Considering that the year is quickly ticking away, investors can shift positions in exchange traded funds to minimize their tax liability for the current year.
For instance, some investors have utilized a popular tax planning strategy with ETFs where they would sell certain positions within an investment portfolio at a loss to offset realized gains elsewhere within the portfolio, reports Ryan Issakainen for MarketWatch.
As a way to avoid potential performance drag from holding large cash positions and to adhere to an investment objective, the proceeds from the sale can be used to invest in a similar ETF. In compliance with the "wash-sale" rule, this new ETF position may be kept within the portfolio or sold and replaced by the original position after 30 days.
In another tax-planning strategy, investors can reduce the current tax impact associated with diversifying stock positions that have greatly appreciated within a portfolio. Individuals would harvest losses from an ETF asset allocation portfolio, which are then used to offset gains from the sale of the appreciated stock.
The proceeds would then be used to invest in a similar ETF, while the sale of the stock may be used to allocate within the overall investment portfolio.
ETFs provide greater portfolio transparency. As such, investors can make an informed decision when deciding to select an equivalent ETF to replace a recently sold position. Additionally, the investment vehicle may be traded like a stock during normal trading hours.
Max Chen contributed to this article.