For investors who identify tax efficiency as a top concern, financial professionals know they can use ETFs to pursue more control over annual tax liabilities. But there are additional ways to leverage ETFs to help minimize capital gain distributions (and help reduce an investor's yearly tax bill), particularly for those who have unrealized losses over the last 12 months. We explore five ideas below.
Capital Group active ETFs can be used for:
Idea #1: Tax-loss harvesting
Tax-loss harvesting can be a valuable tool, especially in challenging market environments, because it allows investors to turn a negative into a positive by selling investments that have lost value, replacing them with other investments and applying those losses to offset future capital gains. At the end of the year, if losses exceed capital gains, the losses can be applied to noninvestment income (up to a specific limit) and any remaining losses can be used to help neutralize future capital gains. Tax-loss harvesting can be used on different types of investments, from individual equity securities to mutual funds to ETFs.
![Photograph shows a headshot of Capital Group ETF Specialist, Anthony Wingate. The copy is a direct quote from him that says, “Ultimately, tax-loss harvesting allows investors to keep more of what they’ve earned while preserving the portfolio allocation to help them stay on track to realizing their long-term financial goals.”](https://static.capitalgroup.com/content/dam/cgc/shared-content/images/photos/etf-storefront-insights-resources/atyw-quote-image.png)
At Capital Group, we provide investors with a wealth of options. Our investment products offer investment strategies across a range of vehicles that all feature our signature approach to active management. Our suite of ETFs may give financial professionals the opportunity to tax-loss harvest current investments that no longer meet an objective, or tax-loss harvest current investments in favor of vehicles that may offer greater tax efficiency. To help identify tax-loss harvesting opportunities, both across equity and fixed income allocations, the list below shows which of our ETFs may be considered as substitutes for common asset classes.
Identifying tax-loss harvesting opportunities
Capital Group ETFs can serve as substitutes for many common asset classes
Ticker | Fund | Morningstar category |
CGUS | Capital Group Core Equity ETF | Large Blend |
CGGR | Capital Group Growth ETF | Large Growth |
CGDV | Capital Group Dividend Value ETF | Large Value |
CGXU | Capital Group International Focus Equity ETF | Foreign Large Growth |
CGIE | Capital Group International Equity ETF | Foreign Large Growth |
CGGO | Capital Group Global Growth Equity ETF | Global Large-Stock Growth |
CGDG | Capital Group Dividend Growers ETF | Global Large-Stock Blend |
CGCB | Capital Group Core Bond ETF | Intermediate Core Bond |
CGCP | Capital Group Core Plus Income ETF | Intermediate Core-Plus Bond |
CGSD | Capital Group Short Duration Income ETF | Short-Term Bond |
CGMS | Capital Group U.S. Multi-Sector Income ETF | Multisector Bond |
CGSM | Capital Group Short Duration Municipal Income ETF | Muni National Short |
CGMU | Capital Group Municipal Income ETF | Muni National Intermediate |
CGBL | Capital Group Core Balanced ETF | Moderate Allocation |
Source: Morningstar Direct*
Idea #2: Constructing fee-based models
Model portfolios allow financial professionals to blend complementary investment approaches, from different asset managers and across a range of investment products, to deliver solutions to help meet investors’ long-term needs. Getting portfolio construction right is especially important during challenging market environments. Whether investors are looking for an actively managed diversified core portfolio or are evaluating adding active management to a predominantly passive portfolio, Capital Group’s portfolio construction team will perform a portfolio analysis to help financial professionals develop portfolio recommendations that reflect investors’ long-term financial goals. To learn more about partnering with our portfolio construction team, request a consultation.
![The image shows 3 multicolored pie charts with each color corresponding to a different Capital Group ETF. The first pie chart is labeled: Core 80/20. It is comprised of 20% CGUS ETF, 15% CGDG ETF, 10% CGGR ETF, 10% CGDV ETF, 10% CGBL ETF, 9% CGGO, 6% CGCP, 5% CGMS, 5% CGCB, 5% CGIE and 5% CGXU ETF. The second pie chart is labeled: Core 60/40. It is comprised of 25% CGBL ETF, 20% CGDV ETF, 20% CGCB ETF, 15% CGDG ETF, 10% CGCP ETF, 5% CGGO ETF and 5% CGUS ETF. The third pie chart is labeled: Municipal 60/40. It is comprised of 40% CGMU ETF, 20% CGXU ETF, 20% CGDG ETF, 15% CGUS ETF and 5% CGGO ETF.](https://static.capitalgroup.com/content/dam/cgc/shared-content/images/photos/etf-storefront-insights-resources/resources/5-ways/Pie-charts_desktop-10-02-23.png)
Idea #3: Rebalancing portfolios
When tax-loss harvesting, financial professionals may suggest that instead of having a similar allocation†, clients consider other options that may help position their portfolios to better pursue their long-term financial goals, such as:
- Shifting away from individual holdings in favor of ETFs to improve portfolio diversification
- Moving from investment vehicles that are less focused on tax efficiency and into ETFs
- Reducing passive index ETFs at the core of portfolios in favor of active core ETFs
Get the latest on Capital Group ETFs
Don’t miss insights and ideas for using our ETFs
Idea #4: Investing cash
Inflation can threaten an investor’s bottom line. To potentially avoid the loss of purchasing power and the impact of longer term inflation, consider investing cash in ETFs that align with investors’ short- and long-term financial goals. There are ETFs to pursue income while seeking a low-risk profile that can serve as an alternative to cash or ETFs designed to offer enhanced cash options, such as Capital Group Short Duration Income ETF (ticker: CGSD), a short duration bond fund, and Capital Group Municipal Income ETF (ticker: CGMU), an intermediate-term muni fund.
ETFs appeal to many investors because they:
- Generally offer a relatively low-cost way to easily diversify portfolios
- May reduce taxable capital gain distribution
- Can be used to construct a complete portfolio or complement an existing portfolio
Idea #5: Reinvesting dividends into ETFs
Many investors automatically reinvest dividend payments directly back into the fund that produced them. However, some investors may benefit from taking dividend payments as cash and reinvesting them into ETFs, which may have the potential to:
- Reduce capital gain liabilities for investors focused on tax efficiency
- Improve overall portfolio diversification
Investors’ individual circumstances should be carefully considered, but this option could be an easy way to incorporate greater tax efficiency into existing portfolios. Our ETFs are mainly core holdings, which means they aim to provide solutions for some of the most common portfolio allocations and, because they’re actively managed, they seek to help investors pursue better outcomes.
See an idea you like? Contact us.
There are many benefits to investing in ETFs for investors in both qualified and nonqualified accounts. These are just a few ways to use ETFs to help manage the tax efficiency of their investments. To further explore these ideas, contact your Capital Group representative or call us at (800) 421-9900.
Tax-loss harvesting: The practice of selling securities that have declined in market value to realize the capital loss so it can be used to offset capital gains.
Need help with tax-loss harvesting?
Get our guide for key considerations and suggestions.
Anthony Wingate is an ETF sales specialist at Capital Group, home of American Funds, covering the Western U.S. He has 16 years of industry experience and has been with Capital Group for one year. Prior to joining Capital, Anthony worked as a sales executive at Vanguard. He holds an MBA and a bachelor's degree in business administration, both from the University of Arizona. Anthony is based in Los Angeles.