Could tax-loss harvesting be a tailwind for ESG ETFs?

ESG ETFs seen as great substitutes for core exposures

Could tax-loss harvesting be a tailwind for ESG ETFs?

With just over four months left in 2022, now is a good time for advisors and investors to think about tax-loss harvesting or selling a losing investment for tax advantages while leveraging the money to move on to maybe better opportunities.

As more and more professionals and DIYers look to implement tax-loss harvesting in their portfolios, some market experts believe it could bolster the adoption of environmental, social, and governance (ESG) exchange traded funds in 2022.

As reported by ETF Trends, conventional, basic stock and fixed income ETFs are struggling, raising the possibility of some advisors and investors choosing ESG strategies over those antiquated funds.

This window of opportunity is opening at a time when the market for equity-based ESG ETFs is flooded with options, and the number of fixed income funds operating in this space is rising.

Matthew Bartolini, head of SPDR Americas Research, said: “[T]he equity sector ESG portfolio doesn’t differ much from the traditional market cap weighted portfolio — less than 2% actually. Tech is the largest overweight and Consumer Discretionary is the largest underweight.”

The SPDR S&P ESG ETF (EFIV) and the SPDR MSCI USA Climate Paris Aligned ETF (NZUS) are two equity-based ESG ETFs that meet the criteria for credible core allocations. While NZUS tracks the MSCI USA Climate Paris Aligned Index, EFIV measures the S&P 500 ESG Index.

Still, investors need to be aware that ESG ETFs are not exact replicas of their conventional beta cousins, and that ESG funds are not risk-free.

“Drivers of active risk in the ESG portfolio are explained by stock-specific factors — an intuitive trend given that stocks are weighted differently, and some are excluded entirely — as well as certain equity style factors, as shown below. And within style, a positive loading towards firms with stronger profitability profiles represents the largest style contributor to active risk,” Bartolini said.

The actively managed SPDR Nuveen Municipal Bond ESG ETF (MBNE) and the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND) are two ESG bond ETFs to think about adding for tax loss harvesting.

With increased market volatility comes increased opportunities for tax loss harvesting, which may draw attention to ESG ETFs.

“Ongoing market volatility across equity and fixed income markets presents big tax-loss harvesting opportunities. In addition to replacing out higher-fee mutual funds for lower-cost ETFs, you can use tax replacements to refine exposures, target new ESG strategies, and build an ESG core with a similar profile to a more traditional allocation. And the best time to do that may be when the losses in core equity and bond assets are so abundant,” concluded Bartolini.