Tax-loss harvesting in general only works in accounts where investment gains incur taxes. “The biggest drawback is that the ETF may not perform as well as the stock that was sold,” Bublé said. “In addition, make sure the tax savings outweigh the transaction costs.”
ETFs don't work as a tax-loss harvesting tool for everyone, advisors noted.
“True high-net-worth investors well along in the stages of wealth accumulation, estate planning, family structures and philanthropy would likely find an ETF strategy far too limiting. They’d be better served by a loss-harvesting approach comprised of individual equities,” said Michael Fulginiti, head of indexed and tax-efficient portfolio solutions at Columbia Threadneedle Investments in Boston. “On the other hand, a high-income investor in the early stages of wealth accumulation might find loss harvesting around ETFs well worth the effort.”
End-of-year timing is also key, advisors said. “It may be better to sell some losers before December 31, but don’t buy back a mutual fund until after the dividend record date,” Vento said. “This is yet another advantage to ETFs, because they typically have little or no capital gains distributions paid out before the end of the year.”