech ETF.
Looking ahead, the continued growth of active ETFs presents a widening opportunity set for investors. With many looking more and more at their portfolio tax impact, active ETFs can help.
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