Posted on 11/29/2011
Yesterday we discussed tax loss harvesting, which is an efficient tax management where you can sell a stock for a loss, “harvest” the write-off, and then use the proceeds to replace the stock exposure with an ETF covering the same space of the market. For the purpose of the discussion yesterday, we used Freeprt-McMoran as an example to demonstrate how the tax loss harvesting works via using ETFs.
Of course Freeport-McMoran is not the only widely-held name that has endured material underperformance this year, there are a number of names that fit a similar description to that of FCX and we've put together a graphic to include double-digit declines within the OEX this year, as well as the ETFs for which they currently post the largest weighting. The returns that we show are year-to-date numbers, but in most cases the stocks are down considerably more from their high watermarks earlier this year or those of a few years ago. This isn't a comprehensive list of Tax Loss Harvesting Candidates, but these are certainly some of the more likely laggards across your accounts and some of the more obvious ETF replacement candidates.
Tax Loss Harvesting with ETFs is simply taking advantage of an opportunity to sell a stock to harvest the tax loss while retaining a degree of exposure to a stock if desired via the purchase of an ETF. You can use this concept for stocks that are down notably on the year, but also for stocks that are simply down from where you bought them. The goal with such a strategy is not necessarily to make a call on the future direction of the stock or the ETF, but rather to look at what has already happened and try to make the most out of these events.
Finally, the premise of harvesting losses is one that draws a great deal of attention today, but we would be remiss if not to mention that the strategy can be employed in an effort to harvest gains as well. Particularly if the prospect of increased capital gains rates were to regain momentum (and surely that is plausible), you may find it beneficial to realize gains in 2011 where possible. We're not CPAs, and we didn't stay at a Holiday Inn Express last night, so we won't present ourselves as tax experts or anything even approaching it. However, just as there are significant laggards among heavily weighted ETF holdings, there are too a number of stocks that have posted massive gains. Apple Computer (AAPL), McDonalds (MCD), and Mastercard (MA)are all names that have seen notable gains so far this year.