With the election in the rear view, and a new year ahead, the time may be now to refresh portfolios. While the S&P 500 has risen 23% YTD, not all investments, of course, have done well. That presents an opportunity for tax loss harvesting, selling off investments at a loss to offset certain tax burdens. Many investors often reinvest those assets, and with ETFs on the rise for another year, it may be time to look to the wrapper’s tax advantages.
See more: 5 ETFs For When Market Volatility Spikes
How exactly does tax loss harvesting work? According to Investopedia, the practice involves timely selling of securities at a loss. Doing so helps investors “offset the amount of capital gains tax owed from selling profitable assets.” As long as investors avoid the so-called “Wash-Sale” rule, which forbids reinvesting tax-loss harvested gains into substantially similar securities, they are safe to engage in the practice.
Appeal of ETFs
ETFs can provide an appealing landing pad for reinvesting assets, especially for those tax loss harvesting from mutual funds. ETFs see fewer taxable events than mutual funds do, owing to ETFs’ “creation/redemption” mechanism. That can make them an appealing long-term play in mitigating tax impacts.
What’s more, ETFs are also a burgeoning category overall. As of August, new ETFs were launching at a record pace. From equities to bonds, ETFs’ tradability, transparency, and tax efficiency are picking up significant interest. Whether tax loss harvesting out of mutual funds or ETFs, ETFs themselves can present some notable upside. Active and passive ETFs, alike, can offer an upside for a brightening, but still uncertain, U.S. market hoping for a soft landing.
For more news, information, and analysis, visit the ETF Investing Channel.
Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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