With 2013 coming to a close, investors have to be thinking about
tax implications for their portfolios. Yet, with many markets up
significantly on the year, the practice of harvesting losses for
tax purposes could be curtailed this time around.
After all, the S&P 500 is up over 25% so far in 2013, meaning
that losers are hard to come by. But in foreign markets and some
sectors, there are still a handful of funds that are down
significantly on the year, and could be great sell candidates for
investors looking to reap some tax benefits to close out the year.
But for investors who want to maintain similar exposure, yet also
want to obtain some tax loss benefits, a look to the
'wash sale' rule
could be something to keep in mind. This rule says that if you buy
substantially identical securities within 30 days before or after a
sale at a loss, you cannot claim the loss on your taxes (see
4 Best New ETFs of 2013
Fortunately, with the advent of many competing ETFs that are
tracking similar-but not identical-indexes, investors can swap one
fund out for another and avoid hitting this wash sale rule. And
best of all, exposure will be pretty close, but likely not close
enough to trigger the wash sale rule.
For investors seeking to apply this strategy this year, or examples
of how this might work in future years, we have highlighted some of
the best candidates for some ETF tax loss harvesting below:
Broad Emerging Markets
Developing countries were crushed in 2013, with many losing double
digits on the year. The culprit for these heavy losses was
undoubtedly taper talk in the U.S. which caused hot money to flow
from emerging nations, while a variety of political and commodity
issues didn't help matters either.
Two of the most popular funds in this space are the
iShares MSCI Emerging Markets ETF (
Vanguard FTSE Emerging Markets ETF (
. These funds both lost on the year, with each member of this duo
falling by at least 5%.
Both of these funds also see extreme amounts of volume, and are
quite popular among investors; both have more than $40 billion in
AUM. However, while they might appear similar, there are actually
some key differences between the funds (see
all the broad Emerging Market ETFs here
For EEM, the fund tracks the MSCI Emerging Markets Index, and the
top sector is financials (24%), followed by technology at 15%.
China, South Korea, Taiwan and Brazil make up the four biggest
nations in the portfolio, with each accounting for at least 9% of
In VWO's case, it follows the FTSE All-World Emerging Markets
Index, with financials taking up 27% of assets, followed by energy
at 13%. For country exposure, China is the biggest at 20%, followed
by Taiwan, Brazil, and South Africa.
Thanks to these differences, VWO and EEM don't appear to be similar
enough to be hit by the wash sale rule, and could be interesting
substitutes for each other if you are looking to obtain a modest
tax benefit but also stay in the emerging market space.
Due to crashing metal prices, metal mining firms were very hard hit
in 2013. Metal miners generally act as a leveraged play on
underlying metal prices, so given how poor gold and silver were
this year, the terrible performances in the metal mining ETF world
should be expected.
In fact, the
Market Vectors Trust Gold Miners ETF (
, which tracks the NYSE Arca Gold Miners Index, lost more than 50%
of its value this year. However, there are others in this space
which track slightly different benchmarks, but also follow the gold
These funds include the
Global X Pure Gold Miners ETF (
which follows the Solactive Global Pure Gold Miners Index, and the
iShares MSCI Global Gold Miners ETF (
, which tracks the MSCI ACWI Select Gold Miners Investable Market
Pain or Gain Ahead for Gold Mining ETFs?
All were down significantly in 2013, but if gold prices can
stabilize, these might be winners in the New Year, and interesting
selections for those looking to cash in on tax losses from GDX
while maintaining gold mining exposure.
Single Country ETFs
Many individual countries now have more than one ETF thanks to
heavy competition among issuers. This has given many investors a
choice when it comes to single country exposure, and it could help
for tax loss purposes this year as well.
That is because many countries-and in particular those in the
emerging world-have seen weakness on the year. But if you believe a
turnaround could be at hand in 2014, it could be a interesting play
to swap one of these funds for its counterpart in order to maintain
exposure but also harvest some tax losses as well.
In particular, three markets stand out; India, Indonesia, and
Brazil. All three have seen poor trading in 2013, but have at least
one competing fund that tracks a pretty similar slice of the market
the Top Ranked ETFs here
For India, investors have the
Market Vectors India Small Cap Index ETF (
Emerging Global Shares INDXX India Small Cap Fund (
. Both of these have lost more than 21% on the year, but have seen
strength in recent sessions, suggesting that things might be
looking up for these two in 2014.
In the Brazilian market, two small cap funds also stand out. Both
Brazil Small Cap ETF (
from Market Vectors and the
iShares MSCI Brazil Small Cap ETF (
have stumbled by more than 27% on the year. But for those looking
for a rebound in this market ahead of the World Cup, these two,
which have a slightly different focus, could be interesting
Lastly, Indonesia is also an interesting choice as the country has
seen its funds tumble as currency woes have built up. And once
again here, Market Vectors and iShares square off with Market
Both have plunged by more than 25% YTD, but could be due for a
bounce in 2014. After all, Indonesia is relatively consumer focused
for a developing Asian market, so if developed nations stumble and
concerns over tapering stabilize, this might be an interesting
selection in the coming year, especially if you take advantage of
some tax selling first.
Many of the funds above have had terrible year-to-date
performances, and could be solid choices for those looking to
harvest losses for tax purposes. However, for investors seeking to
maintain exposure in the respective segments, a look to
competing-and slightly different-funds could be a great idea (Read
3 Hot Sector ETFs for 2014
This is because these funds should get around the wash sale rule
for investors, allowing a tax harvest sale, and immediate purchase
of the similar-but not identical-security in the same space. This
could allow investors to reap the benefits of the losses, but still
maintain exposure for a hopeful rebound heading into 2014,
potentially getting the best of both worlds with minimal exposure
This article is not intended as tax advice, please consult your
tax advisor before any tax-related purchase or sale of
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Author is long IDX.
MKT VEC-BRZL SC (BRF): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-MS INDON (EIDO): ETF Research Reports
MKT VEC-GOLD MI (GDX): ETF Research Reports
MKT VEC-INDONES (IDX): ETF Research Reports
VANGD-FTSE EM (VWO): ETF Research Reports
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