RT Journal Article SR Electronic T1 The Role of ETFs in Active Tax Management JF The Journal of Wealth Management FD Institutional Investor Journals SP 75 OP 86 DO 10.3905/jwm.2016.19.3.075 VO 19 IS 3 A1 Paul Bouchey A1 Jean L.P. Brunel A1 Tianchuan Li YR 2016 UL https://pm-research.com/content/19/3/75.abstract AB The authors investigate how exchange-traded funds (ETFs), which are well known for tax efficiency, can be used to create broader portfolio tax efficiency. They show that it is reasonable for investors who are already comfortable with an opportunistic use of ETFs for loss harvesting to broaden their use in a systematic manner—provided they understand that care should be taken to avoid using replacements that are substantially “identical” as that would trigger a wash sale. Examples show that an ETF portfolio that is tax-managed can produce levels of tax alpha similar to a stock-level portfolio that is tax-managed, in the range of 1% to 2% average annual tax-management alpha. Stock-level portfolios provide more granularity and higher return dispersion, which creates more consistent loss-harvesting opportunities and higher tax alphas. Crisis periods can create the potential for much higher tax alphas for both types of portfolios. Finally, the authors suggest a number of extensions for the use of ETFs to make less liquid or less tax-efficient active strategies more attractive in an after-tax context.TOPICS: Exchange-traded funds and applications, wealth management, performance measurement