Beyond Bulls & Bears

(ETF) Anniversaries and Taxes

As we celebrate the holiday season and ponder what we are thankful for, it’s also time to take stock of one’s investments. Here, David Mann, Head of Global Exchange-Traded Funds (ETFs) Capital Markets, opines on an ETF anniversary he’s thankful for—and offers some tax-planning food for thought.

I really love Thanksgiving. I love getting the family together. I love eating way too much turkey and stuffing. I even love having the same argument with my wife every year on whether we should cook the turkey in the oven or on the smoker (guess who wins that one??).

My loyal readers will know that two other anniversaries occur right around this time of year:

  • The anniversary of our single-country ETF lineup which first launched in November of 2017. Happy 4th Birthday!
  • The annual discussion on tax-loss harvesting (here is the link to last year’s post).

Now, usually I do not discuss these two seasonal events together but am changing my tune on the back of a recent client conversation (I will get to that in a second.) First, the growth of our passive lineup has been a very nice success story. Our 23 single country and regional funds are now closing in on $2.5 billion of combined assets with almost $1 billion of inflows in 2021 alone.1

There is no argument that the vast majority of these funds provide exposure to single countries and regions at a fraction of the cost when compared to the largest ETF in their Morningstar category that provide equivalent exposure. On average, our passive funds are 40 basis points (bps) cheaper and have the potential to provide a noticeable compounding effect on performance.2

That does not mean we do not have any pushback from investors when considering one of our single country funds. In the early days, most questions centered on trading and liquidity. I would like to think that we have now seen enough trading examples to put those concerns to bed once and for all. Look no further than the recent trading and subsequent inflows we have seen this year. In fact, I might even put out a separate whitepaper that highlights the ease of trading these funds!

Anyway, back to the client. The pushback was that they did not want to switch into our lower-cost fund because they did not want to realize a capital gain in their current fund. Fair enough! I am certainly not going to give any tax advice (and would imagine there will be further disclaimers somewhere at the end of this blog). However, if not wanting to transition occurs when there are gains, then consider transitioning when these funds are down for the year.

For investors who hold funds that provide exposure to Chinese, Brazilian, or South Korean equity markets, now is a potential opportunity to realize losses on the year while maintaining exposure to those markets at a fraction of the cost. And as an added bonus, you can be part of the anniversary celebration as well!


What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. 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. 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. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with developing markets are magnified in frontier markets.

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.

Franklin Templeton, its specialized investment managers and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

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1. Source: Bloomberg, as of November 19, 2021. In USD. Actual figures: $2.4 billion combined assets and $969 million in flows.

2. As of 10/31/21. Based off current listed fee, Morningstar. Past performance is not an indicator or a guarantee of future results. One basis point is equal to 0.01%.

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