Optimize your tax strategies with Invesco
Understand how to effectively manage portfolios by implementing two tax strategies to help your clients keep more of what they earn.
Two ways to streamline tax season
Taxes are usually seen as a time-consuming burden, and many don’t know where to start. Investors are often faced with significant taxes on their investments, which reduces their returns and leaves them short of their investing goals. An effective tax management strategy can help investors meet their financial goals.
1. Minimizing capital gains
Minimizing capital gains will help your clients keep more of what they earn. There are two important types of capital gains to know: 1) Investor-Driven: These are capital gains from selling a fund, and 2) Fund-Driven: These occur when a fund distributes capital gains to its shareholders. Here are three strategies to minimize fund-driven capital gains:
- Replace mutual funds that have high fees and high capital gains distributions and underperform with ETFs
- Reduce exposure to repeat offenders and consider reallocating a portion to ETFs
- Potentially adjust future investment allocations to ETFs
ETFs have historically paid minimal capital gains, if any
Capital gains distributions have been less frequent and smaller for US equity ETFs. In some instances, capital gains may be distributed, but these are few and far between, given the ETF creation and redemption process.
Average annual capital gains distribution as a % of NAV of US equity mutual funds and equity ETFs over the last 10 years
|
Value |
Blend |
Growth |
|---|---|---|---|
Large cap |
Mutual funds: 4.71% ETFs: 0.24% |
Mutual funds: 4.95% ETFs: 0.37% |
Mutual funds: 7.25% ETFs: 0.38% |
Mid cap |
Mutual funds: 4.99% ETFs: 0.25% |
Mutual funds: 5.37% ETFs: 0.17% |
Mutual funds: 6.62% ETFs: 0.32% |
Small cap |
Mutual funds: 5.23% ETFs: 0.28% |
Mutual funds: 5.95% ETFs: 0.19% |
Mutual funds: 7.55% ETFs: 0.15% |
Source: Morningstar as of 12/31/23. 10-year period from 1/1/14-12/31/23.
Consider swapping to tax-efficient ETFs
In 2023, only 2% of our ETFs distributed capital gains for one of the lowest percentages in the industry.1 And many, such as QQQM, XMMO, XSMO, RSP, RWK, and RWJ, have never paid capital gains distributions in their lifetime.
| Ticker | Why Swap | Size | Category | Download |
| QQQM | About the benefits | Large cap | Growth | Fact sheet |
| XMMO | About the benefits | Mid cap | Growth | Fact sheet |
| XSMO | About the benefits | Small cap | Growth | Fact sheet |
| RSP | About the benefits | Large cap | Blend | Fact sheet |
| XMHQ | About the benefits | Mid cap | Blend | Fact sheet |
| XSHQ | About the benefits | Small cap | Blend | Fact sheet |
| RWL | About the benefits |
Large cap | Value | Fact sheet |
| RWK | About the benefits |
Mid cap | Value | Fact sheet |
| RWJ | About the benefits |
Small cap | Value | Fact sheet |
Returns less than one year are cumulative. Performance data quoted represents past performance. Past performance is not a guarantee of future results; current performance may be higher or lower than performance quoted. Investment returns and principal value will fluctuate and Shares, when redeemed, may be worth more or less than their original cost. See invesco.com to find the most recent month-end performance numbers. Market returns are based on the midpoint of the bid/ask spread at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times. Fund performance reflects fee waivers, absent which, performance data quoted would have been lower. View Standardized Performance here. Source: Bloomberg LP, as of 9/30/24.
2. Implementing tax-loss harvesting strategies
Tax-loss harvesting can be an effective strategy for turning your clients’ investment losses into tax savings. Even if you sell an investment to harvest the loss, you can still maintain exposure to the asset class or investment type by swapping it to an ETF. ETFs may allow your clients to stay invested in a similar exposure without violating the Internal Revenue Service’s wash-sale rule. Here’s how it works in three simple steps:
- Sell your clients’ underperforming investments
- Harvest their losses to offset capital gains and/or ordinary income
- Replace their current assets with similar Invesco ETFs
Consider our ETFs to maintain the same exposure in the market
Based on year-to-date returns across asset classes, we've identified Morningstar categories with negative price returns. Clients who have experienced investment losses in their portfolios could turn that into tax savings by selling the investments to offset capital gains taxes and reinvesting into an ETF with similar exposure.
Morningstar performance |
Swap idea |
||||||
Category |
YTD |
1Y |
2Y |
3Y |
5Y |
Ticker |
Download |
|---|---|---|---|---|---|---|---|
US Fund Equity Energy |
-1% |
-7% |
1% |
13% |
7% |
||
US Fund Muni National Long |
1% |
6% |
2% |
-4% |
-2% |
||
US Fund Commodities Broad Basket |
1% |
-8% |
-11% |
-6% |
-1% |
||
US Fund Long Government |
2% |
6% |
-4% |
-12% |
-7% |
||
US Fund Intermediate Core-Plus Bond |
2% |
6% |
1% |
-5% |
-3% |
||
US Fund Emerging Markets Bond |
3% |
8% |
4% |
-6% |
-4% |
||
US Fund Preferred Stock |
6% |
10% |
1% |
-5% |
-2% |
||
Source: Morningstar, as of 9/15/24
Footnotes
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1
Source: Morningstar as of 12/31/23.
Connect with our consultants
Learn more about tax strategies and how our Invesco consultants can help you optimize your clients’ portfolios.
QQQM
About this product
Provides exposure to the 100 largest domestic and international nonfinancial companies listed on Nasdaq
Why you should swap
QQQM has outperformed the Nasdaq Composite Total Return Index by 2.19% at NAV, annualized since its inception on 10/12/20.
XMMO
About this product
Seeks to identify and select stocks from the S&P MidCap 400 based on recent trends in price and market leadership
Why you should swap
XMMO has outperformed the S&P MidCap 400 Index by 3.98% at NAV, annualized since tracking its current index on 6/21/19.
XSMO
About this product
Seeks to identify and select stocks from the S&P SmallCap 600 based on recent trends in price and market leadership
Why you should swap
XSMO has outperformed the S&P SmallCap 600 Index by 2.42% at NAV, annualized since tracking its current index on 6/21/19.
RSP
About this product
Provides equal weight exposure to the largest 500 companies in the US as defined by the S&P 500
Why you should swap
Provides less concentrated large blend exposure that should benefit from a broadening market. RSP has outperformed the S&P 500 Index by 0.14% at NAV, annualized since its inception on 4/28/03.
XMHQ
About this product
Seeks exposure to the highest quality companies in the S&P MidCap 400
Why you should swap
XMHQ has outperformed the S&P MidCap 400 Index by 5.83% at NAV, annualized since tracking its current index on 6/21/19.
XSHQ
About this product
Seeks exposure to the highest quality companies in the S&P SmallCap 600
Why you should swap
XSHQ has outperformed the S&P SmallCap 600 Index by 0.26% at NAV, annualized since tracking its current index on 6/21/19.
RWL
About this product
Breaks the link between market cap and weight by weighting the S&P 500 by revenue, which places greater emphasis on fundamentals
Why you should swap
RWL has outperformed the S&P 500 Value Index by 1.44% at NAV, annualized since its inception on 2/21/08.
RWK
About this product
Breaks the link between market cap and weight by weighting the S&P Midcap 400 by revenue, which places greater emphasis on fundamentals
Why you should swap
RWK has outperformed the S&P MidCap 400 Value Index by 1.23% at NAV, annualized since its inception on 2/21/08.
RWJ
About this product
Breaks the link between market cap and weight by weighting the S&P SmallCap 600 by revenue, which places greater emphasis on fundamentals
Why you should swap
RWJ has outperformed the S&P SmallCap 600 Value Index by 2.6% at NAV, annualized since its inception on 2/21/08.
NA3913324
There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Index. The Funds are subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Funds.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Invesco does not offer tax advice. Please consult your tax adviser for information regarding your own personal tax situation.
While it is not Invesco's intention, there is no guarantee that the Funds will not distribute capital gains to its shareholders.
Diversification does not guarantee a profit or eliminate the risk of loss.
Investments focused in a particular industry or sector, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.
There is no assurance that these funds will achieve their investment objectives. Funds are subject to market risk, which is the possibility that the market values of securities owned by these funds will decline and that the value of the fund shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in these funds. Please be aware that these funds may be subject to certain additional risks. See the prospectus for complete details about the risks associated with each fund.
ETFs vs. Mutual Funds
Investors should be aware of the material differences between mutual funds and ETFs. ETFs generally have lower expenses than actively managed mutual funds due to their different management styles. Most ETFs are passively managed and are structured to track an index, whereas many mutual funds are actively managed and thus have higher management fees. Unlike ETFs, actively managed mutual funds have the ability react to market changes and the potential to outperform a stated benchmark. Since ordinary brokerage commissions apply for each ETF buy and sell transaction, frequent trading activity may increase the cost of ETFs. ETFs can be traded throughout the day, whereas, mutual funds are traded only once a day. While extreme market conditions could result in illiquidity for ETFs. Typically they are still more liquid than most traditional mutual funds because they trade on exchanges. Investors should talk with their financial professional regarding their situation before investing.
Morningstar®, Inc. (2024) (and in some cases, its affiliates) provides information, data, analyses, reports and opinions regarding investment options (collectively, “Morningstar Information”) for informational purposes. Morningstar Information should not be the sole piece of information used by financial professionals or investor in making an investment decision.
The Nasdaq Composite Total Return Index measures the performance of all domestic and international based common type stocks listed on the NASDAQ Stock Market. It includes common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. The index is market capitalization-weighted.
The S&P MidCap 400® Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.
The S&P SmallCap 600® Index seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.
The S&P 500® Index is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The S&P 500® Value Index measures constituents from the S&P 500 that are classified as value stocks based on three factors: the ratios of book value, earnings and sales to price.
The S&P MidCap 400® Value Index measures constituents from the S&P MidCap 400 that are classified as value stocks based on three factors: the ratios of book value, earnings and sales to price.
The S&P SmallCap 600® Value Index measures constituents from the S&P SmallCap 600 that are classified as value stocks based on three factors: the ratios of book value, earnings and sales to price.
Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 10,000, 20,000, 25,000, 50,000, 80,000, 100,000 or 150,000 Shares.
