Tax-loss harvesting points to energy ETFs

As the end of the year nears, it is never too early to think about ways to efficiently manage a diversified investment portfolio. One way for some to get more oomph out of their investments is through an exchange traded fund tax-loss harvesting strategy after the underperformance in the energy sector.

"We are getting toward the year end, but many tend to procrastinate on taxes," Paul Baiocchi, Fidelity VP sector and ETF investment strategy, told ETF Trends in a call. "Investors thinking about ETFs and the ETF landscape may think about tax loss harvesting."

As many review their investment holdings toward the end of the year to rebalance or reposition for the year ahead, some may find losing positions that could still be put to work for their investment portfolio.

"Sometimes an investment that has lost value can be a good thing—or at least, not all bad. You can sell stocks, bonds, mutual funds, or other investments that have lost value, to reduce taxes on realized capital gains from winning investments. It’s called tax-loss harvesting," according to Fidelity Investments.

For instance, after the year of plunging crude oil prices in the wake of a growing global supply glut, the energy sector has been the worst performing area of the market. The S&P 500 Energy Sector, which is comprised of energy companies taken from the S&P 500, has declined 9.0% year-to-date. Single company stocks like  Exxon Mobil (NYSE:XOM) and Schlumberger (NYSE:SLB), among others have experienced steep declines this year as well.

Harvesting losses can potentially lower an investor's tax bill, both in current and future years. If your capital losses exceed the gains or if you have no capital gains, one can use a net loss to offset up to $3,000 of the current year’s ordinary income, even though your ordinary income may be taxed at a higher rate than capital gains. Additionally, if your annual loss is more than $3,000, the excess can be carried over to offset capital gains and ordinary income in future tax years.

Consequently, if an investor has experienced losses in integrated oil, oil producer, oil services stocks or broad energy-related ETFs, one may sell off the position and look to another energy sector ETF as a suitable alternative in a tax-loss harvesting strategy.

"Sector ETFs are useful vehicles for tax-loss harvesting," Baiocchi said.

For example, the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) acts as a cheap sector play on energy companies. FENY tries to reflect the performance of the MSCI USA IMI Energy Index, which tracks the energy sector in the U.S. equity market.

Investors seeking alternative investment picks to capitalize off a tax-loss harvesting strategy may also turn to Fidelity's tax-loss harvesting tool to find the right alternative investment to replace a losing position.

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