Portfolio perspectives

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Portfolio perspectives

Vanguard Perspective


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.


AJ Babb
Vanguard Portfolio Solutions
AJ Babb

AJ Babb

Vanguard Portfolio Solutions

Edward Saracino
Vanguard Portfolio Solutions
Edward Saracino

Edward Saracino

Vanguard Portfolio Solutions

Mariya Dmitriev, CFA
Vanguard Portfolio Solutions
Mariya Dmitriev, CFA

Mariya Dmitriev, CFA

Vanguard Portfolio Solutions

Tax-loss harvesting

Turn lemons into lemonade: Tax-loss harvesting

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.


Figure 1: Core drivers of tax-loss harvesting benefit

A graphic highlighting the core drivers of tax-loss harvesting benefit: volatility, portfolio construction, tax-rate spread, offset income, invested cash flows, and liquidation level.1

Source: Vanguard.

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.


Take advantage of the opportunities

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.

Next steps to consider: Evaluate your TLH opportunities

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.

Investment-grade bonds

Find opportunities in high-quality, investment-grade bonds

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:

  • Attractive all-in yield. U.S. investment-grade (IG) bond yields above 6% are in the top decile in terms of all-in yields—the highest for the asset class in more than a decade (sources: FactSet and Bloomberg Indices, as of October 31, 2023). The spread over Treasuries (additional compensation investors receive for taking on default risk of an issuer) is about 120 basis points, which means investors are picking up a good carry with higher credit quality bonds.
  • Strong corporate fundamentals. For the most part, large issuers are well-positioned to withstand an economic slowdown, which continues to be the base case for most economists for 2024. Investors might wonder if spreads would widen amid a weaker economic backdrop. The answer is yes, and that is why we favor high-quality bonds. In active products, we are focusing on noncyclical industries that are less sensitive to the economic environment.
  • Return potential. IG bonds—highly sensitive to moves in Treasury rates—tend to perform well the year after the Fed concludes its hiking cycle. As of the end of October, markets were pricing in no additional hikes (source: Bloomberg). In recent history, corporates have outperformed similar maturity Treasuries in the year following the last rate hike (see Figure 2).

Figure 2: Total cumulative return one year after the last hike

Total cumulative return one year after the last rate hike: Long Treasury: 13.82%, long credit: 16.94%, intermediate Treasury: 11.12%, intermediate credit: 13.79%, short Treasury: 8.01%, and short credit: 9.57%.

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.

Next steps to consider: Look into allocating to high-quality credit

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.

Municipal bonds

Explore the good news about higher rates for municipal bonds

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.


Figure 3: Municipal yields at highest absolute levels in a decade

A table showing the yield percentiles over the past 20 years. Muni: 98.51%, AAA: 62.86%, AA: 99.84%, A: 99.62%, BBB: 98.93%, HY: 98.44%.<br><br>A line chart tracking the Bloomberg Municipal Bond Index Historical YTW (%) over the last 20 year revealed that the muni index is currently at the 98th percentile with a value of 4.49%.

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.


Figure 4: Tax-equivalent yield for municipal bonds remains attractive

A bar chart showing that the tax-equivalent yield to worst for munis at over 7% is more than that for U.S. aggregate, U.S. Treasury, U.S. MBS, and U.S. corporate.

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.

Next steps to consider: Reach out for a consultation

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.

Partner with Vanguard Portfolio Solutions

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.

Vanguard perspectives series

For more expert insights, check out:

  • Market perspectives: Turn to Vanguard's senior economists each month for projected returns and monthly economic highlights on inflation, growth, and expected Fed actions.
  • Active Fixed Income Perspectives: View our quarterly, in-depth commentary for a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.
  • ETF perspectives: Get the latest ETF trends and insights from our investment experts to help you address issues that may affect your clients' portfolios.


  • For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
  • Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.
  • Investments in bonds are subject to interest rate, credit, and inflation risk.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
  • Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
  • Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
  • Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications. We recommend that you carefully review the terms of the consent and consult a tax advisor before taking action.
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