Jerry Hendricks
Portfolio Manager
Topics In Wealth Management: Portfolio Options for Increased Tax Efficiency
09/23/2024
- Stock market has broadened out, making tax loss harvesting more difficult
- ETFs offer additional tax efficiency vs Mutual Funds
- Our actively-managed ETFs present an opportunity for an added layer of tax efficiency
Death and Taxes – neither are pleasant and both are guaranteed to paraphrase the saying. And while investors generally love investments that produce gains, most would prefer not to pay a portion of those gains out in the form of taxes. Teaming with a proficient financial advisor provides an opportunity to properly produce tax efficient strategies that can align with investment goals and risk parameters. This, we believe, is ever more important given how the market has performed during 2023 and throughout 2024. With 79% of the stocks within S&P 500 producing a gain year to date through September 19th, and a median gain of almost 15%, searching for similar investments to offset some of these gains undoubtedly has become more difficult. In addition, capital loss carry forward (CLCF)1 from 2022’s down year has likely been eroded considerably after 2023 produced a year where 70% of the constituents finished in positive territory along with a median gain of approximately 13%. With the market broadening out, investors will find tax loss harvesting2 strategies more difficult to execute.
Source: Bloomberg LP and Strategas Asset Management, as of September 19, 2024
We have discussed the ETF Tax Efficiency previously both with respect to utilizing thematic rotation within our ETF products. But we do feel it is also important to reiterate to investors that mutual funds can provide unwanted tax consequences even if you buy and hold without cashing out, due to the nature of how capital gains are shared across shareholders. Whereas, with an ETF, the investor who sells the ETF is the only one who must deal with the any potential capital gains associated with the sale, much like a stock. In addition, with the introduction of recent rule changes by the Securities and Exchange Commission (SEC), in-kind transactions provide an added layer of tax efficiency as they are not considered taxable events.
While certainly the adage, “Time in the market, rather than timing the market” may hold true for many investors, there can be an element of necessity for sales of securities. Such could occur when a negative news item hits a particular security or a single-themed portfolio or ETF naturally runs its course such as a basket built solely on the outcome of a single event (for example - an election).
Within active ETFs, offerings can provide a nimble component to a portfolio that can adjust to various changes to an index’s structure that simple passive, index-following products are limited due to the construct they must abide by. The current makeup of the S&P 500 shows the weights of the top 10 securities near an all-time high, which, should those names run into a period of negative performance, would impact the underlying performance of the index dramatically. While the indexes, by design, are slow to make changes to the underlying constituents, an active ETF can do so more quickly with the added benefit of managing taxable events via the in-kind transaction mechanism, providing an extra layer of tax efficiency for the end investor.
Source: Bloomberg LP and Strategas Asset Management, as of September 13, 2024
Moreover, we believe our active, thematic ETFs can provide an element of flexibility while adding yet another layer of tax efficiency by avoiding having to sell in the open market as one would have to do should they invest in a single-themed ETF which has run its course. By employing thematic rotation within the ETF portfolio, we feel an added layer of tax efficiency is incorporated by allowing thematic changes to occur in the underlying portfolio without the end investor needing to sell a security, which can trigger a taxable event.
Strategas Asset Management offers three ETFs which employ thematic rotation internally within their portfolios, providing an opportunity for an increased level of tax-efficiency investors may be seeking given the performance in the equity market the past 20+ months.
Our Actively Managed ETFs:
The Strategas Macro Thematic Opportunities ETF (Ticker SAMT) is an actively-managed ETF which invests in 3-5 macro themes at one time. Derived directly from our research, each theme selected within SAMT are believed to be the most impactful ones in the market. The Fund’s thematic positioning is adjusted based on shifts in macro trends to ensure the integrity of each theme’s investment thesis and the relevancy of its constituents.
A more secular product offering comes via our Strategas Global Policy Opportunities ETF (Ticker SAGP). SAGP was crafted with the goal of identifying US large-cap, US small and mid-cap, and non-US large-cap companies that we feel are best positioned for an earnings benefit from policy changes. Thematic rotation within this portfolio comes naturally as companies adjust lobbying efforts based on the changes to the makeup of the parties in Washington.
The Strategas Macro Momentum ETF (Ticker SAMM), our latest offering, is a tactical, actively-managed ETF which leverages nearly two decades of Strategas' proprietary technical and macro research to identify timely investment opportunities with compelling risk/reward profiles. Investing in 20 to 50 U.S. listed securities, this portfolio provides exposure to those tactical themes we believe are currently exhibiting strong technical, momentum, and relative strength characteristics, with rotation occurring within the portfolio based on changes in the technical backdrop.
For additional information on our thematic ETFs please visit https://www.strategasetfs.com/ For more information about Strategas Asset Management, how to access our research, or our other investment solutions please visit our website: https://www.strategasasset.com/ or reach out to a member of our distribution team:
Jon Matta, jmatta@strategasasset.com / (216) 702-4048.
Jim Martin, jmartin@strategasasset.com / (704) 995-3655
Patrick Rista, prista@strategasasset.com / (646) 292-7984.
[1] Capital loss carryover is the net amount of capital losses eligible to be carried forward into future tax years
[2] Tax-loss harvesting involves using the losses from the sale of one investment to offset gains made from the sale of another investment, lowering the federal tax owed that year. Some strategies attempt to maintain portfolio balance by selling one security at a loss and immediately buying a similar security to avoid wash sale rules. For example, swapping Pepsi and Coke within the portfolio.
ETFs and mutual funds each hold baskets of securities. ETFs trade on exchanges intraday at market price, which may be greater or less than net asset value. Shares of ETFs are not individually redeemed from the fund. Transactions in ETF shares result in brokerage commissions and generate tax consequences. Mutual funds are accessed directly from the fund company or through a select broker, pricing generally occurs once a day, and investors buy or redeem shares at the end-of-day net asset value, less any applicable fees. Some mutual funds may charge sales loads or redemption fees. Active ETFs and mutual funds seek to outperform their benchmarks while the goal of index funds is to track their index. Consequently, active funds typically charge more than index-linked products for the increased trading and research expenses that may be incurred. Mutual funds and ETFs are obliged to distribute portfolio gains to shareholders.
Neither Strategas Asset Management, LLC and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.
Carefully consider each of the Funds' investment objectives, risk, and charges and expenses. This and other information can be found in the Funds' summary or full prospectus which can be obtained by calling (855) 273-7227 or by visiting strategasetfs.com. Please read the prospectus, carefully before investing.
Strategas Asset Management, LLC serves as the investment advisor for each Fund and Vident Advisory, LLC serves as a sub advisor to each Fund. The Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Strategas Asset Management, LLC or any of its affiliates, or Vident Advisory, LLC or any of its affiliates.
Shares of any ETF are generally bought and sold at market price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce returns.
An investment in the Fund involves risk, including possible loss of principal.
In addition to the normal risks associated with investing, the Strategas Global Policy Opportunities ETF (SAGP) is subject to lobbying focused investment risk. The adviser's investment process utilizes lobbying intensity as the primary input when selecting investments for the Fund's portfolio and does not consider an investment's traditional financial metrics. The Fund may underperform other funds that select investments utilizing more traditional investment metrics. The Fund may also focus its investments in a particular country or geographic region outside the U.S. and may be more susceptible to economic, political, regulatory or other events or conditions affecting issuers and countries within that country or geographic regions well as risks of increased volatility and lower trading volume.
In addition to the normal risks associated with investing, the Strategas Macro Thematic Opportunities ETF (SAMT) is subject to macro-thematic trend investing strategy risk. Therefore, the value of the Fund may decline if, among other reasons, macro-thematic trends believed to be beneficial to the Fund do not develop as anticipated or maintain over time, or the securities selected for inclusion in the Fund's portfolio do not perform as anticipated.
In addition to the normal risks associated with investing, the Strategas Macro Momentum ETF (SAMM) may invest in smaller companies, heavily in specific sectors, and also invest in gold, all of which can exhibit high volatility. Securities may be difficult or impossible to sell at the time and the price desired. Investments with exposure to international markets may experience capital loss from unfavorable fluctuation in currency values, differences in generally accepted accounting principles, or from social, economic or political instability in other nations. REITs are subject to changes in economic conditions, interest rates, and credit risk. MLPs involve risks related to limited control and limited rights to vote on matters affecting the MLP. MLP common units and other equity securities can be affected by economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer's financial condition, or unfavorable or unanticipated poor performance of a particular issuer. MLP investments in the energy industry entail significant risk and volatility.
The Funds may be more heavily invested in particular sectors and may be especially sensitive to factors and economic risks that specifically affect those sectors.
Topics In Wealth Management: Portfolio Options for Increased Tax Efficiency
Sep 23 2024