Blogs & Comment

Tax harvesting with ETFs: hidden alpha?

One of the advantages of exchange-traded funds (ETFs) is that they make it easier to harvest tax losses in taxable accounts. For example, if you have a loss showing in the iShares CDN Large Cap 60 Index Fund ( XIU) you can simultaneously sell it and buy the iShares CDN Composite Index Fund ( XIC) as a replacement.
It maintains a similar exposure to the Canadian stock market yet is different enough (as I understand) from XIU to avoid triggering the superficial loss rule (which requires waiting 30 days before repurchasing).
Another example was suggested by a financial advisor, Jean Baker, in a Jonathan Chevreau columnawhile back. She suggested Canadian investors holding broadly based U.S.-dollar denominated ETFs on U.S. exchanges take advantage of currency losses (as arise when the C$ shoots up against the U.S. dollar, like over past year) by selling the ETF and replacing it with a similar broad-based ETF. An example would be to sell the iShares S&P500 ( IVV) ETF and buy the S&P Depositary Receipts ( SPY) ETF.
In another article, financial advisor, Laurent Wermenlinger, called the ability to take tax losses by switching among ETFshidden alpha. In other words, with tax harvesting, ETFs may actually be able to surpass market averages (never mind just matching them and beating most advisers).
It seems to be an intriguing concept.I wonder how it would compare against a buy-and-hold strategy within an RRSP. It might be interesting to crunch the numbers. Anyways, the basic of ideaof using ETFs to harvest tax losses does seem to provide another reason for using ETFs over mutual funds.
Update:A reader’s post prompts this proviso: while ETFs like XIU and XIC do have differences, their similarities may leadCanada Revenue Agency torule superficial tax losses occurred when one was used to replace the other.
Update2: According to a statement by a CRA official in this postby Canadian Financial DIY, CRA will not challenge replacing one ETF with another as long as they track different indexes ( so replacing XIU with XIC or vice cersa should not run afoul of the superficial-loss rule since they track different indexes, i.e. TSX 60 vs. TSX 300).