Tax time word on tax form with calculator, pen, glasses

Content provided by Grant Engelbart, CFA, CLS Portfolio Manager

Managing portfolios for tax sensitivity is an often overlooked area of investment management, however this time of year, more than the rest, investors definitely seem to tend to notice if their portfolio was not managed with regards to taxes. Many holders of traditional mutual funds received the unpleasant surprise of a sizeable capital gain on their holdings, even though the performance may have been down last year.

ETFs have provided a solution to the internal capital gains issue that mutual funds face. ETFs also provide flexibility – particularly in volatile markets – for tax loss harvesting. Recent market turbulence has provided opportunity to harvest losses and reduce portfolio tax burden (sometimes to zero). Below is a simple scenario illustrating the value of managing a portfolio efficiently with regards to taxes.

grant chart


Of course, the best you can do is not pay any taxes, as in the case of a Roth IRA, or at least defer your taxes until you retire in the case of a traditional IRA. However, many higher income investors may not have the luxury of investing in IRAs, particularly Roth IRAs. In this instance, avoiding short-term gains is crucial, especially for investors in the top tax bracket. The difference between paying short- and long-term gains can be significant, as shown above. In addition, harvesting losses when available can be even more beneficial (this scenario illustrates harvesting a one-time 5% loss and its impact over a five year period.)

As many investors continue to transition to retirement, the location of their assets, the level of their distributions, and the tax efficiency of the investment vehicles they use will become increasingly important. No one wants to pay taxes, and minimizing the level of taxes paid can extend that nest egg through retirement and beyond. At CLS, our tax managed portfolios offer risk-based asset allocation with an overlay of tax management that (in our opinion) is second to none.

An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket. To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket.  ETFs are subject to the same risks as an individual stock, as well as additional risks based on the sector the ETF invests in. CLS Investments does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. The graphs and charts contained in this work are for informational purposes only.  No graph or chart should be regarded as a guide to investing. 1605-CLS-5/4/2016