The recession that many had predicted for the U.S. this year has thus far not happened. In fact, the S&P 500 is up 18% year to date as of November 17. But as we all know, nothing is ever that simple. After all, much of this rebounding market is due to a small group of big gainers.
This means there are still opportunities to realize tax losses that can be used to offset gains elsewhere. Thanks to the Fed’s rate hikes lowering bond prices, investors may find tax-loss harvesting opportunities within their fixed income portfolios. In fact, there may be more opportunities within bond funds than equity holdings.
See more: Loyal ETF Investors Rewarded With No Tax Bills
“Long-term bonds and bond funds look especially ripe for tax-loss selling,” wrote Morningstar’s Christine Benz. The average long-term bond mutual fund has lost 9% on an annualized basis over the past three years. Long government funds, meanwhile, have lost an average of 15% over the same period.
And while intermediate bonds haven’t experienced significant declines, they’ve still seen declines. Over the last three years, both intermediate government and core bond funds recorded annualized losses of 5%.
“With yields surging, being smart about asset placement now matters more than it did when yields were exceptionally low,” Benz added.
ETFs as Tax-Loss Harvesting Vehicles
Vanguard offers several fixed income ETFs that investors may consider for tax-loss harvesting opportunities. “ETFs can be smart choices when considering tax-loss harvesting decisions,” according to Vanguard. Investors “can still sell an investment and then buy an exchange-traded fund (ETF) that is highly correlated to the original.”
This includes long-term funds like the Vanguard Long-Term Corporate Bond ETF (VCLT ) and the Vanguard Long-Term Treasury ETF (VGLT ). For investors on the middle end of the duration curve seeking tax-loss harvesting opportunities, the Vanguard Intermediate-Term Corporate Bond ETF (VCIT ) and the Vanguard Intermediate-Term Treasury ETF (VGIT ) could be what they’re looking for.
“Compared to mutual funds, ETFs provide greater liquidity, which can help avoid triggering the wash-sale rule,” Vanguard added. “Mutual funds also may charge fees for short-term trading.”
For more news, information, and analysis, visit the Fixed Income Channel.
