Tax-Loss Harvesting Opportunities Increase as Market Losses Mount

By:

Head of SPDR Americas Research

Insights

  • Bonds are in their worst drawdown ever1 and 70% of all stocks are in a bear market2 amid elevated cross-asset volatility.
  • 91% of all ETFs have losses this year — equating to $5.8 trillion in assets underwater year-to-date.3
  • While the losses are painful, they present you with the chance to harvest losses and rotate into more cost-efficient strategies or exposures better aligned to current market trends.

With both stocks and bonds down significantly, you might not feel much like looking at account values. But if you turn away you could miss out on the chance to make the best of a bad situation. Today’s negative returns are an opportunity to harvest losses.

How does tax-loss harvesting work? 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.

Why harvest losses now? Because losses are extensive. And if the market rebounds later this year, you could lose your chance.

Stock and Bond ETF Strategies See Large Losses

Analyzing ETF market performance by broad-based strategy profiles underscores how pervasive losses have been. More than 90% of all stock- and bond-focused ETFs have losses, covering $4.6 trillion assets from equity and $1.1 trillion for bonds, as shown in Figure 1. And almost 70% of equity funds have a more than 10% loss, totaling $3.9 trillion in assets.4 Given the negative returns of these two asset classes, it’s no surprise that mixed allocation funds have seen similar losses.

Commodity ETFs are the only category where the majority of funds have seen gains – with broad based commodities up 32% this year.5

Figure 1: Percent of ETFs by Fund Category With Losses Year to Date

Figure 1: Percent of ETFs by Fund Category With Losses Year to Date

Losses Recorded Across All Equity Categories

As shown in Figure 2, 96% of all funds focused on US equities (ex-sectors) are trading at a loss — and no category has fewer than 80% of funds in negative territory.

While US sector funds have the fewest number of funds trading at a loss (80%), their average loss is much greater than that of the broader US equity segment because of the more concentrated nature of sector strategies.

Across equities, emerging market (EM) and thematic ETFs have seen the worst drawdowns year to date. Thematic ETFs also have the worst average loss at -28.5%. The silver lining? Because so much investment in thematic funds took place in just the past two and a half years, this category is ripe for harvesting losses.

Figure 2: Losses by Equity Category

Figure 2: Losses by Equity Category

Bond ETF Losses Are Even More Widespread

100% of bond ETFs are trading at a loss in six of 11 fixed income segments. Though average bond ETF returns are not as poor as equity returns, in eight of 11 bond sectors returns are worse than -9%.

Bank loan funds, because of their exposure to floating-rate securities that have minimal duration risk, have fared the best amid rising rates — even though every fund is down on the year. Convertibles have the worst return of any bond sector tracked due to their equity sensitivity.

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Footnotes

1 Bloomberg Finance, L.P., as of May 23, 2022, based on the return of the Bloomberg US Aggregate Bond Index.
2 Bloomberg Finance, L.P., as of May 23, 2022, based on the holdings of the MSCI ACWI IMI Index.
3 Bloomberg Finance, L.P., as of May 24, 2022, per SPDR Americas Research calculations.
4 Bloomberg Finance, L.P., as of May 24, 2022, per SPDR Americas Research calculations.
5 Bloomberg Finance, L.P., as of May 23, 2022, based on the return of the Bloomberg Commodity Index.
6 Bloomberg Finance, L.P., as of May 24, 2022, per SPDR Americas Research calculations.
7 Bloomberg Finance, L.P., as of May 24, 2022, per SPDR Americas Research calculations.
8 Bloomberg Finance, L.P., as of May 24, 2022, per SPDR Americas Research calculations.
9 Morningstar, as of May 24, 2022, per SPDR Americas Research calculations.

Glossary

Bloomberg Commodity Index
Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements.

Bloomberg US Aggregate Bond Index
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

MSCI ACWI IMI Index
The MSCI ACWI Investable Market Index (IMI) captures large, mid and small cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries.

Originally Posted May 31, 2022 – Tax-Loss Harvesting Opportunities Increase as Market Losses Mount

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