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section header ETF fundamentals

subsection header Strategies

Tax optimization

In addition to asset location, tax optimization (also known as tax-loss harvesting) can help maximize a portfolio's after-tax returns.

One way is to sell an investment held in a taxable account at a loss to offset capital gains from another source. In the illustration, a large-cap fund is sold to offset the capital gains distribution from a small-cap fund. To retain large-cap exposure, the investor then buys an investment that has high correlation to the original investment—in this case, a large-cap ETF.

 

 

An investor can achieve three goals with this approach:

  • Harvest losses to lower tax liabilities.
  • Remain fully invested within the chosen investment strategy.
  • Potentially improve the portfolio's future tax efficiency by using ETFs.

Remember that capital losses can only be deducted against capital gains, not income. Capital losses that cannot be deducted in a year can be used to offset capital gains realized in any of the three prior years or in any future year.

Also, you don't have to wait until year end to use a tax-loss-harvesting strategy. Opportunities may arise any time the market declines.

 

Points to consider

  • Be sure that if you sell an investment to realize a loss that it doesn't constitute a "superficial loss." A superficial loss generally occurs when you buy the same or an identical investment 30 days before or after the sale of an investment at a loss and you still own the substituted investment 30 days after the sale. Superficial losses are disallowed and cannot be applied against capital gains. You'll want to consult a tax advisor about what constitutes the same or an identical investment.
  • Your replacement investment could underperform your original investment.
  • Transaction costs could be greater than the tax benefit.

Basics

Learn the basics of ETFs, including their history, how they compare to mutual funds, what types are available and more.

Management

Learn about the different types of exchange-traded products, how index and active ETFs are managed and more.

Trading

Learn about ETF trading, common order types, premiums and discounts, liquidity considerations and more.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.

All investment funds, including those that seek to track an index are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While the Vanguard ETFs are designed to be as diversified as the original indices they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.

All monetary figures are expressed in Canadian dollars unless otherwise noted.