Taxes, nobody likes them. But they're unavoidable…or are they? There are a number of things investors can do to increase a portfolio's tax efficiency and potentially reduce their tax bill.
Let's talk specifics:
First, investors can look to avoid capital gains distributions:
Let's start with a definition…capital gains are tax costs that fund investors have to pay that are not a direct result of sell decision made by them. These gains are triggered by a fund manager's decision to sell stocks or bonds within the fund that have appreciated since they were first purchased. A Fund's shareholders may be liable to pay these taxes even if they were not invested in the fund when these securities were originally bought and sold.
iShares has the ability to help financial professionals monitor areas and funds that may be at risk of paying out these distributions. We maintain a database of 7,000+ mutual funds' and ETFs' capital gains distribution estimates. By cross-referencing an investor's holdings with our data, we can help shareholders avoid paying excess taxes on their investments.
Next, investors can identify areas where harvesting losses can reduce a tax bill:
Tax loss harvesting is a technique that can help lower an investor's tax bill while still maintaining exposure to the markets. Throughout the year as different asset classes rise and fall, investors can sell – or harvest – a position that has fallen and replace it with an ETF that may provide similar exposure.
Holding on to this loss allows these investors to offset the future taxes they will have to pay when their other investments increase in value. This strategy can be used at any time, no need to wait until the end of the year!
Finally, investors can replace underperforming funds with low cost, tax efficient ETFs:
iShares ETFs can help improve the tax efficiency and performance of portfolios over longer time horizons.
1. ETFs are low cost, on average iShares ETFs are about 1/3 the costs of a typical mutual fund.
[Written disclosure: Morningstar, as of 12/31/15. Comparison is between the average Prospectus Net Expense Ratio for the iShares ETFs (0.37%) and the oldest share class of active open-end mutual funds (1.08%) with 10-year track records that were available in the U.S. between 1/1/2006 and 12/31/2015. Analysis excludes municipal bond and money market funds.]
2. They are tax efficient, On average, only 3% of iShares funds paid a capital gains distribution in the past five years and
[Written disclosure: BlackRock, Morningstar, as of 11/12/15. There is no guarantee that distributions will not be paid in the future.]
3. They offer competitive performance… iShares S&P style box ETFs have outperformed 87% of their mutual fund peers on average over the past 10 years.
[Written Disclosure: Morningstar, as 12/31/2015. Post-tax pre-liquidation comparison made between the 10 year returns at NAV of iShares S&P domestic equity style box funds and the oldest share class of active open-end mutual funds within Morningstar U.S. domestic equity style box categories available in the U.S. between 1/1/2006 and 12/31/2015 ("Active Style Box Funds"). Returns are calculated after taxes on distributions, including capital gains and dividends, assuming the highest federal tax rate for each type of distribution in effect at the time of the distribution. Overall figure is a weighted average of the percentage of funds that the iShares ETF outperformed in each style box, weighted based on the Active Style Box Fund assets in each style box. Performance may be different for other time periods. Style Box Funds are those categorized by Morningstar as U.S. Large Cap Growth / Blend / Value, U.S. Mid Cap Growth / Blend / Value or U.S. Small Cap Growth / Blend / Value. Past performance is no guarantee of future results.]
Reach out to your BlackRock representative today to get started on the path to improved tax efficiency. Call 800-iShares and ask for a portfolio evaluation.
Spoken Disclosure:
Visit iShares.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing.
Investing involves risk, including possible loss of principal.
Written Disclosure:
Visit www.iShares.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing.
Investing involves risk, including possible loss of principal.
This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in this material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice.
The Internal Revenue Service has not released a definitive opinion regarding the definition of "substantially identical" securities and its application to the wash sale rule and ETFs. The information and examples provided are not intended to be a complete analysis of every material fact respecting tax strategy and are presented for educational and illustrative purposes only. Tax consequences will vary by individual taxpayer and individuals must carefully evaluate their tax position before engaging in any tax strategy.
Investment comparisons are for illustrative purposes only. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products' prospectuses.
Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders.
The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, "BlackRock").
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