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Three Tax Loss Harvesting Strategies to Grow Client Portfolios

The turbulent market environment offers investors the chance to harvest losses and strategically reposition portfolios.

Investors have a lot to digest these days. Geopolitics, inflation and Federal Reserve policy have agitated financial markets in 2022, leaving returns and diversification in short supply. Over the last several decades, global equities and fixed income have provided some level of diversification. This year has been a rare exception, with both equities and bonds suffering steep drawdowns. Investment results have been particularly challenged for growth investments. The S&P 500 Index had its worst start in nearly 50 years, while technology benchmarks have been hit even harder, according to FactSet. Against this difficult backdrop, a silver lining emerges: an unparalleled opportunity for tax loss harvesting. Through tax loss harvesting, investors can unlock potential tax benefits and reallocate capital to new investment opportunities. With that in mind, we have identified three ways that investors can execute this strategy in the growth portion of their portfolio:

1. Sharpen Growth Exposures: Seek Targeted Opportunities

The S&P 500 Index started the year having more than doubled from its March 2020 lows. Dovish monetary policy in 2021 buoyed almost all asset classes, particularly growth equities. Fast forward to today, and the tides have changed. As rising rates and economic uncertainty dominate headlines, those same growth stocks have tumbled. We’ve entered a new market regime, in which attractive growth opportunities are not as easy to come by.

For investors looking to stay invested in growth, identifying precise opportunities that are poised to benefit from long-term structural shifts, even despite economic headwinds, is key. Targeted thematic strategies, for example, offer exposure to companies benefitting from powerful disruptive forces (think areas like electric vehicles and clean power). The opportunity for investors lies in harvesting losses in challenged broad growth investments and swapping them with more targeted megatrend exposures.

2. Spread Out Risk: Diversify, Diversify, Diversify

Predicting the pace and direction of change is a daunting task. This is especially pertinent for investors today. Many companies that enjoyed strong performance over the past two years have been humbled in 2022. 

By attempting to identify a sole winner at the forefront of transformational change, investors risk overlooking the bigger picture. Let’s take the electric vehicle industry as an example. There exists a plethora of auto manufacturers who could benefit from EV adoption. But there are several other areas, like battery producers and technology developers, that could benefit too. Diversifying investments to encompass all parts of the value chain spreads out risk, while offering clients more complete exposure to a particular megatrend.

Investors may consider swapping underperforming individual stocks with investment vehicles, like thematic ETFs, that provide more diversified exposure to a specific megatrend. While betting on one company, geography, or industry can miss the holistic picture, megatrend ETFs strongly position clients to capitalize on a theme in its entirety.

3. Maintain Exposure: Stay Invested

Global stocks and bonds are both down on the year, and volatility is still elevated. It is no surprise that certain thematic exposures have experienced challenged performance. In times like this, it is critical for investors to take a moment to pause, reflect and reevaluate. This downturn serves as a key moment to cut losses in existing thematic allocations and replace them with superior investment vehicles.  

In considering thematic ETFs, investors should keep four principles in mind: precision, diversity, agility, and affordability. By identifying megatrend ETFs that capture precision to pure-play names at the forefront of innovation, diversity to reflect a theme’s entire value-chain, agility to evolve alongside the theme over time, and affordability for cost-effective investment options, investors can harvest losses, while staying invested in high-conviction themes.

Big Losses Present Big Opportunities

These days, you would be hard-pressed to find a portfolio unaffected by market drawdowns. While these losses are painful, they present investors with what is perhaps the most significant tax loss harvesting opportunity in decades. The turbulent market environment offers investors the chance to harvest losses and strategically reposition portfolios to capture new growth opportunities.

Jay Jacobs, is U.S. Head of Thematics & Active Equity ETFs at BlackRock

TAGS: Equities
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