Wealthy Americans Cut Taxes With Losing Bonds


(Bloomberg) – Wealthy Americans who suffered big bond losses in the year inflation roared back find there’s a silver lining to pain in their portfolios: it’s reducing their tax bill.

The bull market for U.S. equities in 2021 has been so pervasive that there aren’t many losers to deploy in harvesting tax losses – the practice of selling securities at a loss to offset a bill. capital gains tax. Advisors and their clients are therefore turning more to bonds.

“Fixed income is really the only game in town if you want to reap losses at this point in the year,” said Matt Bartolini, head of SPDR Americas Research at State Street, which has cut fees for three credit products. ready for tax season. “In stocks, it’s hard to find anything that isn’t up. ”

The S&P 500 has climbed 25% this year, with gains across industries as more than 400 members climb. The result is that less than 15% of exchange traded funds in the United States are underwater.

For bond ETFs, it’s almost half. As economies reopen, inflation rises and central banks reduce stimulus, funds like the $ 19 billion iShares 20+ Year Treasury Bond ETF (TLT ticker) have suffered. TLT is on track for the biggest drop since 2013, according to data compiled by Bloomberg.

Fueled by expectations of price growth and bets on rate take-off, rising Treasury yields spilled over into other debt markets. The $ 91 billion iShares Core US Aggregate Bond (AGG) ETF – which ranges from government debt to corporate bonds to mortgage-backed securities – has fallen more than 3% this year, its worst result in eight years.

“One strategy we’ve seen more and more investors and advisers from is to switch between bond ETFs,” said Ben Johnson, director of global ETF research at Morningstar Inc. “The ETF providers, in particular, take the time to market these types of tactics at this time of year.

State Street lowered the expense ratios of three of its credit ETFs this month to just 0.04%. Part of the timing for the fee reduction was to increase the attractiveness of the products for tax-loss harvesting purposes, said the head of fixed income research at the company’s SPDR group.

ETFs are already often preferred by tax-conscious investors because the way they usually operate – using a market maker to make in-kind redemptions – reduces the fund’s tax burden.

This gives them an advantage over most mutual funds, in which a manager typically has to sell securities in order to raise funds to meet investor redemptions. This is a taxable transaction, the cost of which tends to fall on the remaining holders.

This year’s bill will likely be higher for mutual fund investors, according to Melissa Roberts of Keefe Bruyette & Woods, as equity products are on track for a seventh consecutive year of cash outflows in a robust recovery context.

“In the world of mutual funds, capital gains are going to be higher this year because you’ve had this combination of persistent cash outflows and equity appreciation in funds,” Roberts said. “A lot of funds have to sell valued assets. ”

Of course, a 3% drop in a bond ETF won’t entirely offset the bill for any investor paying taxes on double-digit capital gain, Bartolini said. But in the midst of a sea of ​​greenery, it can help soften some of the blow.

“It won’t be gigantic losses, but in a world where everything has gone up, even a little bit of tax loss harvest can come in handy when looking at your overall tax bill,” Bartolini said.

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