Displaying items by tag: tax efficiency

Municipal bonds are drawing increased attention as investors seek stability amid equity market uncertainty, with recent volatility making tax-exempt yields more attractive on both an absolute and relative basis. Despite negative year-to-date returns across much of the muni market, relative valuations compared to taxable fixed income suggest excess return potential ahead. 

Longer duration exposure gives munis sensitivity to interest rate changes, and if the Federal Reserve moves toward cuts later this year, investors could benefit from both quality and yield opportunities. 

American Century offers strategies like TAXF and CATF that combine diversification, credit research, and active management, while also providing tax efficiency within an ETF wrapper. For California investors in particular, CATF can deliver taxable-equivalent yields above 8%, highlighting the value of tax-exempt strategies in high-bracket states. 

Finsum: Active management adds further advantages, including the ability to navigate sectors and credit qualities excluded from passive indexes.

Investors seeking to diversify or enhance income potential have increasingly turned to options-based ETFs, which have proliferated over the past two years as market conditions favored their growth. 

Rising interest rates and bond market challenges have driven demand for strategies that generate income from option premiums, particularly in volatile markets. These ETFs span a wide range of asset classes—from equities and bonds to alternatives like bitcoin and gold—allowing investors to either augment returns on existing exposures or diversify income sources. 

By combining traditional asset exposure with systematic covered call writing, these funds provide double-digit distribution rates while optimizing after-tax returns. 

Finsum: For income-focused investors, especially those mindful of tax efficiency, options-based ETFs represent a compelling complement to more traditional income-generating assets.

Taxes shouldn’t dictate your investment decisions, but they should definitely inform them,  especially if you’re holding assets in taxable accounts where after-tax returns matter most. Smart investors know that choosing the right account type such as Roth IRAs, traditional 401(k)s, or HSAs can make a big difference in long-term performance by deferring or avoiding taxes altogether. 

Tax-deferred accounts often outperform taxable ones over time, especially when you're in a high tax bracket or expect to drop into a lower one in retirement. A diversified mix of taxable, tax-deferred, and tax-free accounts can give you more control over your income strategy and tax liability in retirement. 

Beyond account choice, selecting tax-efficient investments like municipal bonds or low-turnover ETFs can reduce the drag of taxes on earnings, especially when every percentage point counts. 

Finsum: In the end, tax-savvy investing isn't about dodging the IRS, it's about maximizing what you keep and using tax rules to your advantage.

Tax-efficient investing is gaining momentum, with separately managed accounts (SMAs) emerging as a preferred tool for personalization and tax savings. Unlike mutual funds or ETFs, SMAs allow investors to directly own securities, enabling tailored strategies like tax-loss harvesting. 

Assets in tax-managed SMAs have surged past $500 billion, a 67% increase since 2022, with direct indexing leading the way due to its scalability and precision. Asset managers are now extending tax overlays to active equity strategies, though the process is more complex due to potential conflicts with managers’ top stock picks. 

Meanwhile, model portfolios are incorporating tax-aware transition tools to help advisors move clients into new strategies with minimal tax impact, further expanding the reach of tax management across investor segments.

Finsum: Fixed-income SMAs offer fewer tax opportunities but can still provide benefits during periods of rate volatility or credit stress.

Cerulli Research highlights how the growing wealth of retail investors is pushing advisors to prioritize tax efficiency, with ETFs becoming an increasingly attractive structure. ETFs offer significant tax advantages, such as low turnover and minimized capital gains distributions, making them particularly appealing in today’s uncertain economic climate. 

As a result, Cerulli expects more separately managed account (SMA) assets to shift into ETFs, driven by both tax benefits and operational efficiencies. High net worth advisors are also focusing more heavily on tax planning, with the percentage offering tax guidance rising sharply in recent years. 

Despite the $2.7 trillion currently held in SMAs, advisors are steadily increasing their ETF allocations, especially at larger practices. However, barriers like the high cost of launching ETFs mean wealth management firms will need scale — and may increasingly turn to white-label providers for help — to fully capitalize on this shift.

Finsum: Separately managed accounts could definitely see a spike in popularity in the coming years given technological ease.