How Wholesalers Can Help Advisors Uncover Tax-Loss Harvesting Opportunities in Fixed Income

Welcome to the Asset Management Pulse by YCharts. Optimizing portfolios for tax efficiency and strategic alignment is crucial for advisors at the end of the year. Below, we dive into how wholesalers can use YCharts to identify tax-loss harvesting opportunities in fixed income, and aid advisors as they make these decisions in client’s portfolios.

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As year-end approaches, advisors are focused on optimizing portfolios for tax efficiency and strategic realignment. This period presents a prime opportunity for asset managers and distribution teams to identify tax-loss harvesting opportunities and strengthen relationships with advisors by offering timely, actionable insights.

Fixed income, in particular, offers significant potential for strategic repositioning. Market dynamics such as a rising 10-year Treasury Yield and a dovish Federal Reserve (which just cut interest rates by another 25 basis points ) create an environment where reallocations can unlock tactical and strategic opportunities in portfolios.

End-of-year client meetings make this an especially critical time to engage advisors. These conversations often focus on tax planning and preparing portfolios to align with clients’ goals. With YCharts, wholesalers can elevate these discussions, providing the clarity advisors need to optimize portfolios for tax efficiency and future growth.

Identifying Tax-Loss Harvesting Opportunities?

Using the Fund Screener , wholesalers can review the price and total return performance of fixed-income funds across various time periods to identify the best tax-loss harvesting opportunities. In fixed-income strategies there can be a significant divergence between total and price return due to the income component in these funds.?

Depending on a client’s cost basis, these strategies can be sold to harvest losses, which can help mitigate the tax impact from realized gains in other portfolio areas.

By leveraging these insights before meetings with advisors, wholesalers are better prepared to identify which funds might be ripe for replacement if they are presented with an advisor’s models during the discussion.

Creating Tax-Loss Harvesting Visuals for an Effective Meeting

The current fixed-income landscape has produced a complex backdrop for bond investors, particularly in longer-duration bonds that traditionally benefit investors during periods of falling interest rates.?

However, due to external factors such as the recent U.S. presidential election results, changing inflation expectations, and fiscal deficit concerns, longer-term yields have risen as treasury buyers demand more yield for treasury bond purchases, potentially creating paper losses in certain bond categories.

The visual above provides a snapshot of how various bond funds, including benchmark long-duration Treasury and Corporate ETFs, have performed on a price and total return basis over the past three years. It highlights the impact of rate volatility on fixed-income funds of varying durations and credit qualities.

Visualizing a Fixed Income Fund-to-Fund Comparison

The current rate environment provides a distinct opportunity to reallocate investments across the yield curve. Given the rising yields on long-term bonds, there are potential tax-loss harvesting opportunities for holdings underperforming in this environment.?

For example, using YCharts, wholesalers can effectively illustrate the advantages of selling a hypothetical fixed-income fund whose price has deteriorated by 5% over the last 3 years due to the adverse impacts of rate fluctuations.

By selling Fund A and realizing losses, they can offset other gains within the portfolio and reallocate those assets into Fund B — a similar fund with stable or positive performance over the same period.

Illustrate The Value of Active Fixed Income Management Using YCharts

Recent fund flow data indicates a surge in demand for active strategies within fixed-income ETFs, which attracted $86.7 billion in Q3 2024 alone. Active strategies, which comprise just under 15% of total fixed-income ETF AUM, accounted for $26.8 billion (31%) of these inflows.?

This demonstrates a growing preference for active management in fixed income, as these strategies may offer crucial diversification and flexibility. Active managers can adjust holdings in response to shifting interest rates and economic data, which may prove vital for mitigating risks and capitalizing on opportunities to enhance income-potential in volatile markets.

YCharts can be instrumental in illustrating the value of these strategies. Wholesalers can dynamically create compelling Comp Tables that showcase the advantages of active strategies over traditional vanilla fixed-income strategies. These tables can highlight differences in yield, duration, credit quality, and sector allocation, demonstrating the potential advantages of some active management in their fixed-income sleeve.

Navigating IRS’ Wash Sale Regulations with YCharts

When discussing tax-loss harvesting with advisors, wholesalers must consider the IRS's Wash Sale Rule. This rule prohibits harvesting losses on security if a substantially identical security is purchased within 60 days of the sale that generated the capital loss.?

This means that investors must refrain from purchasing an identical or “substantially identical security”—or even an option to buy such securities—for 30 days before and 30 days after the capital loss is realized.?

Using Category or Peer Group names and fixed income sector exposure in Comp Tables , YCharts can help identify investments that provide similar market exposure without being considered "substantially identical. " Thus, advisors can potentially maintain their preferred market exposure while complying with tax regulations.?

Implementing Portfolio Allocation Recommendations

Wholesalers can use YCharts to identify funds that could be replaced when a portfolio is reconstituted and visualize the historic performance impact of implementing those changes to a model.

By duplicating an advisor’s current portfolio or fixed-income sleeve and substituting an underwater fund, wholesalers can showcase potential improvements in performance, risk-adjusted returns, and overall portfolio resilience against market volatility.

Conclusion

Using YCharts, asset managers can help advisors enhance the tax efficiency of their client portfolios. This support strengthens the relationship between advisors and their clients, positioning you as the valuable partner who demonstrated how taking advantage of tax-loss harvesting opportunities can deliver long-term benefits to their clients.