Tax-Loss Harvesting: A Silver Lining for Single-Country ETFs?

While the subject of taxes would probably elicit a yawn as dinner party conversation (assuming dinner parties happen again at some point), it’s something many investors need to contemplate as year-end approaches. David Mann, our Head of ETF Capital Markets, discusses the concept of tax-loss harvesting and how it can be a silver lining for investors in single-country exchange-traded funds (ETFs).

Federal and state laws and regulations are complex and subject to change, which can materially impact your results. Always consult your own independent financial professional, attorney or tax advisor for advice regarding your specific goals and individual situation.

I have always thought of the tax-loss harvesting year-end discussion as an annual tradition on par with Thanksgiving dinner. However, given that I actually only wrote about this concept in 2016 and 2018, maybe biannual is a bit more accurate! Feel free to click on the links above for a refresh of either the definition of tax-loss harvesting or why it is deployed as a year-end strategy. As a quick refresher, tax-loss harvesting refers to a strategy whereby poorly performing investments are sold at a loss, and those losses are used to offset realized taxable gains on other investments.

For today, I wanted to revisit our 2018 discussion on tax-loss harvesting within the single-country ETF space, given the wide divergence among global markets during the madness that we call 2020. As a reminder from that blog:

Tax-loss harvesting is the silver lining for owners of single-country ETFs that are down for the year. And for some of these countries, we think things seem to be lining up this year:

  • A particular country being down for the year presents the opportunity to tax-loss harvest.
  • There are now low-cost, single-country ETFs that provide access to those markets at a fraction of their largest competitors’ cost, allowing investors to maintain their exposure.
  • There are ETF liquidity providers who can leverage the trading of the underlying basket to minimize the transition costs.

One of the key considerations when making a tax-loss harvesting decision is whether a similar or highly correlated ETF exists that will allow the investor to maintain their desired exposure. As we mentioned in our post two years ago, Franklin Templeton offers a suite of single country funds (19 in total) that provide access to those markets at a fraction of the cost—40 basis points lower on average.1