Tax Update: Tax-loss harvesting strategies to boost a portfolio’s growth
- January 1, 2023: Vol. 10, Number 1

Tax Update: Tax-loss harvesting strategies to boost a portfolio’s growth

by BlackRock

2022 has been a challenging year for investors. With a shifting macro environment, partly led by the Fed’s aggressive rate hikes intended to bring down inflation, pain has been felt across markets. Through Aug. 31, the S&P returned roughly –16 percent on the year, marking the worst start in nearly 50 years.

While this year has been hard on your clients’ portfolios, the market sell-off does provide a silver lining — it opens the door for tax-loss harvesting, which can both unlock tax benefits as well as offer an opportunity for re-evaluating growth exposures amid the changing rate environment. There are several ways you can potentially capture losses and reallocate to more robust growth opportunities for the future.

Similar to how our wardrobe changes with the seasons, your clients’ portfolios should be looked at the same way when the market environment changes. Provide value by getting more granular with your current growth exposures and seek out targeted opportunities that are presenting robust structural tailwinds.

In today’s environment, a potential strategy to gain access to such an exposure includes harvesting losses in negatively performing growth-tilting funds and swapping them with more targeted megatrend strategies.

Volatile markets also have a way of humbling individual stock selections, and this year is no exception. Names that were lauded for their stellar performance over the past two years — particularly large-cap growth companies — are now seeing their fortunes reverse.

Advisers often buy individual stocks with the intent of gaining exposure to a broader theme rather than the prospects of an individual company. For example, buying a fast-growing manufacturer of electric vehicles is often rooted in broader excitement around the shift from gas to electric transportation.

Yet, buying just one stock to capture a theme can expose investors to unnecessary risks — it is extremely hard to pick the winners of today when a new transformative theme may emerge tomorrow. Moreover, many themes traverse geography, industry, and style and investors can benefit from buying an ETF that captures a theme’s entire value chain. In electric vehicles, for example, auto manufacturers are just one portion of the opportunity set, along with technology enablers, battery producers and battery material suppliers.

Advisers may have experienced recent underperformance across existing thematic exposures. For example, indexes tracking the robotics, genomics and blockchain themes performed negatively through the first eight months of the year. Although near-term performance has suffered, the downturn affords an opportunity for investors to capture losses and fine-tune their exposures.

While some thematic strategies can be too highly concentrated and volatile, others can be too dilutive and duplicative. Investors may want to consider ETFs with four principles in mind:

  • Agility: Designed to evolve as a theme advances and key players change
  • Precision: Built to capture the pure-play names driving cutting-edge themes to new frontiers
  • Diversity: Intended to capture niche players across a theme’s full value-chain across the globe
  • Affordability: Priced at the low end of the range for comparable options in the market today

With growth stocks selling off in 2022, consider harvesting losses and allocating to positions that are better suited for the new market regime.


This article was excerpted from a report from BlackRock. Read the complete report here.

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