Reducing Your Tax Bill - Part Two
Manage episode 357507838 series 3048796
In our last episode, we discussed the importance of a portfolio’s asset allocation, and, how that relates to “Reducing Your Tax Bill”. In part two of this episode, we are joined once again by Symmetry’s Managing Director of Research and Investments, Philip McDonald, CFA, CAAIA & Glenn Shirley, CAIA, Head of Investor Relations for Quantinno Capital Management, to discuss the methods by which you can “re-charge that tax benefit”.
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Symmetry Partners, LLC, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, excluded or exempted from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. No one should assume that future performance of any specific investment, investment strategy, product or non-investment related content made reference to directly or indirectly in this material will be profitable. As with any investment strategy, there is the possibility of profitability as well as loss. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.00:00:01.800 --> 00:00:07.600 Hello listeners,
1 00:00:07.600 --> 00:00:10.900 welcome back to part two of our conversation on
2 00:00:10.900 --> 00:00:13.500 investing in taxes. Once again, I'm joined by Glenn
3 00:00:13.500 --> 00:00:16.500 Shirley from quantino and Phil McDonald from symmetry.
4 00:00:16.500 --> 00:00:19.100 Thanks gentlemen for joining us again, whether or not the market goes up
5 00:00:19.100 --> 00:00:22.800 or down when you have the long short overlay you have
6 00:00:22.800 --> 00:00:26.700 opportunities to to find losers losses.
7 00:00:26.700 --> 00:00:29.700 If you will to reach hard that tax benefit,
8 00:00:29.700 --> 00:00:32.400 it's some what counterintuitive right we're looking
9 00:00:32.400 --> 00:00:35.300 for Securities that have gone down in
10 00:00:35.300 --> 00:00:38.100 value, but I think the truth of the matter is is that when you
11 00:00:38.100 --> 00:00:41.600 own an ETF that's tracking an index or mutual
12 00:00:41.600 --> 00:00:44.300 fund that's tracking index. The reality is Phil
13 00:00:44.300 --> 00:00:47.600 you do own those losers. You just might not see them right? They're always
14 00:00:47.600 --> 00:00:50.200 that's right. Yeah looking at and that's
15 00:00:50.200 --> 00:00:53.300 a great Point looking at say in S&P 500 or
16 00:00:53.300 --> 00:00:57.300 Russell 1000 ETF. You you see one number,
17 00:00:56.300 --> 00:00:59.300 you know one one price
18 00:00:59.300 --> 00:01:01.500 one return but behind
19 00:01:02.300 --> 00:01:06.100 You're likely going to have dozens and dozens of positions
20 00:01:05.100 --> 00:01:08.200 that throughout the year and at year end
21 00:01:08.200 --> 00:01:11.900 are in or in a lost position. So in
22 00:01:11.900 --> 00:01:14.400 direct indexing, it just kind of breaks down that wrapper and
23 00:01:14.400 --> 00:01:17.700 you hold, you know hundreds of Securities directly. So
24 00:01:17.700 --> 00:01:20.800 you kind of see those a little bit more clearly sure and
25 00:01:20.800 --> 00:01:24.400 we've seen that in recent years right with some of these tech stocks
26 00:01:24.400 --> 00:01:27.400 the Fang stocks if you will Facebook Apple Amazon Netflix Google
27 00:01:27.700 --> 00:01:30.200 Etc. They were driving the returns of the S&P and there
28 00:01:30.200 --> 00:01:33.400 was a vast majority of those securities within the S&P that
29 00:01:33.400 --> 00:01:36.300 were in the red and by unwrapping it you can
30 00:01:36.300 --> 00:01:39.600 take advantage of those you still run into the issue of
31 00:01:39.600 --> 00:01:42.700 the portfolio seizing and what
32 00:01:42.700 --> 00:01:45.400 I mean by that is what we've been talking about having that portfolio
33 00:01:45.400 --> 00:01:48.000 get to a point where you don't have any room to make
34 00:01:48.300 --> 00:01:51.600 any trades without incurring some sort of tax consequence, but I
35 00:01:51.600 --> 00:01:54.900 think that's where the 1330 comes in right Glenn you're
36 00:01:54.900 --> 00:01:57.300 able to apply that strategy on
37 00:01:57.300 --> 00:02:00.700 top of an existing portfolio generate losses in
38 00:02:00.700 --> 00:02:02.200 any Market environment. And so
39 00:02:02.200 --> 00:02:05.100 So I think that that's a really interesting thing Glenn. Can you talk a little bit?
40 00:02:05.100 --> 00:02:08.200 I didn't mean to interrupt you, but could you talk a little bit about what is
41 00:02:08.200 --> 00:02:11.400 what happens with the risk exposure by putting that overlay on
42 00:02:11.400 --> 00:02:14.500 right investor with that 100 dollars 30 long
43 00:02:14.500 --> 00:02:17.100 30 short what what happens to the
44 00:02:17.100 --> 00:02:20.600 risk characters of that particular account? Sure. Yeah great
45 00:02:20.600 --> 00:02:23.300 question Tom. So if you look at if you just
46 00:02:23.300 --> 00:02:26.900 put on a 30% long 30% short
47 00:02:26.900 --> 00:02:29.300 portfolio. And you said what is the risk of
48 00:02:29.300 --> 00:02:32.500 that portfolio in isolation by itself? The answer
49 00:02:32.500 --> 00:02:36.000 to that is about one percent and that
50 00:02:35.100 --> 00:02:38.300 could be there be you know, standard deviation how much it's
51 00:02:38.300 --> 00:02:42.100 going to move around or it could be if you're if you're looking at that benchmarked
52 00:02:41.100 --> 00:02:44.200 to a you know, an index like
53 00:02:44.200 --> 00:02:47.400 the S&P 500 that would be one percent tracking here. So pretty
54 00:02:47.400 --> 00:02:50.500 modest, you know, a lot of active Equity strategies have tracking
55 00:02:50.500 --> 00:02:53.300 air easily of two percent or more. So we're
56 00:02:53.300 --> 00:02:56.300 not adding a lot of of risk just via that long
57 00:02:56.300 --> 00:02:59.500 short extension, but in reality as I mentioned you have
58 00:02:59.500 --> 00:03:01.600 these kind of Legacy accounts that
59 00:03:02.200 --> 00:03:05.700 Some elevated levels of risk that long short extension is
60 00:03:05.700 --> 00:03:08.200 a tool to reduce that risk. So even though
61 00:03:08.200 --> 00:03:11.400 you have a 1% risk in
62 00:03:11.400 --> 00:03:14.300 that long short extension in isolation. If you use that
63 00:03:14.300 --> 00:03:17.400 long short extension efficiently to reduce
64 00:03:17.400 --> 00:03:20.600 the total risk of the portfolio, then oftentimes we
65 00:03:20.600 --> 00:03:23.900 can also we can actually reduce kind of the total tracking
66 00:03:23.900 --> 00:03:26.400 error or risk versus The Benchmark of a
67 00:03:26.400 --> 00:03:29.200 tax less harvesting strategy often we can at least
68 00:03:29.200 --> 00:03:32.400 keep it the same. So when you look at a quantino kind
69 00:03:32.400 --> 00:03:35.900 of 130 30 tax loss harvesting account tracking errors
70 00:03:35.900 --> 00:03:38.400 typically one and a half percent on average
71 00:03:38.400 --> 00:03:41.400 and that's very very similar to what of
72 00:03:41.400 --> 00:03:44.300 what a clients are probably experiencing in their long only text less
73 00:03:44.300 --> 00:03:47.100 harvesting accounts as well. So just to reiterate what you're
74 00:03:47.100 --> 00:03:50.400 saying by applying the the 1330 extension to
75 00:03:50.400 --> 00:03:53.700 a portfolio the clients risk exposures still that
76 00:03:53.700 --> 00:03:56.300 principle investment is what I'm hearing you say,
77 00:03:56.300 --> 00:03:59.400 however, I think what I think a really really strong
78 00:03:59.400 --> 00:04:01.700 point is that it's not necessarily
79 00:04:02.200 --> 00:04:05.900 the risk by putting the overlay but it actually can be a risk mitigator Phil
80 00:04:05.900 --> 00:04:09.200 you and I have run across these many many times where investors
81 00:04:08.200 --> 00:04:11.600 come to us and we look at their existing Holdings
82 00:04:11.600 --> 00:04:14.200 and we're working on a Case right now
83 00:04:14.200 --> 00:04:17.600 where the investor who probably should
84 00:04:17.600 --> 00:04:20.500 have a balanced portfolio between Brawley Diversified
85 00:04:20.500 --> 00:04:21.600 stocks and bonds.
86 00:04:22.200 --> 00:04:25.900 Is stuck in a single stock position that they
87 00:04:25.900 --> 00:04:28.200 can't do anything with because of the
88 00:04:28.200 --> 00:04:31.200 fact that it's it's got such a low cost basis if
89 00:04:31.200 --> 00:04:34.600 they were to sell that security. They would be looking at some significant.
90 00:04:35.400 --> 00:04:38.400 Tax consequences, but only a single
91 00:04:38.400 --> 00:04:41.300 stock is a real risky Endeavor. Oh, no question,
92 00:04:41.300 --> 00:04:41.800 and I think
93 00:04:43.300 --> 00:04:46.400 This is such an incredibly powerful benefit of this
94 00:04:46.400 --> 00:04:49.600 strategy. And I think it it sometimes is you know
95 00:04:49.600 --> 00:04:52.600 mentioned second after the the tax Alpha
96 00:04:52.600 --> 00:04:55.300 and hey, you can keep more of what you earn but this is so
97 00:04:55.300 --> 00:04:57.100 incredibly powerful, you know, thinking of
98 00:04:58.200 --> 00:05:01.300 Really sad examples through time like Enron, you know things went
99 00:05:01.300 --> 00:05:04.400 very bad for people who held most of their company
100 00:05:04.400 --> 00:05:07.200 stock a lot of incentive plans. These
101 00:05:07.200 --> 00:05:10.400 days will give employees options and shares and
102 00:05:10.400 --> 00:05:13.000 all that. So this is an issue or a lot
103 00:05:13.500 --> 00:05:16.700 of investors and I think this solution really is, you know virtuous and
104 00:05:16.700 --> 00:05:19.400 really helping them in their Financial Health and just to
105 00:05:19.400 --> 00:05:22.600 maybe put a finer point on it and at the
106 00:05:22.600 --> 00:05:25.900 risk of being a little repetitive, you know, if you own a
107 00:05:25.900 --> 00:05:29.200 large amount of your, you know, large amount of your financial wealth
108 00:05:28.200 --> 00:05:31.600 is in an oil stock or a
109 00:05:31.600 --> 00:05:32.100 tech stock.
110 00:05:32.700 --> 00:05:35.800 Immediately in putting on the 13030 strategy
111 00:05:35.800 --> 00:05:38.400 the the 30 extension the
112 00:05:38.400 --> 00:05:40.000 30 more long can hold.
113 00:05:40.700 --> 00:05:42.900 Every other industry except that one you hold.
114 00:05:43.500 --> 00:05:46.900 Imagine that diversification and then the short can reduce
115 00:05:46.900 --> 00:05:50.000 that exposure to that one industry. So overnight in
116 00:05:49.500 --> 00:05:52.400 what in in the first, you know
117 00:05:52.400 --> 00:05:55.700 day of transactions you go from hey, I
118 00:05:55.700 --> 00:05:58.800 might end up like Enron or wow. My my
119 00:05:58.800 --> 00:06:01.400 financial wealth is gonna ride up and down with
120 00:06:01.400 --> 00:06:04.900 the price of crude oil or how Google does and
121 00:06:04.900 --> 00:06:07.400 immediately you're getting more
122 00:06:07.400 --> 00:06:10.000 of a diversified Market portfolio. Even if
123 00:06:10.200 --> 00:06:13.900 you're just shooting toward maybe an S&P 500 Index. It's immediately
124 00:06:13.900 --> 00:06:16.100 beneficial Glen. I don't know if you'd add
125 00:06:16.100 --> 00:06:20.400 anything to that but I really find that as you know, powerful benefit
126 00:06:19.400 --> 00:06:22.400 to the end investor. Yeah, the
127 00:06:22.400 --> 00:06:25.900 your correct fell the deals exchange solution that
128 00:06:25.900 --> 00:06:28.300 quantino offers is really a use case
129 00:06:28.300 --> 00:06:31.400 that came about from client feedback. We're fortunate to
130 00:06:31.400 --> 00:06:34.400 work with a lot of family offices. These are very wealthy families that
131 00:06:34.400 --> 00:06:37.500 have concentration in their portfolio.
132 00:06:37.500 --> 00:06:40.300 They built wealth via service to a public company or
133 00:06:40.300 --> 00:06:43.400 investing in a company that went public and eventually
134 00:06:43.400 --> 00:06:46.000 They want to turn the corner from you know,
135 00:06:46.300 --> 00:06:50.600 this this wealth that has been built by that concentration turning
136 00:06:49.600 --> 00:06:52.400 the corner toward wealth preservation and that
137 00:06:52.400 --> 00:06:55.500 means diversification. So how do we do that in a tax efficient manner?
138 00:06:55.500 --> 00:06:58.800 There's exchange funds that we you
139 00:06:58.800 --> 00:07:01.500 know that are really an option for very wealthy families, but
140 00:07:01.500 --> 00:07:05.200 really not for clients at scale. They're multi-million
141 00:07:04.200 --> 00:07:07.200 dollar minimums their private
142 00:07:07.200 --> 00:07:10.500 Fund Solutions and you know, you're vestly
143 00:07:10.500 --> 00:07:13.800 investing in a hedge fund that's gonna take seven years to diversify
144 00:07:13.800 --> 00:07:15.500 and they're very expensive. So we always knew
145 00:07:16.600 --> 00:07:19.800 that if we could use our capabilities to help clients diversify
146 00:07:19.800 --> 00:07:22.100 concentrated positions to be a pretty powerful thing and
147 00:07:22.100 --> 00:07:25.600 that 30 by 30 extensions the the way we do that so, you
148 00:07:25.600 --> 00:07:27.100 know, we put that long short extension on
149 00:07:27.700 --> 00:07:30.300 The extension generates tax benefits along the
150 00:07:30.300 --> 00:07:33.100 way we can use that extension to reduce the risk of
151 00:07:33.100 --> 00:07:36.200 that concentrated position. You're totally right there. And then
152 00:07:36.200 --> 00:07:39.300 over time as we generate those consistent tax benefits
153 00:07:39.300 --> 00:07:42.300 that gives us a mechanism to sell
154 00:07:42.300 --> 00:07:45.900 down that concentrated position, but we're always matching
155 00:07:45.900 --> 00:07:48.300 the tax benefits that we generate with the
156 00:07:48.300 --> 00:07:51.100 capital gains that we are realizing by selling down that
157 00:07:51.100 --> 00:07:51.400 position.
158 00:07:52.400 --> 00:07:55.700 And then once we sell we're rebalancing into a
159 00:07:55.700 --> 00:07:58.300 diversified index of the advisor and the client's Choice
160 00:07:58.300 --> 00:08:01.900 could be S&P 500. It could be Global stocks really whatever
161 00:08:01.900 --> 00:08:04.700 the asset allocation decision ends up
162 00:08:04.700 --> 00:08:07.400 being so yeah a typical even low basis very
163 00:08:07.400 --> 00:08:10.500 low basis position 20% cost basis. We
164 00:08:10.500 --> 00:08:13.400 can help diversify in a tax efficient manner
165 00:08:13.400 --> 00:08:15.100 in around seven years.
166 00:08:16.300 --> 00:08:19.100 That's very cool. It's a very clever strategy. I mean
167 00:08:19.100 --> 00:08:23.200 we're talking about tax benefits, but what we're really talking about is
168 00:08:22.200 --> 00:08:24.500 transitioning a
169 00:08:25.300 --> 00:08:28.900 Well, I would consider a concentrate risky portfolio very
170 00:08:28.900 --> 00:08:31.200 risky at times into something that
171 00:08:31.200 --> 00:08:34.700 is more suitable for that investor more Diversified but
172 00:08:34.700 --> 00:08:37.600 doing it in a way that they don't
173 00:08:37.600 --> 00:08:40.900 have to feel the the pain of unwinding
174 00:08:40.900 --> 00:08:44.000 those positions that might have some very significant embedded
175 00:08:43.300 --> 00:08:46.600 gains. You know it our
176 00:08:46.600 --> 00:08:47.500 industry we get
177 00:08:49.100 --> 00:08:52.000 picked on I guess for being very jargony right a lot
178 00:08:52.600 --> 00:08:55.100 of jargon and terms that a lot of folks that
179 00:08:55.100 --> 00:08:58.400 are not in this industry on a daily basis and
180 00:08:58.400 --> 00:09:02.000 we throw out the term tax Alpha quite a bit and
181 00:09:01.300 --> 00:09:04.300 I'll throw this question out to both the a Phil and Glenn.
182 00:09:04.300 --> 00:09:07.700 Can we just Define what tax Alpha is
183 00:09:07.700 --> 00:09:10.400 and then can you quantify it? Sure. Yeah. Yeah
184 00:09:10.400 --> 00:09:13.300 to us. I think of tax Alpha is
185 00:09:13.300 --> 00:09:13.900 tax savings.
186 00:09:14.900 --> 00:09:18.400 So, you know if if quantino generates
187 00:09:17.400 --> 00:09:20.900 a dollar of short-term
188 00:09:20.900 --> 00:09:22.200 capital loss.
189 00:09:22.700 --> 00:09:25.700 Then if you have a short-term gain
190 00:09:25.700 --> 00:09:28.500 a dollar of short-term gains, that saves you
191 00:09:28.500 --> 00:09:32.200 40.8 percent. So I've saved the client 40 cents
192 00:09:31.200 --> 00:09:34.900 41 cents in tax. If
193 00:09:34.900 --> 00:09:37.400 I'm using that short-term law stuff set long
194 00:09:37.400 --> 00:09:41.300 term gains that that long-term gains rate essentially 23%
195 00:09:40.300 --> 00:09:43.400 at the federal level. So I've
196 00:09:43.400 --> 00:09:46.800 saved clients, you know, 24 cents
197 00:09:46.800 --> 00:09:49.000 on that dollar of a capital loss.
198 00:09:49.900 --> 00:09:52.700 So if I can consistently generate Capital losses
199 00:09:52.700 --> 00:09:55.700 if quantino can consistently do that. We're letting
200 00:09:55.700 --> 00:09:58.500 clients offset the capital gains
201 00:09:58.500 --> 00:09:59.500 that they have in their portfolio.
202 00:10:00.100 --> 00:10:03.600 and they're just keeping more of the return from those capital gains
203 00:10:03.600 --> 00:10:06.200 year to year and those capital gains from can come from a lot of different,
204 00:10:06.200 --> 00:10:08.500 you know Avenues it could be
205 00:10:09.300 --> 00:10:12.300 Capital gains distributions from Mutual Funds. It could
206 00:10:12.300 --> 00:10:15.700 be long-term gains realized from rebalancing your portfolio
207 00:10:15.200 --> 00:10:19.000 Etc. So to me tax Alpha
208 00:10:18.700 --> 00:10:21.200 is keeping more of that return in the
209 00:10:21.200 --> 00:10:24.400 client's pocket paying less in capital gains and using those
210 00:10:24.400 --> 00:10:27.800 Capital losses as a vehicle to do that great.
211 00:10:27.800 --> 00:10:30.500 That's a that's a very eloquent definition of
212 00:10:30.500 --> 00:10:33.300 taxol. Do you care to add that? Yeah. I I like that
213 00:10:33.300 --> 00:10:36.100 definition as well. Yeah. One thing I'd say is
214 00:10:36.100 --> 00:10:40.000 that I think there's again pretty broad agreement
215 00:10:39.300 --> 00:10:42.700 that long only tax loss harvesting
216 00:10:42.700 --> 00:10:45.300 does have a benefit to the portfolio
217 00:10:45.300 --> 00:10:48.500 and it might be, you know one to two percent maybe maybe
218 00:10:48.500 --> 00:10:51.500 two percent on you know, really good implementations call
219 00:10:51.500 --> 00:10:54.400 it one percent. But again that has a
220 00:10:54.400 --> 00:10:57.600 horizon that's gonna likely track down as your portfolio
221 00:10:57.600 --> 00:11:00.300 ossifies seizes up turns into
222 00:11:00.300 --> 00:11:03.600 our favorite word. No, you know,
223 00:11:03.600 --> 00:11:06.400 nothing with unrealized gains. So, you know,
224 00:11:06.400 --> 00:11:09.100 you're talking 1% dish in
225 00:11:09.700 --> 00:11:12.600 Long only tax less harvesting type of tax Alpha that
226 00:11:12.600 --> 00:11:15.300 that is going to go away in a handful
227 00:11:15.300 --> 00:11:18.700 of years, right? Thank you for that. One of
228 00:11:18.700 --> 00:11:21.800 the the questions and this is gonna go really to
229 00:11:21.800 --> 00:11:24.200 investment vehicle more so than anything else. I've heard
230 00:11:24.200 --> 00:11:27.400 investors say like 2022 for instance.
231 00:11:28.200 --> 00:11:31.400 Horrible, no good very bad year for investors Equity fixed
232 00:11:31.400 --> 00:11:35.100 income both down investors who hold actively
233 00:11:34.100 --> 00:11:36.800 managed mutual funds.
234 00:11:37.900 --> 00:11:38.900 having negative return
235 00:11:39.900 --> 00:11:42.500 But they also got a pretty hefty tax bill
236 00:11:42.500 --> 00:11:45.600 in some scenarios right capital gains distributions in
237 00:11:45.600 --> 00:11:48.500 December. So Phil when investors
238 00:11:48.500 --> 00:11:51.200 are looking at open-ended mutual funds what are
239 00:11:51.200 --> 00:11:54.700 some of the things that they should be considering from a tax efficiency standpoint,
240 00:11:54.700 --> 00:11:57.700 you raise a good point and to some extent
241 00:11:57.700 --> 00:12:00.300 those examples of you know, being down and
242 00:12:00.300 --> 00:12:03.600 having a gains distribution. That's an unlucky
243 00:12:03.600 --> 00:12:06.600 combination of a handful of things right like it comes
244 00:12:06.600 --> 00:12:09.300 down to perform some fun what the
245 00:12:09.300 --> 00:12:12.400 Redemption level was how the fun generates cash
246 00:12:12.400 --> 00:12:15.900 to meet those redemptions and whether
247 00:12:15.900 --> 00:12:18.600 or not that's kind of gain realizing
248 00:12:18.600 --> 00:12:21.700 lost real estate realizing or neutral history of
249 00:12:21.700 --> 00:12:24.500 the mutual funds experience can maybe give you
250 00:12:24.500 --> 00:12:28.000 some insight into that as well as the strategy whether
251 00:12:27.300 --> 00:12:30.500 it's going to be, you know tax efficient in
252 00:12:30.500 --> 00:12:33.800 a neutral kind of scenario and whether
253 00:12:33.800 --> 00:12:36.500 it's you know, growing or stable
254 00:12:36.500 --> 00:12:39.500 as opposed to, you know, shrinking with a lot of redemptions.
255 00:12:40.400 --> 00:12:43.800 you mentioned tack sorry investment vehicles so very often
256 00:12:43.800 --> 00:12:44.200 we
257 00:12:45.100 --> 00:12:48.600 We compare mutual funds and ETFs and there are some important differences
258 00:12:48.600 --> 00:12:51.300 there on the income side, they're pretty
259 00:12:51.300 --> 00:12:55.200 even right funds all funds have to distribute income and
260 00:12:55.200 --> 00:12:58.900 they can choose the frequency with which they do that. Some of
261 00:12:58.900 --> 00:13:01.500 the differences really come into play with capital gains
262 00:13:01.500 --> 00:13:04.400 realization. Now mutual funds to me
263 00:13:04.400 --> 00:13:07.300 to Redemption they have to do that with the cash in the fund. They might
264 00:13:07.300 --> 00:13:10.500 have enough cash. They might need to sell to realize that
265 00:13:10.500 --> 00:13:13.000 to fund that Redemption and some of
266 00:13:13.100 --> 00:13:16.900 the things I mentioned earlier, you know, whether they have enough cash what
267 00:13:16.900 --> 00:13:19.300 their tax Lots look like how their age
268 00:13:19.300 --> 00:13:22.600 how they're Diversified how the fund's been performing, you know
269 00:13:22.600 --> 00:13:25.300 frequency and magnitude of redemptions all that will
270 00:13:25.300 --> 00:13:28.600 kind of impact whether or not you're end. They have realized
271 00:13:28.600 --> 00:13:31.800 game they need to distribute or not with ETFs.
272 00:13:31.800 --> 00:13:34.400 There's a little more complexity in how they're traded
273 00:13:34.400 --> 00:13:38.100 and some of the some of the capital gains efficiencies.
274 00:13:37.100 --> 00:13:40.400 So you and I can trade an ETF
275 00:13:40.400 --> 00:13:43.300 on an exchange and that doesn't involve the fund at all, you know, you
276 00:13:43.300 --> 00:13:44.900 sell share I buy a share from you and
277 00:13:45.100 --> 00:13:49.000 The fund's not involved funds doesn't need to find cash pretty
278 00:13:48.300 --> 00:13:51.400 simple. But there are some transactions that do
279 00:13:51.400 --> 00:13:54.700 involve the fund, you know, something called authorized participants help
280 00:13:54.800 --> 00:13:57.300 ETFs trade efficiently
281 00:13:57.300 --> 00:14:00.900 and sometimes they'll redeem directly with the fund the
282 00:14:00.200 --> 00:14:03.100 ETF the ETF has a choice
283 00:14:03.100 --> 00:14:06.600 to you know, redeem in kind or give Securities to that
284 00:14:06.600 --> 00:14:09.500 redeeming entity, right and in
285 00:14:09.500 --> 00:14:12.400 doing that there's no transaction. There's no realization
286 00:14:12.400 --> 00:14:15.100 of of gains and it gets
287 00:14:15.100 --> 00:14:18.400 even more interesting because that the fun can choose
288 00:14:18.400 --> 00:14:22.300 which shares to redeem out and they can often redeem
289 00:14:21.300 --> 00:14:25.000 out the lowest cost basis shares. Thereby, you
290 00:14:24.400 --> 00:14:27.700 know creating a very tax efficient fund vehicle.
291 00:14:27.700 --> 00:14:31.200 The investors still needs to pay tax on their gain
292 00:14:30.200 --> 00:14:33.800 if they sell their shares, right, but the
293 00:14:33.800 --> 00:14:36.700 fund itself can get pretty creative in
294 00:14:36.700 --> 00:14:39.300 in reducing cap games realization. So,
295 00:14:39.300 --> 00:14:42.300 you know, it depends sometimes on the strategy, you know,
296 00:14:42.300 --> 00:14:44.900 fixing strategies might not be as
297 00:14:45.100 --> 00:14:48.600 Efficient in an ETF as as Equity strategies and some
298 00:14:48.600 --> 00:14:51.200 mutual funds can certainly be very tax efficient. So, you know,
299 00:14:51.200 --> 00:14:54.300 it comes down to you know, I think education getting the
300 00:14:54.300 --> 00:14:57.200 right investment strategy and then, you know also choosing the right vehicle
301 00:14:57.200 --> 00:15:00.800 now, that's that's really interesting and we've had conversations
302 00:15:00.800 --> 00:15:03.100 on the differences between ETFs and mutual funds on
303 00:15:03.100 --> 00:15:06.300 this podcast. And what's really fascinating to me again,
304 00:15:06.300 --> 00:15:09.300 I'm gonna use the term convenient byproduct the creation of
305 00:15:09.300 --> 00:15:12.900 redemption process of an ETF isn't designed
306 00:15:12.900 --> 00:15:15.700 for tax efficiency. It's designed to
307 00:15:15.700 --> 00:15:18.200 making sure that the
308 00:15:18.200 --> 00:15:21.300 nav is equal to the underlying basket of
309 00:15:21.300 --> 00:15:24.700 stocks in that process in itself makes ETFs
310 00:15:24.700 --> 00:15:26.100 extremely tax efficient.
311 00:15:26.900 --> 00:15:29.900 So it's not the goal but it is is something
312 00:15:29.900 --> 00:15:33.700 that you get through that process, which is interesting. Okay,
313 00:15:32.700 --> 00:15:35.300 so just kind of recap here for
314 00:15:35.300 --> 00:15:36.600 our investors.
315 00:15:38.400 --> 00:15:41.100 When considering your tax status with your
316 00:15:41.100 --> 00:15:44.700 portfolios consider what we call an evidence-based
317 00:15:44.700 --> 00:15:47.400 investment philosophy Buy and Hold that
318 00:15:47.400 --> 00:15:51.700 tends to lead to not only a greater likelihood of outperformance
319 00:15:50.700 --> 00:15:53.100 by staying the course, but it
320 00:15:53.100 --> 00:15:56.500 reduces frictions reduces transactions in
321 00:15:56.500 --> 00:16:00.400 the portfolio. Thus leading to a higher level of tax efficiency consider
322 00:15:59.400 --> 00:16:03.000 the vehicles that you're using when using
323 00:16:02.300 --> 00:16:06.100 open-ended mutual funds gravitate towards
324 00:16:05.100 --> 00:16:08.400 more passively managed growing mutual
325 00:16:08.400 --> 00:16:12.000 funds ETFs certainly have tax benefits and
326 00:16:11.200 --> 00:16:14.400 for those investors that are deploying a
327 00:16:14.400 --> 00:16:17.200 direct indexing strategy. There's certainly more
328 00:16:17.200 --> 00:16:21.100 opportunities through the sheer number of names to identify losses
329 00:16:20.100 --> 00:16:23.500 to perform ongoing tax loss harvesting
330 00:16:23.500 --> 00:16:26.200 and then lastly Glenn against thanks for
331 00:16:26.200 --> 00:16:29.700 joining us adding a long short
332 00:16:29.700 --> 00:16:33.100 extension a 1:30 strategy certainly can
333 00:16:32.100 --> 00:16:36.100 help not only from a diversification standpoint,
334 00:16:35.100 --> 00:16:37.200 but also from
335 00:16:38.300 --> 00:16:42.000 Alpha generating strategy. So Glenn.
336 00:16:41.200 --> 00:16:44.300 Thank you so much for your time Phil. Thank you for joining us
337 00:16:44.300 --> 00:16:47.200 here for our listeners. Thank you for for listening to
338 00:16:47.200 --> 00:16:50.200 us. You can access this podcast and all of
339 00:16:50.200 --> 00:16:53.900 our podcasts and our series anywhere you get your podcasts and
340 00:16:53.900 --> 00:16:56.000 I look forward to our conversation next time. Thank you
341 00:16:56.200 --> 00:16:59.800 so much gentlemen, thank you. Thanks Cemetery Partners. LLC
342 00:16:59.800 --> 00:17:02.600 is an investment advisor firm registered with
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351 00:17:26.200 --> 00:17:30.200 strategy product or non-investment
352 00:17:29.200 --> 00:17:32.000 related content made reference to
353 00:17:32.600 --> 00:17:35.600 directly or indirectly in this material will be profitable.
354 00:17:36.600 --> 00:17:39.100 As with any investment strategy there is the
355 00:17:39.100 --> 00:17:42.700 possibility of profitability as well as loss due
356 00:17:42.700 --> 00:17:45.400 to various factors including changing market
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358 00:17:48.600 --> 00:17:51.700 Content may not be reflective of current opinions
359 00:17:51.700 --> 00:17:54.800 or positions. Please note the material
360 00:17:54.800 --> 00:17:57.200 is provided for educational and background use
361 00:17:57.200 --> 00:18:00.700 only moreover. You should not assume that any discussion or
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363 00:18:03.800 --> 00:18:06.400 the receipt of or as a substitute for
364 00:18:06.400 --> 00:18:08.900 personalized investment advice.
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