Stocks have been hit by inflation this year, with major stock indices falling for most of 2022 and even entering bear market territory. This offers advisors and investors the possibility to recover tax losses mid-year and move to alternative fund types better suited to mitigate volatility within equities while still providing income opportunities.
Two major reports the Federal Reserve relies on to decide its monetary policy were higher than expected in August. within the job market.Fed tightening is likely to remain aggressive in the second half of 2022 unless there are clear and consistent indicators of lower inflation and a slowing job market.
As long as inflation remains high, consumer purchasing power may continue to decline, impacting a wide range of stocks, with far-reaching effects across supply chains, and many more as rising costs squeeze profits. influence.
The Dow Jones Industrial Average, which tracks 30 blue-chip companies, is down 15.72% year-to-date as of Sept. 16, while the broader S&P 500, which tracks the top 500 U.S. public companies, is down 19.72%. over the same period. Recovering losses in the S&P 500 and moving to blue chip companies that typically perform more reliably over the long term, including during market downturns, or from investing in Dow Jones Industrial in general, the same A risk-managed investment within an index.
tax loss harvesting opportunities
Equity losses this year may be recovered through tax loss harvesting. This is the practice of selling an investment at a loss, and those losses can be applied to the taxes levied on the profitable investment. In other words, capital losses can offset capital gains, but tax loss harvesting is a tax deferral, not a cancellation.
Advisors and investors who sell investments for the purpose of harvesting tax losses but want to maintain exposure should be aware of the wash sale rule. This ensures that 60 days before and after the sale (30 days before the sale and otherwise the capital loss will not apply to offset capital gains. Methods to get around this provide the desired exposure, but are subject to the wash sale rules). Buy similar funds that are different enough to avoid the trigger.
In the case of the Dow Jones Industrial Average, if an investor has an allocation to a broad ETF covering the Dow Jones and wants to capture those capital losses to offset gains this year, they will can be sold. Moving to a loss-based his ETF, a fund that may offer better volatility mitigation within the Dow Jones for the current uncertain market, while also offering monthly income opportunities.
Various ETFs are available to mitigate stock volatility or seek high current income, but few funds combine the two using collar strategies. Collar strategies require that you hold an equity stake in the underlying security while at the same time purchasing and making a call to a protective put option on the same security, seeking to reduce volatility, generate income, and provide a means of downside protection. increase.
A put option gives its holder the right, but not the obligation, to sell the underlying asset at a specified price on a specified date. In contrast, a call option gives its holder the right, but no obligation, to purchase the asset on their behalf.
Nationwide offers a variety of actively managed ETFs that utilize collar strategies within equities. Nationwide Dow Jones® Risk Managed Income ETF (NDJI)ETFs that invest in portfolios of securities included in the Dow Jones Industrial Average, and funds that can be used to tax this year’s harvest of losses.
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