ETF Strategists Offer Year-End Advisor Tips

December 16, 2013

At the end of 2013, investors should think about harvesting losses, and a lot more.

IndexUniverse asked three of its contributing ETF strategists to serve up a few end-of-year tips for investors, ranging from tax matters to issues related to asset allocation.


Michael Vogelzang, president and chief investment officer of Boston-based Boston Advisors LLC

The most obvious is to harvest losses. If you’ve got emerging market funds or if you’ve got bond funds that are down for this year, tax loss harvesting is the most obvious thing. Frankly, if you don’t do this, it’s malfeasance; certainly if you’re managing money for other people, this is malfeasance. You have to harvest losses.

And the wonderful thing about ETFs is you can find things that are close enough, with high enough correlation, but that are still different from an SEC perspective, so that you can still make an investment [steering clear of the wash-sale rule].

I’m not an expert on this, but the IRS has been vague on this. It has said you can’t buy identical things. So you can’t sell SPY (SPDR S&P 500 | A-98) and buy VOO (Vanguard S&P 500 | A-96)—you can’t do that. It’s the same fund. You can’t buy and sell them instantaneously and realize a loss—it’s effectively a wash sale.

But that doesn’t matter. If you have VWO (Vanguard FTSE Emerging Markets | B-85)—it’s down this year, 5 or 10 percent, depending on when you bought it. Whether you go through an individual name, like EEM (iShares MSCI Emerging Markets | B-100), or something that has high correlation, it's not hard.

And if you really wanted to be safe, you could piece together some regional emerging market funds that provide you the same level of investment. You could sell your VWO at a loss, go buy your proxy, hold it for 30 days. The most you’re going to get is a few basis points of variation.

So it’s easy to replace the beta in an IRS-friendly way so you don’t have to afraid of wash sales and you have to be out of the market for 30 days. That doesn’t happen with individual stocks.

If you don’t do tax-loss harvesting, it’s walking by nickels on the sidewalk, as they say.


Bob Smith, president and chief investment officer of Austin, Texas-based Sage Advisory Services

There is a temptation to take profits here; people are going to be looking to do that in terms of their tax-loss harvesting. I think it’s crucial not to abandon fixed income altogether in the face of this increase in interest rates.

I was recently at two client meetings and I watched two consultant firms scare the trustees about how harsh or bad it’s going to be for fixed income, and that they should really be eliminating their fixed income.

And I’m saying: “Whoa, hold on!” First of all, for most of these clients that were at this table, their longest maturity is five years. And in 1994, for debt that was five years and in, and three years and in, investors made money on that part of the curve. Yes, you do make money in fixed income when rates are rising! The question is, What kind of fixed income?

So, again, don’t abandon fixed income, just find the safer place in fixed income. And fixed income is your anchor to windward. So if you’re sitting here at a market high that you’ve never seen before in U.S. equities, the ballast in your portfolio—fixed income—should remain so.

But it should be a different kind of ballast. Let’s make it a little bit more conservative. Don’t abandon fixed income, is the message; just find a safer place in fixed income. Because there may come a time early next year when we get a 10 percent correction in equities, and you’re going to wish you had your bonds.


Kim Arthur, chief executive officer and founding partner of San Francisco-based Main Management

We’ve definitely been doing the tax-loss harvesting. We’re also doing some rejiggering of asset allocation, moving people into strategies that we think will benefit from a heightened volatility that will happen next year.

I don’t think it will be explosive volatility, but I think we’ll have more volatility than we had this year. Specifically, we’ve got our option overlay, our buy-write strategy, and we’re moving people into that, and that will allow us to capture return when the VIX moves higher.

And I’d also throw out here that there’s an interesting stat out there that every time you have a new Fed chairperson—this is the first time we’ll ever have a Fed Chairwoman—the market averages an 11 percent drop in the first six months of that person’s call to duty. That’s equities in the Dow Jones, specifically.

One of the reasons for that might be as simple as that first chairperson gets in and says, “I have a compulsion to contain inflation.” Even though Janet Yellen said in her confirmation hearing that she would target employment and price stability, new Fed chairs want to show how tough they are.

They want to show that they’re good at fighting inflation, and that obviously scares the stock market. And typically what happens after that six-month scare is that people get back to doing what they want to. But it’s eerie; it’s been that way all the way back to 1917.

So we’re actively moving people into that strategy, and we’ll probably be more aggressive on the call writing. This market pullback with the new Fed Chair is a six-month thing, but we’ll probably be writing calls a little close and be monitoring price targets a little tighter here.


Find your next ETF

Reset All