Beyond Bulls & Bears


A Time of Transition and Tax-Loss Harvesting

As the transition to a new year approaches, David Mann, Head of ETF Product & Capital Markets, revisits the annual tax-loss harvesting season. He also discusses how the strong US dollar has been driving down the returns of US-listed ETFs that hold international equities.

My son—an avid Chelsea Football Club fan—has been slightly frustrated in the early parts of this season as the team tries to find its form. Early season struggles, as many of you may be aware, can be quite common as teams incorporate their newly added players. The main mechanism for adding players is the transfer window, a set time when clubs buy and sell players toward the close of summer and before the new season begins.

We discussed some of the largest transfers of all time (Neymar and Kylian Mbappé), and more recently we both agreed that Erling Haaland would have looked much better in Chelsea blue. I then made a throwaway comment that these summer transfer fees were much cheaper now, at least from a US dollar perspective.

I jumped on what I figured was a great teachable moment for my son and explained to him that a €50M transfer on September 1st was the equivalent of US$50 million, while that same transfer on January 1st would have been closer to US$58 million. Once he realized that these currency moves were not going to impact his card trading business, however, he tuned me out and refocused on Chelsea’s Saturday match.

As tax-loss harvesting season begins in earnest (an almost annual event that I discussed in 2016, 2018, 2020 and 2021), the main headline typically focuses on the selloff in global equity and fixed income markets, many of which are down well over 10% so far this year.1 However, for US-listed ETFs that hold international equities, returns are driven by both the performance of the underlying equity markets AND the performance of the local currency in relation to the US dollar.

In a recent post I touched on the liquidity evolution of several of our single-country ETFs that have spiked in both assets and trading volume. Interestingly, the 2022 year-to-date performance of many US listed ETFs holding international equities have predominantly been driven by the weakness of the local currency in relation to the US dollar – for example, ETFs holding UK and Japanese stocks. As investors consider tax-loss harvesting transition trades within single-country ETFs, it is helpful to remember that this is part global market selloff and part US dollar strengthening.

There is one other narrative worth mentioning in this tax-loss harvesting story, which is the selloff in most major fixed income asset classes. For example, most high-yield indexes are having their worst year since the 2008 global financial crisis.2 With the potential for increased volatility and deterioration of credit quality on the horizon, I believe now is a perfect time for active management as these portfolio managers can stay nimble to avoid sectors and parts of the credit spectrum that might see increased distress and defaults.

I have previously discussed the ETF Rule and how it operationally treats index and active ETFs the same way. That means ETF market makers can leverage the custom creation and redemption processes of an ETF issuer to move bonds efficiently into and out of ETFs. This can allow for a smooth risk transfer when investors transition into alternative high-yield ETF options for tax-loss harvesting purposes.

The ETF transfer window is now open for investors looking for low-cost, single-country options or active fixed income management. 


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1. Source: Morningstar. The MSCI All Country World Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global developed and emerging markets. The Bloomberg Global Aggregate Index measures the performance of the global investment-grade, fixed-rate bond markets. The benchmark includes government, government-related and corporate bonds, as well as asset-backed, mortgage-backed and commercial mortgage-backed securities from both developed and emerging markets issuers. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results. See for additional data provider information.

2. Source: Reuters, “Bonds in line for worst year in decades,” June 30, 2022.

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