Practical Applications of The Role of ETFs in Active Tax Management

Abstract

ETFs offer compelling advantages for investors who seek to systematically harvest tax losses, say Paul Bouchey and Tianchuan Li of Parametric Portfolio Associates in this interview with Institutional Investor Journals. With co-author Jean L.P. Brunel, managing principal of Brunel Associates and editor of The Journal of Wealth Management, they extended to ETFs their earlier research on the impact of systematic tax loss harvesting on multi-asset portfolios and derivatives. Using a portfolio of large-cap US stocks and their corresponding sector ETFs, the authors found that although single-security tax management proved more beneficial than a single-ETF or sector-focused-ETF strategy, “ETFs turned out to be almost as valuable a tool as a sophisticated stock-level strategy,“ according to Bouchey. They also happen to be uniquely suited to investors determined to avoid triggering the Internal Revenue Service9s “wash rule.”