Beyond Bulls & Bears


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

Two years later, we can see how those 19 single-country ETFs have performed as compared to the largest ETF in the market providing exposure to that same country. On average our funds have outperformed the largest by 1% (NAV Returns) and 0.42% (Market Price Returns)2 for the two-year period ending 10/12/20!3 See performance table here.

There are once again plenty of opportunities for tax-loss harvesting within the single-country ETF space. Sticking with those 19 global markets and looking at their daily performance over the past two years, we estimate that around half of all purchases made during that period would now be at a loss. For several of those markets, we estimate that number is closer to 80%.4

With so many opportunities, the timing for investors seeking to harvest a tax loss may be favorable. Furthermore, ETF market makers have become even more comfortable in providing transition trades with almost no market impact when measured in terms of the fund’s bid/ask spread. To be honest, talking about any strategy built on the foundation of losses in a portfolio kind of stinks. However, hopefully we can all agree that when it comes to losses (and tax liabilities), the smaller, the better.

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the portfolio selection and research process. Factual statements are taken from sources considered reliable but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or as an offer for any particular security. Past performance is not an indicator or a guarantee of future results.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236,—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

This information is intended for US residents only.

What Are the Risks?

All investments involve risks, including possible loss of principal. Generally, those offering potential for higher returns are accompanied by a higher degree of risk.  Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.

ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

For more information on any of our funds, contact your financial advisor or download a free prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.

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1. Based off current listed fee, Morningstar.

2. Net Asset Value (NAV) Returns are based on the NAV of the ETF; Market Price Returns are based upon the official closing price of the ETF’s shares. The fund’s NAV represents the per-share-value and is determined by dividing the total NAV of the fund by the number of shares outstanding. The fund calculates the NAV per share each business day as of 1 p.m. Pacific time which normally coincides with the close of trading on the New York Stock Exchange (NYSE). The fund does not calculate the NAV on days the NYSE is closed for trading. If the NYSE has a scheduled early close or unscheduled early close, the fund’s share price would still be determined as of 1 p.m. Pacific time. Market Price returns are calculated using the closing price as of 1 p.m. Pacific time on each trading day. Returns are average annualized total returns, except for those periods of less than one year, which are cumulative.

3. Source: Morningstar as of 10/12/20. Past performance is not an indicator or guarantee of future results.

4. Sources: Franklin Templeton, Bloomberg, as of October 12, 2020.

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