ETF Tax Strategies to Follow for 2024

ETFs can enhance your year-round tax strategy

With the recent close of the 2023 tax season, tax strategy is likely top-of-mind for you and your business. According to the Internal Revenue Service (IRS), long-term capital gains taxes have increased more than 50% since 2013, so it’s important to begin thinking ahead to next tax season in order to develop a cost-saving strategy that you can rely on. Exchange-traded funds, or ETFs, can offer significant benefits that are worth pursuing for your year-round tax strategy.

According to Sean Walker, executive director, head of sales for the ETF & Funds Management division at Texas Capital, ETFs can even be more beneficial for your tax strategy than mutual funds. “ETFs are unique in that they use all methodologies available to them to create one of the most tax-efficient experiences for you when delivering a specific market exposure,” Walker said. “As a solution wrapper, ETFs have multiple layers of liquidity that enable tax efficiencies compared to other product wrappers such as mutual funds, closed-end funds or UITs.”

ETFs offer two notable tax efficiencies:

Long-term capital gains exposure is potentially minimized by ETFs.
You have more control over tax-loss harvesting opportunities, as ETFs trade daily like stocks.

With mutual funds, holders allocate dollars toward trades but do not know the price they will pay or receive until the next day, taking the pricing leverage out of their hands and giving it to the outside mutual fund managements team. With ETFs that trade daily, intraday pricing movements allow you to know what you’ve paid for something immediately after execution and what price you’ve sold at specific to your experience, not to a pooled experience.

Having an ETF-focused 2024 tax strategy to help limit cost means more money goes back to work for you. Here are three key financial planning tactics to use when executing an ongoing tax strategy.

Harvest tax losses. While losses are never a goal for long-term financial success, they can be used to help offset gains in the portfolio. You may have just completed tax loss harvesting or sold something you’ve lost money on to use against something else you’ve gained money on. According to Walker, it’s wise to not wait until the last few weeks of the year to tax loss harvest. As the markets move up and down, take advantage of these movements strategically to help you offset future gains as tax losses can be carried forward in the future.
Manage capital gains and dividends. When buying individual positions, be mindful of when the investment pays out capital gains and/or dividends. If you purchase an investment that is issuing a capital gain distribution, you will be liable for the tax bill of that distribution even if you have not participated in the return. An example of this would be a mutual fund that generates 15% returns between January and October of a given year but that is flat in November and December. If you wait to buy the fund until November, even though you did not participate in any of the upside between January to October, you may still be subjected to a capital gains distribution. ETFs have better mechanisms in place and, generally, only about 13% of ETFs distribute a capital gain versus more than 70% in a mutual fund structure.
Plan strategically. When choosing between two like investments in a taxable account, have a bias toward the investment that maximizes tax efficiency. Many times, there are multiple investments using different vehicles, like mutual funds and ETFs, that deliver similar investment exposure. According to Morningstar, the average tax cost of a Large Cap Equity Blend Mutual Fund was 1.26%, or $1,260 for every $100K invested - nearly 1.5x the cost of the average expense ratio of 0.85% or $850 per $100K invested for the 12 month period ending July 31, 2024.¹ The expense ratio of an investment has less impact on you than the tax implications for your taxable accounts. Look at all costs that can potentially affect the dollars you have to invest, not just the expenses.

Connect with your Private Client Advisor to help you generate and execute your annual tax strategy so you can build and maintain your legacy.

Have further questions?

To learn more about our ETF & Funds Management solutions and to speak with our sales team call us at 844.TCB.ETFS (844.822.3837).

¹ Source: Morningstar, as of July 31, 2024. The tax rate applies to the U.S. large-cap blend equity open-end mutual funds available in the U.S.

Investors should carefully consider the investment objectives, risks and charges of the fund before investing. The prospectus contains this information and other information about the fund, and it should be read carefully before investing. Investors can obtain a copy of the prospectus by calling 844.TCB. ETFS (844.822.3837).

Investment and Market Risk. As with all investments, an investment in the Fund is subject to investment risk. Investors in the Fund could lose money, including the possible loss of the entire principal amount of an investment, over short or prolonged periods of time.
Index Tracking Risk. There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its investment objective. The Fund may have difficulty achieving its investment objective due to fees, expenses (including rebalancing expenses), and other transaction costs related to the normal operation of the Fund. These costs that may be incurred by the Fund are not incurred by the Index, which may make it more difficult for the Fund to track the Index.
New Adviser Risk. The Adviser has not previously served as an adviser to a registered mutual fund or ETF. As a result, there is no long-term track record against which an investor may judge the Adviser and it is possible the Adviser may not achieve the Fund’s intended investment objective.
New Fund Risk. The Fund is new and does not have shares outstanding as of the date of this Prospectus. If the Fund does not grow large once it commences trading, it will be at greater risk than larger funds of wider bid-ask spreads for its shares, trading at a greater premium or discount to NAV, liquidation and/or a stop to trading. Any resulting liquidation of the Fund could cause the Fund to incur elevated transaction costs for the Fund and negative tax consequences for its shareholders.
Geographic Concentration Risk. Because the Fund and the Index will invest only in issuers headquartered in a particular geographic region, the Fund’s performance is expected to be closely tied to various factors such as social, financial, economic, and political conditions within that region. Events that negatively affect that region may cause the value of the Fund’s shares to decrease, in some cases significantly. As a result, the Fund may be more volatile than more geographically diverse funds.
Small Capitalization Companies Risk. Investments in securities of small-cap companies may be riskier, more volatile, and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Small-cap companies often have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. The equity securities of small-cap companies are generally less liquid than the equity securities of larger companies.

The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Texas Capital Bank Wealth Management Services, Inc. d/b/a Texas Capital Bank Private Wealth Advisors (“PWA”), a wholly owned subsidiary of Texas Capital Bank serves as investment adviser to Texas Capital Funds Trust (a Delaware statutory trust formed in 2023 and registered as an open-end management investment company under the Investment Company Act of 1940) for its funds (the “Funds”) and is paid a fee for its services. Shares of the Funds are not deposits or obligations of, or guaranteed or endorsed by, Texas Capital Bank or its affiliates. The Funds are not insured by the FDIC or any other government agency. The Funds are distributed by Northern Lights Distributors, LLC, member FINRA/SIPC, which is not affiliated with Texas Capital Bank Private Wealth Advisors.

Neither PWA, Texas Capital Bank nor any of their respective employees provides tax or legal advice. Nothing contained in this communication is intended as tax or legal advice for any recipient, nor should it be relied on as such. Taxpayers should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or legal counsel.

Not a Deposit. Not FDIC Insured. Not Guaranteed by the Bank. May Lose Value. Not Insured by any Federal Government Agency.

The fund is distributed by Northern Lights Distributors, LLC, member FINRA/SIPC.