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With just over two months remaining in 2023, now is an appropriate time for registered investment advisors to consider tax-loss harvesting strategies within client portfolios.
As a quick refresher, tax-loss harvesting is the act of selling a losing position to offset capital gains liabilities incurred when realizing profits on a winning position. Tax-loss harvesting is indeed a strategy, meaning implementation is of the utmost importance. Clients won't derive much benefit from blindly selling a stock or a fund simply because it's in the red this year. After all, it could be a legitimate rebound candidate and if the client moves into something else that's comparable to the sold position, he or she could run afoul of IRS wash sale rules.
Point is on a year-to-year basis, there are always interesting ways in which clients can benefit from this strategy. Owing to high Treasury yields, 2023 tax-loss opportunities are abound in the fixed income universe and at the sector level. With that in mind, here are some ideas for advisors mulling tax-loss harvesting into year-end.
Cull the Core
With 2022 ranking as one of the worst years on record for broader bond benchmarks and 2023 doing little to ameliorate that scenario, core bond funds are prime opportunities for tax-loss harvesting. That’s highlighted the fact that Bloomberg Aggregate US Bond Index is down 18% since the start of last year.
The slack performance is there to offset gains realized on profitable trades and the outlook for these often Treasury-heavy funds isn’t great when acknowledging that the Federal Reserve may not have the luxury of lowering interest rates next year.
“Core bonds’ three-year return is the worst ever. The rolling three-year return for the Agg is an annualized -5% and cumulative -15%,” notes State’s Street’s Matthew Bartolini. “The Agg’s rolling three-year return has been negative since July 2022. So, anyone who has bought core bonds since the summer of 2019 is likely sitting on a loss.”
On an after- tax basis – the one that matters when it comes to tax-loss harvesting – the Agg is still negative, confirming broad bond funds are ripe for tax-loss benefits.
Other Assets Primed for Tax-Loss Harvesting
Advisors are not limited to U.S. government debt when it comes to fixed income tax-loss harvesting. There are opportunities across corporates, ,munis and more. Likewise, the equity landscape has its share of duds that could be pared to generate tax benefits.
Those include an array of single-country emerging markets exchange traded funds and a variety of sector funds that have been plagued by rising interest rates, among other factors.
Five sectors — Utilities, Consumer Staples, Real Estate, Health Care and Financials — are in the red this year,” adds Bartolini. “The highly rate-sensitive Utilities sector is leading the losses this year, almost 16% as macro forces severely negatively impacted the sectors return path.”
Momentum and value strategies have also been laggards this year, indicating there could be tax-loss harvesting opportunities in those realms, too.