November 27, 2023
November 27, 2023
Each month, you'll have access to the latest insights from our Portfolio Solutions experts to help you address evolving issues that may affect your clients' portfolios.
Vanguard Portfolio Solutions
Vanguard Portfolio Solutions
Vanguard Portfolio Solutions
Each year, tax-loss harvesting creates an opportunity for advisors to "make lemons into lemonade." You can realize losses that a client experienced during the year and use them to offset realized gains in other parts of the portfolio. Our advisor partners say that tax-loss harvesting gives them an opportunity to turn a negative conversation with a client into a positive one while also highlighting the value they bring to their clients on an ongoing basis. The amount of value that comes from a tax-loss harvesting strategy hinges on both the market environment and factors that may be unique to your clients. As stated in Your mileage may vary: Setting realistic tax-loss harvesting expectations, some factors you should consider are summarized below in Figure 1.
Volatility: Choppy markets lead to increased potential for tax-loss harvesting.
Portfolio construction: Trading a higher number of portfolio securities creates the potential for more tax-loss harvesting opportunities.
Tax-rate spread: You can evaluate a client's current tax rate against a potential future tax rate.
Offsettable income: In the absence of gains, the benefit of tax-loss harvesting lessens.
Invested cash flows: Regular contributions to the portfolio allow for diversification of tax lots, creating more opportunities to harvest.
Liquidation level: An account with a lower expectation of liquidation yields a greater tax-loss harvesting potential.
Before embarking on a tax-loss harvesting strategy, it's important to evaluate each client's situation independently and not apply a one-size-fits-all approach.
Fixed income: It isn't just the leaves that have been falling this season; intermediate and longer duration bond prices have been as well, pushing the 10-year Treasury yield to levels that haven't been seen since July 2007 (source: YCharts, as of October 25, 2023). For portfolios that have seized the long-term benefits of extending duration, the price decline in recent months may provide a year-end opportunity to harvest these losses and offset any realized gains on the equity side of the portfolio.
Consider Vanguard's Treasury suite of ETFs (VGSH, VGIT, VGLT) as a swap for existing Treasury positions or to inject quality into your client's fixed income portfolio. Exposure to the intermediate or long end of the Treasury curve can lock in higher interest rates for longer. It can also act as a stronger diversifier against future equity volatility, when compared to money markets.
For broader, more diversified options, consider two cornerstone building blocks of Vanguard’s fixed income allocations: BND is a passive representation of the U.S. bond market, and VCOBX is an active approach to U.S. bonds.
Equities: With broad equity markets rebounding in 2023, instances where it makes sense to harvest losses may be less obvious. Vanguard's targeted size and style ETFs, along with broadly diversified products, are potential tools to allow you to meet your clients' specific needs.
Our Portfolio Solutions team is here to help you make the most informed decisions for your clients as you evaluate potential portfolio changes. Vanguard's equity and fixed income ETF line-up can help you execute your tax-loss harvesting approach and ensure your portfolio is postured appropriately for your clients.
You would probably agree that we are at or near the end of the hiking cycle. Markets have capitulated recently and begun to price in higher for longer rates, which in turn has driven significant investor demand for government bonds. Treasury bonds, without a doubt, are offering quite attractive yields across the maturity curve—an environment investors have not seen in over a decade (source: Treasury yield curve, as of October 31, 2023). But is there another segment of the fixed income market that could potentially boost investors’ returns by providing an attractive spread over Treasury bonds? We believe that high-quality corporate bonds are positioned to do just that.
In our view, high-quality corporate bonds look enticing as part of a diversified portfolio for several reasons:
Note: The one-year returns after rate hikes are a complete average for the periods of February 1, 1995, to February 1, 1996; May 16, 2000, to May 16, 2001; June 29, 2006, to June 29, 2007; and December 19, 2018, to December 19, 2019.
Sources: Bloomberg data via FactSet. Long Treasury represented by Bloomberg U.S. Aggregate Government-Treasury-Long Index; Long Credit represented by Bloomberg U.S. Aggregate Credit-Long; Intermediate-Term Treasury represented by Bloomberg U.S. Aggregate Government-Treasury (5–10 Y); Intermediate-Term Credit represented by Bloomberg U.S. Aggregate Credit (5–10 Y); Short Treasury represented by Bloomberg U.S. Aggregate Government-Treasury (1–5 Y); Short Credit represented by Bloomberg U.S. Aggregate Credit (1–5 Y). Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Investors looking to lock in higher yields should consider Vanguard Intermediate-Term Corporate Bond ETF (VCIT). The fund provides diversified exposure to the intermediate-term investment-grade U.S. corporate bond market and is yielding 6.23% as of October 27, 2023 (source: Vanguard).
Vanguard Intermediate-Term Investment-Grade Fund (VFIDX) is a great option to consider for investors looking for an actively managed fund that reflects the views of Vanguard's talented, disciplined Fixed Income Group.
Muni bond valuations are attractive right now across multiple lenses. The top-line yield for the broad market has been trading above the 98th percentile (see Figure 3) over the last 20 years. Only during the credit and liquidity strain of the global financial crisis have we seen muni bonds trade at these yield levels. While muni yields are robust, fundamentals remain strong. Our credit analysts believe state balance sheets are on firm footing and there are plenty of high-quality credit opportunities within revenue sectors.
Source: Bloomberg and Vanguard calculations, as of November 1, 2003, to October 31, 2023. Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Additionally, tax-equivalent yields for investors in the highest tax brackets relative to other segments of investment-grade fixed income are compelling (see Figure 4). If you have clients that are in these tax brackets and don’t have tax-deferred opportunities available, look closely at municipal bonds.
Source: Bloomberg Indices, using yield-to-worst data as of October 31, 2023.
Note: Tax-equivalent yield is calculated using a 40.8% tax bracket, which includes a 37.0% top federal marginal tax rate and a 3.8% net investment income tax to fund Medicare.
Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
As mentioned, we are seeing some of the best valuations for municipal bonds coincide with some of the strongest fundamentals over the last two decades. For deeper context into the municipal or other segments of fixed income markets, contact our team of specialists to help you customize a solution to meet your clients’ needs. In addition, please see our most recent issue of Active fixed Income Perspectives.
Our team of experts can provide an objective perspective on your portfolio construction decisions, validating your choices or uncovering opportunities. Take advantage of our personalized analysis based on your specific concerns or challenges.
In addition, our self-service analytics tools allow you to evaluate your clients' portfolios from a variety of angles, confirming your current portfolio construction approach and/or identifying opportunities for improvement.
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