Bond yields climbed and prices slid, with the 10-year hovering near 5%. That shift has pushed many bond mutual funds and ETFs lower, creating unrealized losses for investors who bought when yields were lower. The move stands in stark contrast to stocks - the S&P 500 is up about 13% year to date - which is why some advisors say the fixed income sleeve is where the tax opportunities are right now.
Two popular bond ETFs tell the story: Vanguard Total Bond Market Index Fund ETF (BND) and iShares Core U.S. Aggregate Bond ETF (AGG) have each fallen more than 3.5% so far this year. As NewSpring Wealth Partners' Kristin Larson in Minnetonka, Minn., put it, "For a lot of clients, the bond side of the portfolio is the only side that's down right now."
Investors often wait until December to sell losing positions to offset gains elsewhere. However, in a note from American Century Investments, Joseph Gotelli and Jason Greenblath - both senior portfolio managers - wrote, "Tax-loss harvesting is often treated as a year-end exercise. But markets don't follow the calendar." They added, "Today's fixed-income landscape offers compelling potential opportunities to harvest losses, manage tax liabilities and improve yield and tax efficiency."
Vanguard made a similar point in a fourth-quarter ETF industry perspective last year, calling it "sensible to do tax-loss harvesting in client portfolios on a regular basis when opportunities arise." The firm pointed to bond price declines and stock market records, which made loss harvesting in equities "just about impossible to find."
Prime Capital Financial's Conor Kelly in Overland Park, Kansas, urged not waiting too long: "It's an opportunity to strike while the iron's hot because there's no guarantee that these losses are going to stick around."
While rates have pulled back recently, the backdrop still points to another upswing, given that the Federal Reserve lifted interest rates last week and indicated at least one additional hike this year. After hotter economic data, yields jumped on Wednesday, highlighting how fast conditions can shift.
Start with the math. You need to know your cost basis - the amount you paid, including any commissions or fees - and compare that to the current value to see if selling would trigger a loss or a gain. Reinvested dividends and interest add shares and raise your overall cost basis, and brokerages typically track this for you.
"It's not automatic that you'll have a tax loss just because an ETF has a negative price return for the year," said Bill Schwartz, managing director in Wealthspire's Potomac, Maryland office. He gave a concrete example: if you bought Vanguard Total Bond Market Index Fund ETF on Jan. 2 and did not reinvest dividends or interest, you would show a loss year to date because on Jan. 2 the ETF finished at 74.04, versus 71.40 on Sept. 21. "However, if you made multiple purchases over multiple years, there are no guarantees you'll have a tax loss," Schwartz said.
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Some investors keep it simple and sell the whole position. Others choose to sell and shift the proceeds into a new fund - potentially one with a different credit posture or a different index - said Mitch Schlesinger, Evermay Wealth Management's chief investment strategist in Arlington, Virginia. In those cases, investors often look at the position's aggregate cost basis, which averages all purchases plus reinvested dividends and interest.
More often, advisors dig into the details. If you purchased shares at different times, you have multiple tax lots. Even if the overall position shows a gain, specific lots could be at a loss - those are the ones you can harvest.
"That's why it's critical that you can see the tax lot detail and not just the overall gain or loss," Larson said. "You need to look carefully at the individual lots that were purchased," Schlesinger added.
Many online brokers let you choose which lots to sell and offer tax optimization settings to automatically pick lots that maximize losses or minimize gains. If your online statements do not show lot-level detail, ask your custodian how to access it. Advisors can also help identify which lots to target.
One important guardrail is the IRS wash-sale rule. Selling at a loss and then purchasing a substantially identical security during the 61-day window - the 30 days before and after the sale - will disallow the loss deduction. Schwartz noted that this ties investment choices to tax decisions.
If you strongly prefer a particular holding and do not have a sufficiently different substitute, selling it purely for tax reasons may not make sense. One option is to wait 31 days and then buy it back; the opportunity cost becomes apparent only after that window has closed.
ETFs can make this sale and repurchase process easier to complete. And in fixed income, sitting in cash for a short stretch is a smaller risk than in fast-moving stocks, Kelly said. "In fixed income, simply sitting in cash for 30 days before repurchasing is much easier than sweating out sitting out of a stock for 30 days and seeing it jump up and move against you."
All of this ladders up to a simple takeaway for your money: bond losses are out there, and you do not have to wait until December to use them. Check your cost basis and tax lots, know the wash-sale timing, and decide whether you want the same exposure or a different bond fund after you sell. If anything, this is one of those housekeeping moves that can make the rest of your portfolio work a little harder.
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