Tax-loss harvest partner for S&P600 Small Cap Value ETFs

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daveydoo
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Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by daveydoo » Fri Feb 02, 2018 1:06 pm

Had a very inopportune but otherwise rational move into small-cap value the day before the downturn started.

Can I safely tax-loss harvest iShares S&P SmallCap 600 Value Idx (IJS) into Vanguard S&P Small-Cap 600 Value ETF (VIOV)? Safely means avoiding washed sale.

They both are "S&P600 value index" but they have slightly different average market cap ($1,420 vs $1,424 million) and slightly different small-cap vs micro-cap weighting (49.98/50.12 vs 50.01/49.98, respectively). I guess this could be an artifact of when the data are updated at Morningstar. Have already used VBR (Vanguard Small-Cap Value ETF) to harvest a quick few percent over the past week so that's out. RZV (Guggenheim S&P SmallCap 600® Pure Value ETF ) looks too small and thinly traded with spread of 0.4%.
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jhfenton
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by jhfenton » Fri Feb 02, 2018 1:49 pm

There is no clear guidance on what "substantially identical" means in the context of mutual funds or ETFs.

I personally draw the line at funds that follow the same index, because I would have a hard time making the argument that they were not substantially identical. Yes. They are not identically identical, but I think they are "substantially" so.

I do not consider index funds that follow different indices in the same asset class substantially identical.

Brokers will not flag an IJS for VIOV swap as a wash sale. They are only required to flag identical securities in the same account. But you would have to decide whether or not it should be reported.

I'm not a fan of the Russell 2000 indices, but VTWV and IWN follow the Russell 2000 Value index. I'm not sure that I would want to risk being stuck with them. (I might buy them as replacement property in tax-advantaged and buy something else I want to hold in taxable.)

Jags4186
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by Jags4186 » Fri Feb 02, 2018 1:59 pm

You can use RZV Guggenheim SP600 PureValue ETF. The funds holdings are substantially smaller and more deeply discounted than in IJS. Enough so that no one could consider it a washsale.

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jhfenton
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by jhfenton » Fri Feb 02, 2018 2:09 pm

I might also consider VOE (Vanguard Mid-Cap Value Index ETF) or IJJ/IVOV (iShares/Vanguard S&P Mid-Cap 400 Value). Especially in the short-term, mid-cap value is usually a good proxy for small-cap value.

software
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by software » Fri Feb 02, 2018 2:58 pm

Just use VB, then after 30 days switch back into IJS or VIOV if you are really married to the S&P600 index.

Sure it has more mid cap and growth exposure, but over such a short time period it will track closely enough and is better than sitting on sidelines for 30 days.

MotoTrojan
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by MotoTrojan » Fri Feb 02, 2018 3:13 pm

software wrote:
Fri Feb 02, 2018 2:58 pm
Just use VB, then after 30 days switch back into IJS or VIOV if you are really married to the S&P600 index.

Sure it has more mid cap and growth exposure, but over such a short time period it will track closely enough and is better than sitting on sidelines for 30 days.
With this logic, it would make most sense to swap into ijr (the S&P600 blend) or Vanguard's equivalent. This would be blended, but still similar market cap, unlike the ~2x increase Vanguard's CRSP index results in.

daveydoo
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by daveydoo » Fri Feb 02, 2018 5:06 pm

jhfenton wrote:
Fri Feb 02, 2018 2:09 pm
I might also consider VOE (Vanguard Mid-Cap Value Index ETF) or IJJ/IVOV (iShares/Vanguard S&P Mid-Cap 400 Value). Especially in the short-term, mid-cap value is usually a good proxy for small-cap value.
Thank you, and thanks to all for the suggestions. Never had to do "acute" TLH before this most recent turn.

Oh, and if anyone ever wants to know when the next big market downturn will be, I can just PM you before a buy a lot of something. :D
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livesoft
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by livesoft » Fri Feb 02, 2018 5:16 pm

There are so many possibilities, but I'll give just one:

Sell IJS and go to cash, but in a tax-deferred account, exchange from bond fund to VSIAX / VBR or whatever your choice is. Then see what happens. If a buying opportunity happens before 30-days is out, buy VBR (or IWN or RZV or ???) in taxable and exchange VSIAX/VBR back to a bond fund or stay doubled up. Or just wait until the 30 days is up and go back into IJS.

You are only limited by your imagination (and that "substantially identical" thing).
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daveydoo
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by daveydoo » Fri Feb 02, 2018 5:34 pm

livesoft wrote:
Fri Feb 02, 2018 5:16 pm

Sell IJS and go to cash, but in a tax-deferred account, exchange from bond fund to VSIAX / VBR or whatever your choice is. Then see what happens. If a buying opportunity happens before 30-days is out, buy VBR (or IWN or RZV or ???) in taxable and exchange VSIAX/VBR back to a bond fund or stay doubled up. Or just wait until the 30 days is up and go back into IJS.
So I can do whatever I want in a tax-deferred account since it is not a taxable event? It won't impact my ability to buy or sell the same funds on the taxable side (vis-a-vis wash sale)? Am I understanding correctly?

Otherwise, I'd hate to use tax-deferred since in this instance I did two rounds of TLH in the same week. With the new analogous "piece" in tax-deferred, I couldn't TLH again if things continued to go south (like they just did). I took a 1% loss and then a 2+% loss, sequentially over the past week.
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livesoft
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by livesoft » Fri Feb 02, 2018 6:10 pm

daveydoo wrote:
Fri Feb 02, 2018 5:34 pm
So I can do whatever I want in a tax-deferred account since it is not a taxable event? It won't impact my ability to buy or sell the same funds on the taxable side (vis-a-vis wash sale)? Am I understanding correctly?

Otherwise, I'd hate to use tax-deferred since in this instance I did two rounds of TLH in the same week. With the new analogous "piece" in tax-deferred, I couldn't TLH again if things continued to go south (like they just did). I took a 1% loss and then a 2+% loss, sequentially over the past week.
You still have to think things through. If you sell for a loss in taxable, then you cannot buy a substantially identical investment in an IRA 30 days before or 30 days after without creating a disallowed loss. But if you sell for a loss in tax-deferred, think about it: It still reduces your future taxes because you don't have a gain that will end up being taxed when you withdraw. Nevertheless, if you sell for a loss in tax-deferred, you can buy the identical investment in taxable right away (assuming no wash sale occurs in taxable). Or if there is no loss, then you can sell for a gain in tax-deferred without creating immediate tax.
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Earl Lemongrab
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by Earl Lemongrab » Fri Feb 02, 2018 6:47 pm

I would do it, but I have double-digit carryover losses. So if the IRS decided to declare a wash, I argue for quite a while but if I lost it would mean essentially nothing. I'd have to file an amended return with a different carryover loss figure. Remember, the IRS would first need to know you did it, and this wouldn't be automatic reporting, and they would need to care.

I think having different custodian, especially with the radically different Vanguard multi-class structure, make it not "substantially identical".

I have volunteered to do a TLH to the same index if it comes up. I will look over my assets, but I don't think I will find anything.
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Theoretical
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by Theoretical » Fri Feb 02, 2018 7:08 pm

Five good, but somewhat flawed options:

VBR - cheaper ER, not as small or valuey, but it gets the job done.

RWJ - Oppenheimer's Revenue-weighted S&P 600. It's extremely valuey and much more concentrated than IJS, but is a good option to stay in the S&P 600 universe. ER is .39%

EES - WisdomTree's Earnings Weighted ETF is also .39% but it's extremely similar to IJS in factor exposure.

If you're willing to mix mid-cap growth and deep SCV, based on the RAFI index design, Schwab's FNDA at .25% is a good option.

iShares JKL is also not a bad option as a somewhat deeper small-mid value take. Its got an ER of .30.

I STRONGLY DISAGREE with TLHing IJS into VIOV or vice versa. They're both extremely tight index trackers of the same index, even down to being aggressive users of securities lending that offsets the ER. You're probably not a big enough fish to fry or flush but it's really asking for trouble.

stan1
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by stan1 » Fri Feb 02, 2018 7:23 pm

Multiple S&P 500 funds have existed for decades. If the IRS felt strongly about tax loss harvesting between index funds using the same index there would be a decision of record. To my knowledge there isn't one. I would tax loss harvest from IJS to VIOV. I'm less certain that I would tax loss harvest from VIOV to IJS because I'd rather hold VIOV long term due to Vanguard's history of lowering expense ratios when expenses decrease (iShares does not do that). Someone else might choose a more cautious approach.

daveydoo
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Re: Tax-loss harvest partner for S&P600 Small Cap Value ETFs

Post by daveydoo » Sat Feb 03, 2018 5:59 pm

Thanks again, all, for the replies and for the broad range of opinions (!) and suggestions for other investment options.

I guess I'll be conservative in terms of what "substantially identical" means, even if I'll be wandering a bit from my initial investment objective. It's only for 31 days -- assuming I remember to switch back...

Although this could be a busy 31 days, if last week was any indication :D
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

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