Colby is Portfolio Manager/Municipal Bond ETFs with more than 30 years of fixed income experience.
Less than six weeks remain in 2013. To paraphrase the Chinese proverb, we have certainly lived through a year of interesting times. That being said, some savvy municipal bond market investors have not been deterred from taking advantage of a tax-loss harvest opportunity that has not been readily available in municipal bonds since the end of the last decade. This strategy involves using realized losses to offset capital gains elsewhere in your portfolio.
In some respects, now may be an opportune time to be active in the municipal bond market because overall supply of bonds continues to be weak, which generally encourages traders to make decent bids for bonds. Valuations, by most measures, show relative value strength (not cheapness), which signals a good environment for sellers. The question that investors implementing a tax-loss harvest strategy must ask, given the Federal Reserve's affirmation to keep interest rate policy steady, is "Where to reinvest, even if only in the short term?"
I believe municipal bond ETFs could serve well as a short-term choice for individuals or advisers due to daily transparency of holdings, low costs compared to traditional mutual funds, and on-demand exchange-based tradability.
Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could perform worse than the original investment, and that transaction costs could offset the tax benefit. There may be tax implications. Consult your tax adviser before taking action.
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