Investors that are looking to take advantage of yearend tax-loss selling can use sector ETFs as proxies for the stocks they dump, says a report published Wednesday by Toronto-based National Bank Financial Inc. (NBF).
The report presents a list of stocks from the S&P/TSX composite index that are down more than 10% so far this year and have a corresponding ETF that provides an approximate exposure.
It details ETFs that best match these sell-off candidates, so that investors can capture a similar return during the period when they can’t buy back the stock.
Under the tax rules, investors that sell-off beaten down stocks must wait 30 days after that before buying the stock back in order to preserve the tax loss. However, NBF advises that during the 30-day period, investors can buy other securities, such as ETFs, that will provide them with a similar exposure.
“The ETF will give a sector-specific return in place of the stock. When appropriate, investors can cycle back into the underlying equity after the 30-day period has elapsed,” the report says.
According to the report, eight of 11 Canadian sectors have generated negative returns so far this year, with 74% of the stocks in the S&P/TSX composite index down on the year.
“We highlight the best ETF candidate by looking at the relative stock weight and its correlations with the ETF,” the report says. Specifically, it highlights stocks with at least a 3% weighting inside a corresponding ETF, and a return correlation of at least 50%.
For example, Ivanhoe Mines Ltd. is down 40% year-to-date. The stock has a 4% weight in BMO Equal Weight Global Base Metals CAD-H (TSX: ZMT) managed by Toronto-based BMO Asset Management Inc., and the stock-ETF correlation is 69%.
The last day for tax-loss selling this year is Dec. 27, so that the trade settles before the end of the year, the report notes.