‘Tis the season for investors to consider ways to lower their capital gains bill. That’s right, it’s tax loss harvesting season (the most wonderful time of the year…?). Against a backdrop of the worst sell-off in bond markets since the 1980s, the tax loss harvesting options are quite impressive.
Tax loss harvesting involves selling an investment at a loss to reduce federal capital gains tax. At Bloomberg, Capital Group’s Holly Framsted notes that, after this year’s bond market losses, financial advisors should not overlook the role that fixed income can play in clients’ tax loss harvesting strategies.
“Reinvestment in ETFs, which have tended to distribute fewer capital gains than mutual funds, can provide an additional layer of tax efficiency to taxable portfolios undergoing this year-end strategy,” Framsted wrote. “Ultimately, tax loss harvesting can help mitigate some of the impact of these compulsory distributions and capitalize on the broader market losses — including the bond market — year to date.”
The later stages of a market cycle are also an ideal time for investors to reconsider the role bonds play in a diversified portfolio. While the recent downturn has made some investors wary of fixed income, Framsted argues that “there’s still significant value because of where bond markets are today,” and that there’s a “potential yield uplift available in short duration, high-quality bonds” in the short- and medium-term.
“History tells us these kinds of bonds can provide meaningful and significant diversification from equities in a portfolio when equity markets decline — along with capital preservation, inflation protection, and income,” she wrote. “Given slowing economic growth and predictions by some of a recession next year, these four roles of fixed income are important to emphasize to clients.”
With that in mind, investors may want to consider the Vanguard Short-Term Corporate Bond ETF (VCSH ) or the Vanguard Intermediate-Term Corporate Bond ETF (VCIT ) for their tax loss harvesting strategies.
VCSH seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to follow the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index, which includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between one and five years.
VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. This index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between five and 10 years.
“As you consider the tax impact and potential for tax loss harvesting opportunities in your client portfolios this year, fixed income should not be overlooked,” Framsted added. “This is a use-it-or-lose-it moment, as tax loss harvesting comes but once a year.”
For more news, information, and analysis, visit the Fixed Income Channel.
