Harvesting Tax Losses While Positioning for Rising Rates

Rising interest rates and inflation have made 2022 among the worst on record for bond investors. However, there may be a silver lining in the sell-off. A review of bond fund investments may present the opportunity to harvest losses, attempt to offset capital gains distributions from actively managed funds, and prepare for potentially rising rates.

  • Bond Fund Losses Are Widespread: When interest rates rise, bonds lose money. Rising rates have left many bond funds with negative returns so far this year.

  • Harvesting Losses May Help Reduce Tax Burden: When held in taxable accounts, bond funds that have lost value may be sold to offset gains elsewhere and help to reduce taxes.

  • Consider Potential Capital Gains Distributions: For investors in actively managed mutual funds, the prospect of capital gains distributions could increase the importance of exiting positions with losses. According to Morningstar, 56% of actively managed corporate bond funds distributed capital gains in 2021.

  • Prepare for Rising Rates: Making year-end shifts in portfolio allocations is an opportunity to revisit investors’ fixed income strategies. Interest Rate Hedged Bond ETFs could be a replacement to help prepare for potentially rising rates.

Source: Bloomberg, 12/31/21-10/31/22. The Investment Grade-Interest Rate Hedged Index is represented by the FTSE Corporate Investment-Grade (Treasury-Rate Hedged) Index.

Source: Bloomberg, 12/31/21-10/31/22. Index information does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot directly invest in an index. Past performance does not guarantee future results.

If your bond funds have lost money this year, you may be looking to harvest losses to offset potential capital gains in other areas. If so, consider replacing some of your holdings with an Interest Rate Hedged ETF, like ProShares Investment Grade—Interest Rate Hedged (IGHG). IGHG is a diversified portfolio of long-term investment grade bonds with a built-in hedge designed to alleviate the impact of rising rates.

IGHG is an innovative bond ETF that:

  • Offers the return potential of a diversified portfolio of investment grade corporate bonds.

  • Has an interest rate hedge that uses short Treasury futures to target zero interest rate risk.

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Investment Grade—Interest Rate Hedged

Seeks investment results, before fees and expenses, that track the performance of the FTSE Corporate Investment Grade (Treasury Rate-Hedged) Index.

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There is no guarantee that the strategies discussed will be effective. The information and examples provided are not intended to be a complete analysis of every material fact respecting tax strategy and are presented for educational and illustrative purposes only. Tax consequences will vary by individual taxpayer, and individuals must carefully evaluate their tax position before engaging in any tax strategy. All regulated investment companies, including ProShares, are obliged to distribute portfolio gains to shareholders at year’s end. Trading shares of the funds will also generate tax consequences and transaction expenses. This material is not intended to be tax advice.

ProShares does not offer tax advice, and you should consult your tax advisor before selling or buying any investments.

Investing is currently subject to additional risks and uncertainties related to COVID-19, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and world economic and political developments.

Investing involves risk, including the possible loss of principal. ProShares ETFs entail certain risks, including risks associated with the use of derivatives (swap agreements, futures contracts and similar instruments), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance. Please see summary and full prospectuses for a more complete description of risks. There is no guarantee any ProShares ETF will achieve its investment objective.

IGHG does not attempt to mitigate factors other than rising Treasury interest rates that impact the price and yield of corporate bonds, such as changes to the market’s perceived underlying credit risk of the corporate entity. IGHG seeks to hedge investment grade bonds against the negative impact of rising rates by taking short positions in Treasury futures. These positions lose value as Treasury prices increase. The short positions are not intended to mitigate credit risk or other factors influencing the price of the bonds, which may have a greater impact than rising or falling interest rates. Investors may be better off in a long-only investment grade investment than investing in IGHG when interest rates remain unchanged or fall, as hedging may limit potential gains or increase losses. No hedge is perfect. Because the duration hedge is reset on a monthly basis, interest rate risk can develop intra-month, and there is no guarantee the short positions will completely eliminate interest rate risk. Furthermore, while IGHG seeks to achieve an effective duration of zero, the hedge cannot fully account for changes in the shape of the Treasury interest rate (yield) curve. IGHG may be more volatile than long-only investment grade bond investment. Performance of IGHG could be particularly poor if investment grade credit deteriorates at the same time that Treasury interest rates fall. There is no guarantee the fund will have positive returns.

Bonds will decrease in value as interest rates rise. 

Short positions in a security lose value as that security’s price increases.

The fund concentrates its investments in certain sectors. Narrowly focused investments typically exhibit higher volatility.

Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing.

“FTSE®” and “FTSE Corporate Investment Grade (Treasury Rate Hedged)” have been licensed for use by ProShares. FTSE is a trademark of the London Stock Exchange Plc and The Financial Times Limited and is used by the FTSE International Limited (“FTSE”) under license. ProShares have not been passed on by FTSE or its affiliates as to their legality or suitability. ProShares based on the FTSE Corporate Investment Grade (Treasury Rate Hedged) Index are not sponsored, endorsed, sold or promoted by FTSE or its affiliates, and they make no representation regarding the advisability of investing in ProShares. THIS ENTITY AND ITS AFFILIATES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES.

ProShares are distributed by SEI Investments Distribution Co. ("SIDCO"), which is not affiliated with the funds' advisor or sponsor. SIDCO is located at 1 Freedom Valley Drive, Oaks, PA 19456.

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