ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Direct Indexing
    • Disruptive Technology
    • Energy Infrastructure
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Financial Literacy
    • Fixed Income
    • Gold/Silver/Critical Minerals
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Market Insights
    • Modern Alpha
    • Multifactor
    • Night Effect
    • Portfolio Strategies
    • Responsible Investing
    • Retirement Income
    • Richard Bernstein Advisors
    • Tax Efficient Income
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
  • Research
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF of the Week Podcast
    • ETF Prime Podcast
    • Video
  • Company
    • About VettaFi
    • Get VettaFi’ed
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Core Strategies Channel
  2. How to Use Tax-Loss Harvesting to Maximize Returns
Core Strategies Channel
Share

How to Use Tax-Loss Harvesting to Maximize Returns

Karrie GordonDec 07, 2021
2021-12-07

The end of the year generally sees a flurry of activity within the ETF space as advisors and investors move in and out of funds while looking to maximize their tax-loss harvesting. This year is proving to be no different, and the Wall Street Journal ran some simulations to discover just how much can be saved within portfolios utilizing this method.

Tax-loss harvesting is the practice of selling assets and stocks whose value has fallen and using those losses to offset the tax liability attached to capital gains. This method reduces the overall tax burden of a portfolio come tax time, and at the volatile close of a year that has seen record equity performances, the potential to capture greater losses has ETF trades on the rise for the month.

Through simulations that covered a variety of portfolio sizes, tax brackets, and holding periods, it was discovered that investors with a capital gains tax rate of 25% can increase their portfolios’ annual returns by 1.1–1.42% by using tax-loss harvesting. These numbers are estimated based on steady market performance; in the midst of volatility, the potential is greater because stocks could potentially lose more, thus offering greater balance for capital gains.

Higher returns are also possible when capital gains tax rates are higher, due to an investor selling short-term holdings within their portfolio or because of higher interest rates from the government.

The simulations were built using data going back to the 1930s from the NYSE, Nasdaq, and the old American Stock Exchange. Portfolios were created that were value weighted to duplicate the typical investment practices of most investors and were run through a variety of market conditions.

The 1.1% increase was based on conservative estimates, and the 1.42% increase was based on maximum tax-loss harvesting opportunities utilized. Both stem from steady market conditions, but in down years of market performance the losses harvested could amount to as much as a 3.21% return increase.

In years of above average market volatility, investors could gain 2.22% on average, and low-volatility years yielded just 0.95% in returns gained. All were based on a tax rate of 25%.

American Century Investments underscores that times of volatility provide excellent opportunities for tax-loss harvesting in a paper. ETFs are known for their tax efficiency and trading flexibility, and for these reasons they make excellent vehicles for tax-loss harvesting.

When considering tax-loss harvesting, it’s important to understand the wash sale rules, which basically mean that an investor can’t sell a security and then turn around and either buy it back or buy a “substantially identical” one within 30 days without incurring tax penalties, according to American Century.

“Something to watch: the tax loss harvesting flows usually pump up December beyond monthly average,” tweeted Erich Balchunas, senior ETF analyst for Bloomberg. Balchunas went on to predict that seeing $6 billion per day in flows is not unthinkable when driven by tax-loss harvesting movement.

For more news, information, and strategy, visit the Core Strategies Channel.

Loading Articles...
Our Sites
  • VettaFi
  • Advisor Perspectives
  • ETF Trends
Tools
  • ETF Screener
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Database Pro
More Tools
  • Financial Advisor & RIA Center
Explore ETFs
  • ETF News
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Information
  • Contact Us
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X