"It's not what you earn, it's what you keep."
David Peterson's time-tested quip makes the case, succinctly, for tax-efficient investing, something on which he's an expert. Despite all that's happening, he says, many of the issues with tax-efficient investing have remained surprisingly constant in recent years.
"That's why I still think ETFs are one of the top tax-efficient investing vehicles," Peterson, managing director with United Capital Financial Advisers, says when asked about tax themes to watch for in the wake of fiscal cliffs, sequesters and everything else happening in 2013. "So many advisors point to separately managed accounts, but I've never really seen them perform well from a tax-efficiency standpoint."
He's not alone in his ETF admiration, as the combined assets of U.S. listed exchange-traded funds ended 2012 at $1.337 trillion, according to the Investment Company Institute (ICI). The increase in assets invested in ETFs showed a 27.6% gain compared with levels in December 2011. Granted, tax efficiency is only one of many reasons for the trends, but it's telling nonetheless.
ETFs allow you to "play games," he says, but not like one would think. By way of example he notes that, from a rebalancing standpoint, if the S&P 500 isn't performing well, the investor can sell 50% for a loss, thereby reaping the tax harvest. It can then be reinvested it in the Russell 1000 Large Cap Value or Russell 1000 Large Cap Growth indexes.
"Investors tend to put tax ramifications of an investment above the importance of portfolio construction, which is a mistake," Peterson adds. "They can actually combine the two by reinvesting in the same asset class and actually avoiding wash-sale rules. Experience the loss for tax purposes and rebalance for investing purposes."
Surprisingly (but accurately), he points to the fact that for the majority of investors, the capital gains tax rate did not go up, calling the controversy surrounding an increase "a lot of pomp, but not a lot of circumstance."
