The Financial & Risk business of Thomson Reuters is now Refinitiv

All names and marks owned by Thomson Reuters, including "Thomson", "Reuters" and the Kinesis logo are used under license from Thomson Reuters and its affiliated companies.

December 15, 2017

Tis the Season to Be . . . Tax-Loss Harvesting?

by Tom Roseen.

by Tom Roseen.

Despite the prospect of a Santa Claus rally, along with the strong bull market returns of 2017, investors were net redeemers of equity funds for the fund-flows week ended December 13, 2017, with equity funds (including ETFs) suffering their largest net redemptions (-$16.2 billion, their eleventh largest weekly net outflows on record) since December 21, 2016, despite posting a handsome one-week return of 1.17%.

For the fund-flows week the broad-based indices generally rallied to new highs, with the Dow Jones Industrial Average Price Only Index closing the flows week up 1.84%, while the S&P 500 Price Only Index rose 1.28%. Nonetheless, fund investors appeared to be content to sit on the sidelines, taking some of their equity-related winnings off the table ahead of the holiday season and the potential nod to a new tax law. Year to date the Dow and the NASDAQ Composite Price Only Index were up 24.40% and 27.73%, respectively.

Investors’ hopes for a final tax plan before year-end were sparked on Thursday, December 7, after the Republican-led Senate agreed to begin negotiations with the House of Representatives. However, it appeared that many investors may have taken their collective foot off the pedal to digest the implications of a provision in the Senate’s version of the tax bill that would require investors to sell securities on a first-in, first-out (FIFO) basis, forcing investors to sell their oldest shares, generally with the lowest cost basis, ahead of those more recently purchased and potentially impacting the current benefits of tax-loss harvesting. Under the current tax code investors can choose to identify particular shares (specific share identification) to sell, in order to offset capital gains with capital losses; however, under the proposed FIFO provision those tax strategies would become much more difficult to implement.

While it is common knowledge that at year-end investors often choose to use tax-advantaged trading strategies to offset potential current-year tax liabilities, in 2017—because of the pending tax proposals—investors might have put that practice in overdrive before the year-end and the implementation of the FIFO provision. For the thirty-eighth consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $19.3 billion (for the fund group’s fourth largest weekly net outflows on record, going back to 1992). Domestic equity funds, handing back a little more than $18.5 billion (their largest weekly net outflows on record), witnessed their fiftieth week of net outflows while posting a 1.20% return on average.

Supporting the normalcy of the tax-loss harvesting scheme in December and its possible influence on fund flows, we noted six of the seven largest weekly net redemptions for equity funds (ex ETFs) have occurred in December: 12/20/2000: -$20.5 billion, 10/26/2016: -$20.2 billion, 12/21/2016: -$19.9 billion, 12/13/2017: -$19.3 billion, 12/23/1997: -$18.2 billion, 12/16/2015: -$17.3 billion, and 12/19/2007: -$15.7 billion.

Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

Get In Touch