Tax Loss Harvesting

November 15, 2023
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A challenging market environment and an opportunity to take action

While 2023 has been a challenging year for many investors, there may be a silver lining: the opportunity to sell investments with losses to offset capital gains elsewhere.

For investors in actively managed mutual funds, the prospect of capital gains distributions could increase the importance of exiting positions with losses. Capital gains distributions may be more likely when mutual funds experience outflows.

 

Harvesting losses with a tax swap strategy

A tax swap is a loss harvesting strategy utilized in taxable accounts. It involves selling a fund that has experienced market losses and buying a fund with similar, but not identical, investment characteristics. By making this swap, a capital loss can be realized. That loss may then be used to offset capital gains realized in other funds and potentially reduce an investor’s tax liability.

To help identify opportunities for loss harvesting, we have analyzed several market segments that have posted losses so far this year. Our analysis includes all U.S.-listed mutual funds and ETFs within the specified categories.

 

An Opportunity to Reposition Portfolios

The year-end may also be an opportunity to revisit investment strategies and prepare portfolios for 2024.

1 S&P Dow Jones Indices LLC, CRSP database; U.S. active funds within the Equity Income Funds category. Data from June 30, 2013, to June 30, 2023.

Sources: Morningstar, ProShares (1/1/23-9/30/23). All categories are based on Morningstar categorizations. The High Dividend category is composed of all ETFs classified as Strategic Beta Dividend by Morningstar and Segment U.S. Equity – High Yield by FactSet. Index performance returns are for illustrative purposes only and do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged, and one cannot invest in an index. Performance data for ProShares ETFs current to the most recent month-end may be obtained at ProShares.com.

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NOBL

S&P 500 Dividend Aristocrats ETF

Seeks investment results, before fees and expenses, that track the performance of the S&P 500® Dividend Aristocrats® Index.

REGL

S&P MidCap 400 Dividend Aristocrats ETF

Seeks investment results, before fees and expenses, that track the performance of the S&P MidCap 400® Dividend Aristocrats® Index.

SMDV

Russell 2000 Dividend Growers ETF

Seeks investment results, before fees and expenses, that track the performance of the Russell 2000® Dividend Growth Index.

TOLZ

DJ Brookfield Global Infrastructure ETF

TOLZ focuses exclusively on pure-play companies—the owners and operators of infrastructure assets such as toll roads, airports and cell towers.

IGHG

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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This material is not intended to be tax or investment advice. Tax consequences may vary by individual taxpayer. For specific tax advice, we recommend you speak with a qualified tax professional. There is no guarantee dividends will be paid. Companies may reduce or eliminate dividends at any time, and those that do will be dropped from the indexes at reconstitution.

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.

Investments in smaller companies typically exhibit higher volatility. Small- and mid-cap companies may have limited product lines or resources, may be dependent upon a particular market niche and may have greater fluctuations in price than the stocks of larger companies. Small- and mid-cap companies may lack the financial and personnel resources to handle economic or industry-wide setbacks and, as a result, such setbacks could have a greater effect on small- and mid-cap security prices. International investments may involve risks from: geographic concentration, differences in valuation and valuation times, unfavorable fluctuations in currency, differences in generally accepted accounting principles, and from economic or political instability. Some ETFs concentrate investments in certain sectors. Narrowly focused investments typically exhibit higher volatility.

TOLZ is subject to risks faced by companies in the infrastructure, energy and utilities industries to the same extent as the Dow Jones Brookfield Global Infrastructure Composite Index is so concentrated. This ETF invests in master limited partnerships (MLPs). Investments in MLPs expose the ETF to certain tax risks associated with investing in partnerships. Changes in U.S. tax laws could revoke the pass-through attributes that provide the tax efficiencies that make MLPs attractive investment structures. MLPs may also have limited financial resources, may be relatively illiquid, and may be subject to more erratic price movements because of the underlying assets they hold. In addition, a portion of the ETF's distributions may be a return of capital, which constitutes the return of a portion of a shareholder's original investment. Under tax rules, returns of capital are generally not currently taxable, but lower a shareholder's tax basis in their shares. Such a reduction in tax basis will result in larger taxable gains and/or lower tax losses on a subsequent sale of shares.

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.

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. Obtain them from your financial professional, or visit ProShares.com.

The "S&P 500® Dividend Aristocrats® Index," "S&P MidCap 400® Dividend Aristocrats Index" and "Dow Jones Brookfield Global Infrastructure Composite" are products of S&P Dow Jones Indices LLC and its affiliates. "S&P®" is a registered trademark of Standard & Poor's Financial Services LLC ("S&P") and "Dow Jones®" is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones") and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates. The "Russell 2000® Dividend Growth Index" and "Russell®" are trademarks of Russell Investment Group, and "FTSE®" and "FTSE Corporate Investment Grade (Treasury Rate Hedged)" are trademarks of the London Stock Exchange Plc and The Financial Times Limited and are used by the FTSE International Limited ("FTSE") under license. All have been licensed for use by ProShares. ProShares have not been passed on by these entities and their affiliates as to their legality or suitability. ProShares based on these indexes are not sponsored, endorsed, sold or promoted by these entities and their affiliates, and they make no representation regarding the advisability of investing in ProShares. THESE ENTITIES AND THEIR 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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