Last-Minute Tax Tips For ETF Investors

December 27, 2013

2: Look for other widely held losses and find wash-proof alternatives.

This is the inverse case if you’re one of the investors who holds part of the $6 billion GDX. If you’re sitting on that 50 percent loss for the year, now’s the time to pull the trigger. You could swap into a bullion ETF, of course, or you could swap into the more-than-suitable alternative, the iShares MSCI Global Gold Miners ETF (RING | B-99), which is actually our analyst pick in the space.

But it doesn’t just have to be enormously dramatic to be helpful to your tax situation. Consider the most widely held emerging market ETF, the iShares MSCI Emerging Markets ETF (EEM | B-100) and the Vanguard FTSE Emerging Markets ETF (VWO | B-85). Between the two funds, $90 billion of investor money is sitting on losses of between 3.4 percent (EEM) and 4.6 percent (VWO).

Why not take those losses on the chin and use them to offset gains, all while perhaps swapping into our preferred fund in the space, the iShares Core MSCI Emerging Markets ETF (IEMG | B-98). You may be able to save yourself substantial expenses next year in the bargain (18 bps versus 69 bps in EEM, although still 18 bps in VWO).

And fixed income is rife with losses this year as well. Consider investors in the iShares 20+ Year Treasury Bond ETF (TLT | A-72). TLT holders are down more than 14 percent in 2013 year-to-date. While there’s no 100 percent direct competitor to that ETF, the SPDR Barclays Long Term Treasury ETF (TLO | B-88) provides extremely similar yield, maturity and duration, and certainly would cover any rally for a month.

Again, you’d also be swapping into the fund that’s our analyst pick in Long Term Treasurys, so you consider this an opportunity to upgrade to what’s arguably a better fund, while using those bond losses to offset, perhaps, some equity gains.

And let’s be clear—you’ve probably got equity gains. While various international ETFs struggled this year, the worst-performing U.S. equity ETF in our analytics system is down only 4.17 percent in the past 12 months as I write this—the SPDR S&P Metals and Mining ETF (XME | A-53), which suffered right alongside the global miners. In fact, of the 360 U.S. Equity ETFs we track, only five have negative 1-year performance, all focused either on REITS or miners.

So what about the winners? Oftentimes taxable investors are reluctant to book their gains for fear of the tax man, and this can overwhelm common-sense rebalancing of positions.

If you were a crystal-ball-gazing genius who put 20 percent of your portfolio into the PowerShares Nasdaq Internet ETF (PNQI | B-72) one year ago today, well, that fund’s 67.4 percent gain means your 20 percent is likely a whole lot more like 30 percent now. Perhaps it’s time to take a little off the table?

The beauty of using ETFs in a diversified portfolio is that come tax time, a little portfolio work can make an already-tax-efficient investment even more tax efficient. You just have to be willing to make a few trades.

At the time this article was written, the author held no positions in the securities mentioned. Contact Dave Nadig at [email protected].


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