Broad-market volatility (like we experienced in late January and early February) definitely creates opportunities for tax-loss harvesting—and in the midst of market turbulence, chances to harvest tax losses can be a silver lining. While broad-based volatility and weak markets are helpful for generating tax alpha, these conditions aren’t always required. For example, 2017 was a tremendously strong year for markets across the board, but a wide variety of opportunities for tax-loss harvesting were still present, stemming from weakness in particular sectors.
Tax-loss harvesting in 2017: No lack of opportunities despite strong headline numbers
2017 was a remarkably strong year for U.S. large-cap stocks, with the S&P 500® Index gaining 21.8%. For context, that is almost twice the index’s return in 2016 and more than triple its annualized 20-year return of 7.2%. What wasn’t reported in the headlines, however, was that more than one-third of the index constituents showed a year-to-date loss of more than 10% at some point. In fact, 90 constituents showed a loss of greater than 20% at some point in the year!
As shown below, the overall index’s strong return can mask weakness in its subsets:
Source: Parametric, Factset
For illustration purposes only. Not a recommendation to buy or sell any security. It is not possible to invest directly in an index.
The Value of Tax Alpha
Parametric’s Custom Core strategies are designed to provide flexible, tax-efficient equity index exposure. “Tax alpha” is how we quantify the value of active tax-management. Here, we explore the two key drivers of tax alpha - the overall market return and cross-sectional stock volatility.
Wash Sales: How to Keep Your Tax Losses from Shrinking
Want to use your investment losses for tax purposes? Running afoul of the IRS’s wash-sale rule is like accidentally laundering your favorite wool sweater in the hot-water cycle. Here's what you need to know to avoid being hung out to dry.
Potential Parametric solution
One of the primary drivers of tax efficiency in a tax-managed Custom Core® account comes from tax-loss harvesting. Parametric portfolio managers will sell the majority of a basket of securities at a loss and simultaneously replace it with a different basket of purchased securities. The trade results in net tax losses for the client, which can offset capital gains realized by other parts of the portfolio, such as hedge funds.
Rey Santodomingo, CFA, Managing Director of Investment Strategy
Rey is responsible for all aspects of Parametric’s tax-managed equity strategies. As one of the primary strategists for Custom Core®, he works closely with taxable clients and advisors to design, develop, and implement custom portfolio solutions. Prior to joining Parametric in 2008, Rey was a vice president in product management at MSCI Barra. He earned an MA in financial engineering from the University of California, Berkeley, and a BS in chemical engineering from the University of California, Santa Barbara. A CFA charterholder, Rey is a member of the CFA Society of Seattle and a prior board member of the CFA Society of Seattle. He has also served as an adjunct instructor at Seattle University's Albers School of Business and Economics.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.