- The steep sell-off during the first quarter created an "unprecedented opportunity" for investors to take advantage of tax-loss harvesting, Armando Senra, the head of iShares Americas, said.
- Investors can sell losers in their portfolios to lower their capital-gains-tax burden.
- Senra expects investors will rotate into three themes after they sell losers.
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The coronavirus-driven plunge in global markets left stock investors with few places to hide.
But sell-offs like this always bring new opportunities beyond the chance to invest in the best companies at cheaper prices.
One of these openings is a strategy known as tax-loss harvesting. It involves selling investments that are in the red to minimize what you pay in capital-gains taxes on securities that make a profit.
For example, let's say you invested $10,000 each in two separate funds. During the sell-off, the value of one crashed to $2,000, an $8,000 loss, while the other bucked the trend and rose to $15,000 in value, a $5,000 gain. Cashing out of the winning fund alone will leave you with a profit that is subject to taxation.
But if you sell the loser at the same time, you wind up with a net loss of $3,000 that Uncle Sam can't touch.
The stock market's rapid decline of more than 30% into a bear market has created an "unprecedented opportunity" to take advantage of tax-loss harvesting, Armando Senra, the head of iShares Americas, said in a recent note.
He specifically sees this as an opportunity for investors to rotate into exchange-traded funds that suit their goals. BlackRock's iShares provides ETFs with more than $2 trillion in assets.
"The embedded capital gains generated by years of bull market returns were high hurdles for clients looking to reallocate significant portions of the portfolios," Senra said.
Many investors will undoubtedly call up their accountants to inquire about this tax benefit. Data from iShares showed that 83% of active equity mutual funds had a negative three-year price return as of the end of the first quarter. Every small-cap value fund with a three-year track record was underwater, and 52% of large-cap growth funds were negative, the data also showed.
While tax-loss harvesting is perfectly legal, the IRS has imposed an important regulation on the practice known as the wash-sale rule. It disallows selling a losing security and then buying a substantially similar one within 30 days.
With this in mind, here are three themes Senra expects investors to take advantage of and rotate more of their money into:
- Value: Given the aforementioned losses for investors in value funds, Senra anticipates rotation into value ETFs that provide similar exposure. The iShares Edge MSCI USA Value Factor ETF captures this theme.
- Resilience: The iShares Edge MSCI Quality ETF provides exposure to companies with stable earnings and low debt — characteristics that should weather the economic storm.
- Sustainability: Demand for investing strategies that focus on environmental, societal, and governance principles surged in 2019. The iShares ESG MSCI USA ETF is one way to stay exposed to companies that meet these standards.
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