| Ticker | Fund | Morningstar category |
| CGUS | Capital Group Core Equity ETF | Large Blend |
| CGGR | Capital Group Growth ETF | Large Growth |
| CGDV | Capital Group Dividend Value ETF | Large Value |
| CGXU | Capital Group International Focus Equity ETF | Foreign Large Growth |
| CGIE | Capital Group International Equity ETF | Foreign Large Growth |
| CGGO | Capital Group Global Growth Equity ETF | Global Large-Stock Growth |
| CGDG | Capital Group Dividend Growers ETF | Global Large-Stock Blend |
| CGCB | Capital Group Core Bond ETF | Intermediate Core Bond |
| CGCP | Capital Group Core Plus Income ETF | Intermediate Core-Plus Bond |
| CGSD | Capital Group Short Duration Income ETF | Short-Term Bond |
| CGMS | Capital Group U.S. Multi-Sector Income ETF | Multisector Bond |
| CGSM | Capital Group Short Duration Municipal Income ETF | Muni National Short |
| CGMU | Capital Group Municipal Income ETF | Muni National Intermediate |
| CGBL | Capital Group Core Balanced ETF | Moderate Allocation |
Categories
Seeking to maximize tax efficiency with ETFs: 5 strategies
For investors who identify tax efficiency as a top concern, financial professionals know they can use ETFs to pursue more control over annual tax liabilities. But there are additional ways to leverage ETFs to help minimize capital gain distributions (and help reduce an investor's yearly tax bill), particularly for those who have unrealized losses over the last 12 months. We explore five ideas below.
Capital Group active ETFs can be used for:
Idea #1: Tax-loss harvesting
Tax-loss harvesting can be a valuable tool, especially in challenging market environments, because it allows investors to turn a negative into a positive by selling investments that have lost value, replacing them with other investments and applying those losses to offset future capital gains. At the end of the year, if losses exceed capital gains, the losses can be applied to noninvestment income (up to a specific limit) and any remaining losses can be used to help neutralize future capital gains. Tax-loss harvesting can be used on different types of investments, from individual equity securities to mutual funds to ETFs.
At Capital Group, we provide investors with a wealth of options. Our investment products offer investment strategies across a range of vehicles that all feature our signature approach to active management. Our suite of ETFs may give financial professionals the opportunity to tax-loss harvest current investments that no longer meet an objective, or tax-loss harvest current investments in favor of vehicles that may offer greater tax efficiency. To help identify tax-loss harvesting opportunities, both across equity and fixed income allocations, the list below shows which of our ETFs may be considered as substitutes for common asset classes.
Identifying tax-loss harvesting opportunities
Capital Group ETFs can serve as substitutes for many common asset classes
Source: Morningstar Direct*
Idea #2: Constructing fee-based models
Model portfolios allow financial professionals to blend complementary investment approaches, from different asset managers and across a range of investment products, to deliver solutions to help meet investors’ long-term needs. Getting portfolio construction right is especially important during challenging market environments. Whether investors are looking for an actively managed diversified core portfolio or are evaluating adding active management to a predominantly passive portfolio, Capital Group’s portfolio construction team will perform a portfolio analysis to help financial professionals develop portfolio recommendations that reflect investors’ long-term financial goals. To learn more about partnering with our portfolio construction team, request a consultation.
Idea #3: Rebalancing portfolios
When tax-loss harvesting, financial professionals may suggest that instead of having a similar allocation†, clients consider other options that may help position their portfolios to better pursue their long-term financial goals, such as:
- Shifting away from individual holdings in favor of ETFs to improve portfolio diversification
- Moving from investment vehicles that are less focused on tax efficiency and into ETFs
- Reducing passive index ETFs at the core of portfolios in favor of active core ETFs
Idea #4: Investing cash
Inflation can threaten an investor’s bottom line. To potentially avoid the loss of purchasing power and the impact of longer term inflation, consider investing cash in ETFs that align with investors’ short- and long-term financial goals. There are ETFs to pursue income while seeking a low-risk profile that can serve as an alternative to cash or ETFs designed to offer enhanced cash options, such as Capital Group Short Duration Income ETF (ticker: CGSD), a short duration bond fund, and Capital Group Municipal Income ETF (ticker: CGMU), an intermediate-term muni fund.
ETFs appeal to many investors because they:
- Generally offer a relatively low-cost way to easily diversify portfolios
- May reduce taxable capital gain distribution
- Can be used to construct a complete portfolio or complement an existing portfolio
Idea #5: Reinvesting dividends into ETFs
Many investors automatically reinvest dividend payments directly back into the fund that produced them. However, some investors may benefit from taking dividend payments as cash and reinvesting them into ETFs, which may have the potential to:
- Reduce capital gain liabilities for investors focused on tax efficiency
- Improve overall portfolio diversification
Investors’ individual circumstances should be carefully considered, but this option could be an easy way to incorporate greater tax efficiency into existing portfolios. Our ETFs are mainly core holdings, which means they aim to provide solutions for some of the most common portfolio allocations and, because they’re actively managed, they seek to help investors pursue better outcomes.
See an idea you like? Contact us.
There are many benefits to investing in ETFs for investors in both qualified and nonqualified accounts. These are just a few ways to use ETFs to help manage the tax efficiency of their investments. To further explore these ideas, contact your Capital Group representative or call us at (800) 421-9900.
Anthony Wingate is an ETF sales specialist at Capital Group, home of American Funds, covering the Western U.S. He has 16 years of industry experience and has been with Capital Group for one year. Prior to joining Capital, Anthony worked as a sales executive at Vanguard. He holds an MBA and a bachelor's degree in business administration, both from the University of Arizona. Anthony is based in Los Angeles.
†The Internal Revenue Service's wash-sale rule regulates the timing around how quickly a substantially identical security can be purchased after the underperforming asset was sold to realize a tax benefit from tax-loss harvesting.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses.
This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Capital Group exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETF shares are bought and sold through an exchange at the then current market price, not net asset value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF's listing will continue or remain unchanged.
Investments in mortgage-related securities involve additional risks, such as prepayment risk.
The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional securities, such as stocks and bonds.
Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.
The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
Income from municipal bonds may be subject to state or local income taxes and/or the federal alternative minimum tax. Certain other income, as well as capital gain distributions, may be taxable.
Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.
As nondiversified funds, Capital Group ETFs have the ability to invest a larger percentage of assets in securities of individual issuers than a diversified fund. As a result, a single issuer could adversely affect a fund's results more than if the fund invested a smaller percentage of assets in securities of that issuer. Refer to the applicable prospectus for details.
This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.
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On or around July 1, 2024, American Funds Distributors, Inc. will be renamed Capital Client Group, Inc.
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*Large-blend funds are fairly representative of the overall U.S. stock market in size, growth rates and price. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios tend to invest across the spectrum of U.S. industries, and owing to their broad exposure, the portfolios’ returns are often similar to those of the S&P 500 Index.
Large-growth funds invest in stocks of big U.S. companies that are projected to grow faster than other large-cap stocks. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large-cap. Growth is defined based on fast growth (high growth rates for earnings, sales, book value and cash flow) and high valuations (high price ratios and low dividend yields).
Large-value funds invest in stocks of big U.S. companies that are less expensive or growing more slowly than other large-cap stocks. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large-cap. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value and cash flow).
Foreign large-growth funds focus on high-priced growth stocks, mainly outside of the United States. Most of these portfolios divide their assets among a dozen or more developed markets, including including Japan, Britain, France and Germany. These portfolios primarily invest in stocks that have market caps in the top 70% of each economically integrated market (such as Europe or Asia ex-Japan). Growth is defined based on fast growth (high growth rates for earnings, sales, book value and cash flow) and high valuations (high price ratios and low dividend yields). These portfolios typically will have less than 20% of assets invested in U.S. stocks.
World large-stock-growth funds invest in a variety of international stocks that are larger. World-stock portfolios have few geographical limitations. It is common for these portfolios to invest the majority of their assets in developed markets, with the remainder divided among the globe’s smaller markets. These portfolios typically have 20%-60% of assets in U.S. stocks.
Short-term bond funds invest primarily in corporate and other investment-grade U.S. fixed-income issues and have durations of one to 3.5 years (or, if duration is unavailable, average effective maturities of one to four years). These portfolios are attractive to fairly conservative investors, because they are less sensitive to interest rates than portolios with longer durations.
Intermediate-term core-plus bond funds invest primarily in investment-grade U.S. fixed income issues, including government, corporate and securitized debt, but generally have greater flexibility than core offerings to hold non-core sectors such as corporate high yield, bank loan, emerging markets debt, and non-U.S. currency exposures. Their durations (a measure of interest-rate sensitivity) typically range between 75% and 125% of the three-year average of the effective duration of the Morningstar Core Bond Index.
Multisector bond funds seek income by diversifying their assets among several fixed-income sectors, usually U.S. government obligations, U.S. corporate bonds, foreign bonds and high-yield U.S. debt securities. These portfolios typically hold 35% to 65% if bond assets in securities that are not rated or are rated by a major agency such as Standard & Poor’s or Moody’s at the level of BB (considered speculative for taxable bonds) and below.
Muni national intermediate funds invest in bonds issued by various state and local governments to fund public projects. The income from these bonds is generally free from federal taxes. To lower risk, these portfolios spread their assets across many states and sectors. These portfolios have durations of 4.0 to 6.0 years (or average maturities of five to 12 years).