'Tis that season again: tax time, when investors turn their attention toward their annual IRS tax filings. Except investors shouldn't wait until spring to start thinking about their taxes, argues Bob Holderith, CEO of Green Harvest Asset Management, a N.Y.-based asset management firm specializing in tax beneficial ETF investing. (Note: Green Harvest does not provide tax advice.)
Instead, says Holderith, investors and their advisors should make tax management part of a year-round plan, something that's easier than ever before, with the use of ETFs and better portfolio management technology.
ETF.com recently sat down with Holderith to discuss how using ETFs can save investors significant amounts of money on their taxes, even if they don't have a large asset base to start with.
ETF.com: Your philosophy is that tax management must be a year-round business. Why can't investors just wait until the end of the year to take care of their taxes?
Bob Holderith: Say you had broad S&P 500-like exposure, whether in a mutual fund, a group of stocks or whatever, in the period between 2010 and 2019. If you had waited until Dec. 15, then there was only one year in the past nine that you could have taken any losses at all. That was in 2018. Every other year, the market was up for the year and on Dec. 15. You'd have been out of luck.
Market volatility doesn't happen when you want it to. It happens when there’s a driver for it, like coronavirus or interest rates or elections. So the way to be most effective and efficient is to be ready all the time, every day.
ETF.com: Maybe, but for what size asset base does regular tax-loss harvesting truly become a meaningful use of time?
Holderith: When we capture tax benefits … and, by the way, we don’t call them "losses," because people think that you have to lose money to capture losses, which is not the case. Let's say you're making $75,000/year, and we can capture $3,000 in tax benefits for you, through regular mortgage payments, a little of this and that. Then we have meaningfully lowered the amount of tax you have.
On a percentage basis, we may be just as helpful to somebody who makes that much money as we are to someone who's ultra-high-net-worth. Our average account is about $1 million to $2 million, and we may save those people 3%, 5%, even 7% on their taxes. It ends up being a much greater dollar amount for them, though, because they're paying more taxes.
So it all depends on how tax-sensitive you are. For example, people who own mutual funds that pay short-term capital gains … in 2018, I think the average was 10% in short-term capital gains distributions. So if I had $100,000 and $10,000 distributed to me, and I had a $5,000 to $6,000 tax bill, I'd be tax-sensitive. But that's also true if I had $10 million and I had a $50,000-500,000 tax bill.
ETF.com: Can you walk us through the process you use for your clients?
Holderith: Let's say you want to own the S&P 500. You could buy the SPDR S&P 500 ETF Trust (SPY); you could buy the Vanguard 500 Index Fund; you could buy each of 500 stocks. We use 11 sector ETFs, in the appropriate weights.
For every exposure we have, we assign what we call an "anchor security." In this case, they're the Sector SPDRs, because they're the purest expression of each sector in the S&P 500 and they're very low cost.
Then we pre-assign additional tiers of "swap candidate" ETFs [that can be substituted for the anchor security]. In tier 2, we typically (but not always) have the Vanguard fund, then tier 3 is iShares. Other tiers might include Fidelity, First Trust, etc.
ETF.com: So if you're holding the Energy Select Sector SPDR Fund (XLE), you might have the Vanguard Energy ETF (VDE) in your tier 2, correct?
Holderith: Exactly. Our technology allows us to monitor every position in every client account, every minute of every market day. When one of our anchor securities goes down below a precalculated threshold—for example 4%—we’re alerted, and we put in an order for one of our swap securities. We call that "sweeping and swapping," as in, we're sweeping our book for opportunities, and swapping when those opportunities pop up.
Let's say the client's energy position is down. Whenever that position hits a precalculated threshold, we can sell XLE and buy VDE.