There is nothing nostalgic about the tax-loss harvesting orchard this fall. With bonds suffering through another year of historic losses, the S&P 500 has posted double-digit gains. That means that, unlike most years, bonds and not equities are ripe for harvest.
But whatever losing position you sell in an effort to minimize taxes, a wide range of low-cost ETFs makes it easy to reinvest the proceeds to reduce your overall costs or better align portfolios with today’s market.
In taxable accounts, when you sell a position that has lost value, you can use the loss to offset capital gains that result from selling securities at a profit during the year. Your booked losses can also offset funds’ annual capital gain distributions.
At year end, if your capital losses exceed your gains (or if you don’t have any gains), you can use the losses to offset up to $3,000 in non-investment income, even though that is often taxed at a higher rate than capital gains. Losses greater than $3,000 carry forward and can be used to offset capital gains and ordinary income over your lifetime.
Importantly, when reinvesting proceeds from the sale of a losing investment, you must abide by the Internal Revenue Service’s Wash-Sale Rule, which prohibits claiming a loss on the sale of an investment if the same or “substantially identical” investment is purchased either 30 days before or after the sale date.
With nearly $2 trillion in AUM, core bond ETFs and mutual funds have attracted over $180 billion in inflows this year.2 And more than 90% of those intermediate-core and Intermediate core-plus funds have posted negative returns.3
With bonds, the price return — which is the change from purchase price to sale price without coupons or dividends — is the measure that matters for harvesting. Because bond funds tend to distribute the bulk of their return in income distributions, their price return is usually well below their total return. Year to date:
Year to date, losses extend across traditional and non-traditional bond segments (Figure 2). For example:
Look at the price returns of the same assets listed above since the Federal Reserve began hiking rates at the start of 2022 (Figure 3). You’ll see there are more opportunities to harvest losses in these bond sectors mired in significant double-digit drawdowns:
Despite the strong headline double-digit returns of the S&P 500 Index, harvesting opportunities do exist (Figure 4):
Plenty of major equity markets are still down a considerable amount from the start of 2022 (Figure 5). The Energy sector is the only equity market that has outsized returns since 2022,22 speaking to some of the power behind sector rotation strategies.
It’s worth repeating that the Wash-Sale Rule prohibits claiming a loss on the sale of an investment if the same or “substantially identical” investment is purchased either 30 days before or after the sale date. That’s why investors use a tax swap as a placeholder to maintain exposure to the asset class for 30 days.
But, importantly, choosing a tax swap also can be a chance to reposition portfolios for the longer term. You choose a swap to:
Check out our summary of asset classes with losses and SPDR® ETFs that can help you refine exposures or lower portfolio costs.
And our Morningstar Fund Comparison Tool can help you evaluate specific mutual funds and ETFs.
Keep in mind that if the swap appreciates and you sell it within a year, those gains will be taxed at the short-term capital gains tax rate, which is higher than the long-term capital gains rate. So it may be advantageous to choose a swap that could become a longer-term holding.
As tax-loss harvesting season continues, look to our Market Trends pages for timely commentary, macroeconomic perspectives, and ETF flows data.
1Bloomberg Finance, L.P. October 12, 2023.
2Morningstar as of October 12, 2023.
3Morningstar as of October 12, 2023.
4Bloomberg Finance, L.P. as of October 12, 2023.
5Bloomberg Finance, L.P. as of October 12, 2023.
6Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
7Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
8Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
9Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
10Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
11Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
12Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
13Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
14Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
15Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023 based on the Bloomberg US High Yield Index.
16Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023.
17Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023 based on the MSCI China Index.
18Barclays Live, Bloomberg Finance, L.P. as of October 12, 2023 based on the MSCI Thailand Index and MSCI Chile Index.
19Bloomberg Finance, L.P. as of October 12, 2023.
20Bloomberg Finance, L.P. as of October 12, 2023.
21Based on the S&P 500 Pure Value Index and the MSCI USA Momentum Index as of October 12, 2023 per Bloomberg Finance L.P.
22Bloomberg Finance, L.P. as of October 12, 2023.
23State Street Global Advisors, Morningstar, as of September 12, 2023. Based on median prospectus net expense ratio for US domiciled open-end mutual funds across 18 Morningstar categories representing SPDR Portfolio ETFs.
Bloomberg US Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is designed to measure the performance of the U.S. dollar denominated investment grade bond market, which includes investment grade (must be Baa3/BBB- or higher using the middle rating of Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings Inc.) government bonds, investment grade corporate bonds, mortgage pass through securities, commercial mortgage backed securities and other asset backed securities that are publicly for sale in the United States.
S&P 500 Index
The S&P 500® Index is designed to measure the performance of the large-cap segment of the US equity market. It is float-adjusted market capitalization weighted.
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
Momentum investing involves going long on stocks, futures, market exchange-traded funds (ETFs), or any financial instrument showing upward-trending prices.
The views expressed in this material are the views of the SPDR Research and Strategy team through the period ended October 12 2023, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
Unless otherwise noted, all data and statistical information were obtained from Bloomberg Finance, L.P. and SSGA as of October 12, 2023. Data in tables have been rounded to whole numbers, except for percentages, which have been rounded to the nearest tenth of a percent.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Investing involves risk including the risk of loss of principal.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
Because of their narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.