This post was written with contributions from Martin Dunn. Martin is a Research Analyst in the ETF and Mutual Fund Research Team.

With interest rates rising and bond prices falling, we conducted research this summer to determine the extent of fixed income losses and identify potential opportunities for tax loss harvesting. The results were compelling—our analysis of the 30 largest fixed income ETFs by assets under management (AUM) found significant losses across the fixed income spectrum. But markets can shift and change rapidly, so we reran the numbers as of the end of September to see what had changed.

How big is the autumn harvest?

The June results showed widespread opportunities for tax loss harvesting, but the September results are now even more compelling. Looking at the price returns of the 30 largest fixed income ETFs over 69 rolling 1-month periods ending September 30, 2018,1 we found:

  • 9 had losses in 100% of the periods, reflecting $175 billion in assets [30% of the funds]
  • 18 had losses in 90% of the periods, reflecting $294 billion in assets [60% of the funds]
  • 22 had losses in 80% of the periods, reflecting $358 billion in assets [73% of the funds]
  • 24 has losses in 75% of the periods, reflecting $377 billion in assets [80% of the funds]

Of course, with such considerable losses, it is also probable that investors holding funds outside the 30 largest might be sitting on unrealized losses in their fixed income portfolios.

Put the harvest to work

From investment grade to Treasuries to mortgages, every index we tracked had losses—further illustrating that investors are very likely to be sitting on long-term fixed income losses. It might be time to consider adjusting portfolios to:

  • Use losses to offset current or future gains
  • Refine exposures to create more resilient portfolios against rising rates by shortening duration to reduce drawdowns, using floating rates to increase income while balancing risk, or going active to mitigate interest-rate sensitivity.
  • Lower costs by looking at similar exposures in a more cost effective wrapper 

Don’t forget harvesting rules

Tax loss harvesting is the practice of selling an investment that has lost value to offset capital gains. If capital losses exceed a portfolio’s gains—or if there are no capital gains—the net loss can be used to offset up to $3,000 of the current year’s ordinary taxable income (even though the investor’s ordinary income may be taxed at a higher rate than capital gains). If the annual net loss is more than $3,000, the excess can be carried over to offset gains and ordinary income in future years.

Investing the proceeds from a harvested loss into another fund, a "tax swap," offers the opportunity to reposition portfolios for today’s rising rate environment and lower fund costs. Importantly, investors using tax swaps must abide by the Internal Revenue Service’s Wash-Sale Rule that prohibits claiming a loss on the sale of an investment if the same or “substantially identical” investment is purchased within 30 days before or after the sale date.

You can read the full details of our initial analysis in A Summer Harvest: Rising Rates Create Tax-Loss Opportunity in Bonds, or visit our website for access to all of our tax loss harvesting insights, including research, correlation and comparison tools for potential tax swaps, as well as explore SPDR ETFs that may help you refine exposures and lower portfolio costs.

1State Street Global Advisors, as of 09/30/2018. Analysis of the 30 largest fixed income ETFs by AUM from 12/31/2012 – 09/30/2018.

Definitions

Tax Swap
A method of crystallizing capital losses by selling losing positions and purchasing companies within similar industries that have similar fundamentals.